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According to Liberals Paying People Not to Work Boosts GDP

January 02, 2013 By: Scott Spiegel Category: Economy

107Part of the ongoing fiscal cliff negotiation involves deciding the fate of extended unemployment insurance (UI) benefits, which end on January 2 if a resolution isn’t reached.

In support of their goal of keeping Americans dependent on government, liberals have been trotting out a Congressional Budget Office (CBO) report from November arguing that $1.10 in economic output will be created for every $1 spent on extended UI benefits.

As Ezra Klein squawked when Rachel Maddow let him sit at her desk over Christmas break, unemployment benefits are “Crazy stimulative!” and “Stimulus on steroids!”

The CBO report claims that extending UI benefits would result in “more consumer spending and increased demand for goods and services…”  For three of the four extension options the CBO considers, “economic output would be $1.10 higher per dollar of budgetary cost, on average, in 2013… and employment would be increased by six years of full-time equivalent employment per million dollars of budgetary cost” or about $166,667 per year of employment.

A note in their Summary Figure reads: “CBO’s central estimates… correspond to the assumption that the values that describe key parameters of economic behavior (in particular, the extent to which lower federal taxes and higher federal spending boost aggregate demand in the short term) equal the midpoints of the ranges used by CBO.  The ends of the lines represent estimates based on the full ranges that CBO uses for those parameters.”

That’s a lot of caveats packed into one disclaimer.  Unpacking them all reveals the CBO report’s central claim to be the utter nonsense it is.

First, the CBO admits it is making assumptions about “key parameters of economic behavior,” including “the extent to which lower federal taxes and higher federal spending boost aggregate demand in the short term.”  In other words, the CBO—whose report was commissioned by Democratic Senate Finance Committee Chair Max Baucus, and whose conclusions are only as sound as the assumptions it starts with—is projecting the effect of extending UI benefits under the assumption that higher federal spending boosts demand.  This assumption is in turn based on the expectation that consumer demand will “boost overall output and employment in the short term.”

How will consumer demand boost overall output and employment?  Presumably employers will produce more goods and hire more people if they expect consumers to purchase more of their products.  And employers will anticipate a boost in purchasing if the government gives consumers more money to spend on their products.

But where will the government get the money to give consumers to spend on employers’ products?  From payroll taxes that federal and state governments impose on those same employers.

Employers don’t typically absorb the cost of higher payroll taxes—they usually pass it on to employees in the form of reduced earnings.  So if employees earn less because they’re subsidizing extended UI benefits, how exactly is it that they’re going to have more money to boost consumer demand?

The CBO is focusing only on increased consumer spending from UI benefits, and not the fact that consumers are the ones subsidizing those benefits in the first place.

The CBO acknowledges this effect when they write: “UI payroll taxes… change firms’ and workers’ decisions about employment…  [F]irms effectively repay the UI system for a portion of the benefits paid to workers whom they lay off.  Those repayments take the form of higher subsequent UI taxes that, when passed through to the employees who remain with the firm, reduce wages…”  Yet somehow this dynamic doesn’t factor into the CBO’s calculations.

At best, the CBO’s estimate is narrowly correct, in that extended benefits might cause output and employment to increase in the short term, before companies adjust long-term hiring plans and keep down wages to fund future benefits.  The CBO glibly references some mechanism whereby all of this chaos will be sorted out in the future: “As the economy improves, total UI benefits will automatically fall, and total UI taxes will automatically rise.  That evolution will help stabilize economic activity in the future.”  But this kick-the-can-down-the-road approach belies a tawdry motivation to boost employment in the short term for political gain at the expense of long-term employment.  To wit: even if we get $1.10 in GDP for every dollar of benefits in 2013, how much less in GDP will we get as a result of this economy-hampering policy in 2014 and beyond?

Second, the CBO admits that its estimates fall on a continuum where “[t]he ends of the lines represent estimates based on the full ranges that CBO uses for those parameters.”  The continuum for GDP ranges from 0.4 to 1.8.  In other words, the CBO acknowledges there’s a good chance, not just that the GDP multiplier effect could be lower than $1.10, not just that it could be lower than $1.00 (i.e. a money loser), but that it could be as low as $0.40.  That means it’s possible there would be only $0.40 in GDP per dollar spent on extended UI benefits.  There’s so much uncertainty in the CBO’s estimate that the upper limit of their confidence interval is 450% as high as the lower limit.

I don’t know about you, but I’m disinclined to believe rosy or even middle-of-the-road projections by federal government-sponsored studies, since those projections are almost always much more optimistic than reality.

The continuum for full-time-equivalent employment ranges from 2 to 10 years.  So the CBO admits there’s a chance that the employment index could lead to as little as two years of employment per million dollars spent, or $500,000 per year of employment.  Even their sunniest projection yields only ten years, or $100,000 per year of employment, which is more than twice median U.S. personal income.

The left likes to tug at our heartstrings with humanitarian appeals to institute or increase or extend various government benefits.  The flaws in those altruistic pleas are a story for another day.  But when liberals claim that spending money to keep people from working is a boon for the budget, they need to be exposed as the laughingstock they are.

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