This article appeared in the New York Post on November 17, 2009.
Why did the unemployment rate rise so rapidly — from 7.2 per cent in January to 10.2 percent in October? It was clearly the administration's "stimulus" bill — which in February provided $40 billion to greatly extend jobless benefits at no cost to the states.
As Larry Summers, the president's top assistant for economic policy, noted in July, "the unemployment rate over the recession has risen about 1 to 1.5 percentage points more than would normally be attributable to the contraction in GDP." And the rate has moved nearly a percentage point higher since then, even though GDP increased. Countries with much deeper declines in GDP, such as Germany and Sweden, have unemployment rates far below ours.
Summers knows why the US rate is so high. He explained it well in a 1995 paper co-authored with James Poterba of MIT: "Unemployment insurance lengthens unemployment spells."
That is: When the government pays people 50 to 60 percent of their previous wage to stay home for a year or more, many of them do just that.
And the stimulus bribed states to extend benefits — which have now been stretched to an unprecedented 79 weeks in 28 states and to 46 to 72 weeks in the rest. Before mid-2008, by contrast, only a few states paid jobless benefits for even a month beyond the standard 26 weeks.
When you subsidize something, you get more of it. Extending unemployment benefits from 26 to 79 weeks was guaranteed to leave many more people unemployed for many more months.
And longer unemployment translates to higher unemployment rates — because the relatively small numbers of newly unemployed are added to stubbornly large numbers of those who lost their jobs more than six months ago.
Until benefits are about to run out, many of the long-term unemployed are in no rush to make serious efforts to find another job — or to accept job offers that may involve a long commute, relocation or disappointing salary and benefits.
(Incidentally, the "mercy" of longer benefits does no long-term favors: The literature is quite clear that a prolonged period on unemployment tends to depress income for years after you finally go back to work.)
The median length of unemployment hovered around 10 weeks for six months before February's "stimulus" plan. Since half the unemployed found jobs within 10 weeks, more than half of those counted among the unemployed in one month would no longer be included three months later. In other words, more frequent turnover among the unemployed held down monthly unemployment.
But after February, with jobless benefits stretched out to 46 to 79 weeks, the median duration of unemployment nearly doubled, reaching 18.7 weeks by October.
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