Beware of Democratic Trap

he House voted Thursday to pass a significantly pared down stimulus package. The package included an extension of unemployment insurance benefits and a relatively small tax break for business investment. By giving so much ground on the stimulus bill, House Republicans have fallen into a trap that was set for them two weeks earlier by Tom Daschle.

It is fairly clear now that a key Democratic strategy for the fall elections is to hope for a prolonged recession and to blame the Republicans if it comes. While recent data suggest that the recession may be ending, the House bill increases the likelihood that the good news will be visible everywhere but in the employment statistics. This sets up a scenario that we have seen before. Republicans will tell voters in the fall that things are much better, while Democrats will point to long unemployment lines and sing in unison that "it's the economy stupid!" This scenario is delightful to Democratic ears, and is more likely to occur in a world with meager tax cuts and expanded unemployment insurance.

Why? The extension of unemployment benefits will increase the unemployment rate, thus making it easier for Democrats to use the economy as an election issue. While the original Republican package also offered increased unemployment insurance benefits, the growth generated by the much larger tax cuts would have offset the higher unemployment produced by the increased unemployment insurance. The Democrats have successfully decoupled the two, and one can see the rhetoric coming a mile away.

Dozens of economic research papers indicate that when you extend or increase unemployment benefits, you lengthen unemployment, because recipients wait until their benefits have been exhausted to take their next job. Larry Katz, the chief economist at the Labor Department during the Clinton administration, coauthored a study that found that workers are almost three times more successful in finding jobs when benefits are just about to run out.

One solution might be to offer larger benefits, rather than increasing the number of weeks that benefits are paid, but research suggests that this will also increase unemployment. A highly regarded textbook by Harvard University professor George Borjas reports that a 25-percent increase in the level of benefits increases the duration of unemployment by 15 to 25 percent.

In fact, the impact of benefits on unemployment is so strong that experiments have even been constructed that successfully reduced unemployment through clever manipulation of payouts. For example, Bruce Meyer, an economics professor at Northwestern, conducted a careful survey of experiments with unemployment insurance in Illinois, Pennsylvania, Washington, and New Jersey and concluded that paying workers bonuses to find jobs before their benefits ran out reduced how long people were unemployed. While he was cautious to recommend such bonus plans because they encourage some people to become unemployed just so they can switch jobs and collect the bonus, the bottom line is clear: incentives matter. The last thing that extending unemployment benefits will do is encourage people to work and be productive.

So what would the Democrats' plan do to the unemployment rate? Eighty-five percent of the unemployed live in states that would receive the extended benefits under the Senate legislation, and about half of the unemployed in those states are eligible for unemployment insurance. Most estimates suggest that unemployment would rise by 25 percent in those affected states should the Democratic plan go through. That would raise the national unemployment rate from 5.6 to 6.6 percent.

How should Republicans have responded? First of all, they could have responded to the concern that some workers have lost their jobs and used up their insurance by giving the new money as a lump sum only to those workers who have already exhausted their original 26 weeks of benefits. That way, the perverse effect of benefits on job search would not be an issue at the margin. Second, Republicans should have made the point that, with an unemployment rate hovering at 5.6 percent and initial claims for unemployment insurance dropping off sharply, finding jobs is no more difficult than it was a few years ago. If Democrats didn't see the urgency in increasing unemployment benefits then, why now? Finally, they should never have backed down so much on business tax cuts.

There is, however, a significant risk to the Democrats' "recession" strategy. The economy is turning up so quickly that unemployment may not be a big issue even with the expansion of benefits. But if it is an issue one thing is certain: Despite their own economists' work, which clearly demonstrates that higher benefits increase unemployment, Democrats will blame Bush and the Republicans.

Without knowing the income demographic studied (and the same for jobs lost as a result of 9/11, it is impossible to know if this is an accurate model. Suffice it to say that this scenario may work for low wage workers, however, higher wage workers will not behave in the manner articulated here.

You'd be surprised how much influence these extended benefits have. I worked for the TX Employment Commission for a while, and we had someone call up in a panic because extended benefits had just been announced and they had already gotten a job. They wanted to know what they should do.

If people think these benefits help the poor, they're wrong. Most of the working poor don't stay on any one job long enough to qualify for benefits. What we saw in our surburban office was housewives in tennis outfits, collecting benefits through the summer while they're kids were out of school, and people wanting to collect unemployment benefits and retirement benefits at the same time. They were angry when they found out one had to be actively pursuing a job in order to collect unemployment payments. They just thought one had to be out of work. The system stinks.

TAX CUTS, very good idea, has anyone got a line on the info Rush put out about that 'Flat Tax" in Russia and how much it had brought in. That was good news. We need a link to that kind of data on a thread like this.

The GOP is all about compromise, never do they get the RATS to come to there posistion. NEVER do they draw a line and stand, and stand for principle. THEY can't, they don't know how. The spinless wimps. They won't even call the RATS on any of the tricks they pull and GET a way wiith.

So in the future it will be written into history that the GOP = Spinless, Cowards, so no one will say anything bad about them. It makes me sick.

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