The US recovery from 2008 has been tepid. Blame it on Democrat “stupidonomics.”
A new study shows that Mr. Obama needs a ‘Seinfeld’ epiphany.
In a 1994 “Seinfeld” episode, George realizes that “every decision that I have ever made in my entire life has been wrong. My life is the complete opposite of everything I want it to be.” Jerry replies: “If every instinct you have is wrong, then the opposite would have to be right.”
So Costanza approaches a gorgeous woman in the coffee shop and announces, “My name is George. I’m unemployed and I live with my parents.” To his surprise, she’s interested. He lands a job with the Yankees after insulting George Steinbrenner.
Maybe President Obama ought to take Jerry’s advice too. That’s our reading of a striking new economic study that examines Congress’s decision to zero out extra unemployment benefits last year.
The authors find that this abrupt policy shift created some 1.8 million jobs, or slightly more than three of five net positions filled in 2014. The cuts also pulled a million workers who dropped out of the labor force back into the workplace. This reality happens to be the opposite of what Mr. Obama and other liberal sachems predicted.
Cash transfer payments like jobless benefits were at the core of the Keynesian project of the 2009 stimulus. It was natural for Washington to try to help people through the recession. But Democrats also argued that redistribution would supply the best boost for the economy based on the theory of the spending multiplier. This said that every extra dollar of jobless benefits would increase “aggregate demand” and return $1.80 in higher GDP.
Before the stimulus, benefits were determined by states and typically lasted 26 weeks. The Pelosi Congress financed as many as 53 additional weeks, with benefits flowing on a sliding scale based on the severity of a state’s unemployment. Congress also created another 20-week bonus program, allowing the unemployed to collect unprecedented compensation for nearly two years.
The programs were renewed a dozen times long after the recession ended, and as late as December 2013 benefits still lasted 53 weeks on average. That month Mr. Obama refused to negotiate any unemployment or budget reforms, so the GOP House simply let the programs expire.
At a Dec. 13 event, Mr. Obama invoked the needy and explained that this supposed abdication was “bad for our economy and that’s bad for our cities, because if they don’t have the money to pay the rent or be able to buy food for their families, that has an impact on demand and businesses and it can have a depressive effect generally. In fact, what we know is the economists have said failing to extend unemployment benefits is going to have a drag on economic growth for next year.”
The White House Council of Economic Advisers forecast direct job losses reaching 240,000 as aggregate demand fell. The Keynesians at the Congressional Budget Office warned of a recession.
As late as a June 2014 rally in Minneapolis, Mr. Obama added that the Republicans had harmed “more than three million Americans who are out there looking every single day for a new job, despite the fact that we know it would be good not just for those families who are working hard to try to get back on their feet, but for the economy as a whole.”
Instead, job growth in 2014 was roughly 25% higher than any post-2009 year. Joblessness plunged to 5.6% from 6.7%. Net job creation averaged 246,000 a month. What happened?
Writing for the National Bureau of Economic Research, economists Marcus Hagedorn, Iourii Manovskii and Kurt Mitman treat the 2014 benefits cutoff as a natural experiment. The extra federal benefits ranged from nothing to 47 weeks state by state, and then all at once fell to 26 weeks nationwide. This variation allowed them to compare the employment effects between states sponsoring more generous benefits and those with less.
Assuming that the pre-2014 trends would have continued among the two groups, the authors find that “the cut in unemployment benefit duration led to a 2% increase in aggregate employment, accounting for nearly all of the remarkable employment growth in the U.S. in 2014.” They then confirm these results with a second experiment that compares adjacent counties in different states whose economies are otherwise equal except for their unemployment benefits.
Notably, job growth improved most in states and counties that offered the most generous benefits before Congress took away the punch bowl. This suggests that the extra jobless benefits reduced the incentives for businesses to create jobs and for jobless workers to fill the vacancies.
Paying people not to work means they have less incentive to get on a payroll. More generous benefits also discourage businesses from hiring. Since benefits raise the price at which people are willing to search for work, employers must pay above-market wages in the more generous regions, and respond by creating jobs elsewhere or not at all. More jobs draw more people back into the labor force, in a virtuous cycle.
Since the states with the highest unemployment were targeted with the most federal benefits, the extra benefits harmed the people and regions that suffered the worst of the recession and weak recovery. Had Mr. Obama done the opposite, the stimulus might have recognized that people prefer the dignity of a job to claiming a government stipend for not having one. Both individuals and the larger economy would have been healthier.
Mr. Obama is now taking credit for 2014’s job gains that his policies inhibited, much as he is for the boom in oil and gas drilling that his Administration resisted. Thus comes the opportunity for a late-term “Seinfeld” economic epiphany. Imagine the possibilities if the President realized that everything he thought about economics is wrong.
A President Costanza would cut the tax rate on capital, not raise it; reduce the incentives to go on disability, not increase them; and reduce regulatory costs on business, not add to them. Whatever economic instincts you have, Mr. President, do the opposite.