By Simon Johnson
The principle behind unemployment insurance is simple. Since the 1930s, employers – and in some states employees — have paid insurance premiums (in the form of payroll taxes, levied on wages) to the government. If people are laid off through no fault of their own, they can claim this insurance – just like you file a claim on your homeowner’s or renter’s policy if your home burns down.
Fire insurance is mostly sold by the private sector; unemployment insurance is “sold” by the government – because the private sector never performed this role adequately. The original legislative intent, reaffirmed over the years, is clear: Help people to help themselves in the face of shocks beyond their control.
But the severity and depth of our current recession raise an issue on a scale that we have literally not had to confront since the 1930s. What should we do when large numbers of people run out of standard unemployment benefits, much of which are provided at the state level, but still cannot find a job? At the moment, the federal government steps in to provide extended benefits.
In negotiations currently under way, House Republicans propose to cut back dramatically on these benefits, asserting that this will push people back to work and speed the recovery. Does this make sense, or is it bad economics, as well as being mean-spirited?
(For details on the current benefit situation, see this information from California, as well as this on the political background. After a two-month extension of benefits at the end of last year, the terms of continuing it are currently before a House-Senate conference committee.)
The United States has lost more jobs than in any other recession in the last 70 years – and jobs have been slower to return, as this chart shows.
In raw numbers, we lost more than eight million jobs, most of which have not returned. Paul Solman of the PBS NewsHour prefers a measure he calls U-7, which includes “the underemployed and those who want a job but have been out of work so long that the government no longer counts them; this currently stands at 16.9 percent of the workforce (see this story and also, for background, a discussion Paul and I had in the fall on the “shape” of the recovery, in which we rely on the B.L.S. data.)
However you want to count it, the financial crisis of 2008 brought on a jobs disaster — and the scale of this disaster is still with us. We like to say that the recession is “over,” but this just means that the economy is growing again. In no meaningful sense is the jobs crisis over.
Typically in the United States, most people are unemployed for relatively short periods of time, with a lot of movement in and out of unemployment. The fraction of long-term unemployed as a percentage of all unemployed is usually 10 to 15 percent. In the early 1980s, it briefly reached almost 25 percent.
Again, however, our experience since 2008 has been dramatically different – the share of long-term unemployed in total unemployed is close to 45 percent. And it appears to be staying at or near that level for the foreseeable future.
The House Republicans now propose to change many rules under which the federal government provides “extended benefits” to people who have exhausted their state benefits.
In most countries, unemployment insurance is managed primarily by the central government and its agencies – in our federal structure we have preferred, as with other kinds of emergencies (such as natural disasters) to have the states provide the first line of defense, with the federal government providing back-up. It is the federal government that has the strongest ability to borrow at low interest rates; most states are much more strapped for cash.
Do not be deceived by claims that the federal government is “broke,” in the sense that it cannot afford to provide additional support to states and people at this level. This is a myth, pure and simple.
Perhaps the most obvious – and most obviously wrong – proposal is for the federal government to support extended benefits only when unemployment is higher now than it has been on average over the previous three years (in legislative jargon, this is known as a three-year look-back). But three years ago was early 2009 – when the jobs crisis was already well under way. In you were caught up in the initial downdraft from the collapse of Lehman Brothers, you would be left on your own. The look-back should either be updated or, preferably under these circumstances, suspended entirely. Neither the GOP nor – amazingly – the Obama White House have yet taken any steps in that direction.
Along with other policy changes, the Republican proposal would cut up to 40 weeks from the existing available federal unemployment benefits.
The jobs crisis was caused by recklessness in the financial sector, made possible by irresponsible deregulation (including when Republicans controlled Congress and the White House) and resulting in enormous unconditional bailout protection for the bankers at the heart of the disaster (under both President George W. Bush and President Obama).
Let’s be generous for a moment and simply state that mistakes were made – on an enormous, macroeconomic scale with gut-wrenching consequences for families around the country. Why would anyone now seek to punish these people when they seek work but cannot get it?
In some parts of the Midwest, there are roughly four unemployed people for every job vacancy; there are similar figures in many other parts of the country. Simply telling people to move is also not helpful – where exactly do you see hiring on a scale that would put a dent in these overall numbers?
Extended unemployment benefit provides on average about $300 a week – one-third of the average weekly wage and only about 70 percent of the poverty level for a family of four. If you strip even this money from people who remain out of work through no fault of their own, you will push more individuals and families onto the streets and into shelters. The cost of providing those fall-back services is very high – and much higher than providing unemployment benefits.
How does it help any economic recovery when the people who lose jobs cannot even afford to buy basic goods and services – enough to keep their family afloat?
This was the profound insight – under tragic circumstances – learned from the Great Depression. Unemployment insurance and Social Security were introduced together in the 1930s and funded in the same way – through payroll taxes. As President Franklin Delano Roosevelt said at the time (quoted by David M. Kennedy in “Freedom From Fear,” on Page 267):
“We put those payroll contributions there so as to give the contributors a legal, moral and political right to collect their pensions and their unemployment benefits. With those taxes in there, no damn politician can ever scrap my Social Security programs.”
That logic worked for nearly 80 years. In the face of our modern mean-spiritedness, it now seems likely to collapse.
An edited version of this post appeared this morning on the NYT.com’s Economix blog; it is used here with permission. If you would like to reproduce the entire post, please contact the New York Times.