Obama's New Deal: Encourage People to Stay Unemployed

The New York Times reported on the front page of its Sunday edition that as part of the planned stimulus program, Obama Considers Major Expansion in Aid to Jobless. If the article is true, it is a very bad sign for both the economy and the culture:

One proposal, as described by Democratic advisers, would extend unemployment compensation to part-time workers, an idea that Congressional Republicans have blocked in the past.

Other policy changes would subsidize employers’ expenses for temporarily continuing health insurance coverage to laid-off and retired workers and their dependents, as mandated under a 22-year-old federal law known as Cobra, and allow workers who lose jobs that did not come with insurance benefits to be eligible, for the first time, to apply for Medicaid coverage.

As far as the economy goes, the plan as discussed basically involves paying more people in both cash and benefits to stay unemployed. This is just about the worst possible approach to reinvigorating the economy.

A major recession will require many people to make real adjustments and do difficult things. They will have to relocate to different states, change careers, accept significantly lower pay while they gain experience in their new careers, work short-term at unrewarding jobs while they go to night school to train for better careers, etc.

In the long run, this Schumpeterian process of creative destruction will benefit both the individual and the economy at large. The individual winds up working in a new, more rapidly growing and thus a more opportunity-filled industry while the country sees its resources--in this case labor resources--reallocated to places and careers where they can do the most good.

In the short term, though, this type of transition wreaks havoc on families and individuals--that is why it is called creative destruction. This means that few people will undertake such changes except under extreme necessity. Anything the government does to reduce that necessity--such as paying benefits and giving health insurance--creates a reason for a waitress in Michigan to stay put and hope things get better when the real opportunity for her may be to move to Arizona and work in the elder-care industry.

Beyond economics, extending these types of benefits is extremely corrosive to the culture. As a small business owner, I can’t tell you how many people over the years have approached me looking for work “off the books” because they were receiving unemployment benefits and didn’t want to lose them. These job applicants perceived getting a job as carrying an enormous tax equal to 100% of the unemployment benefits. Add in normal income and payroll taxes plus the cost of commuting and they saw a job as not worth it. These types of benefits tempt otherwise law-abiding citizens to engage in illegal activities.

Traditional unemployment benefits have already been extended by 13 weeks in states with an unemployment rate of at least 6 percent. This will delay the recovery. To add subsidized health insurance and Medicaid for those who never had health insurance plus give money to former part-timers … this is all a way of slowing necessary changes in the economy.

One can appreciate the need to increase aggregate demand; one can empathize with the desire to help unemployed people, but if the goal is a speedy recovery without undermining law-abiding practices, the rule should be simple: Minimize or avoid situations in which we pay people for staying unemployed.