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extend unemp benefits

I’ve been taken to task before for asserting that extended unemployment benefits aggravated the increase in the jobless rate during the so-called “Great Recession.” New research finds that those extensions actually were a primary contributor to the increase. Richard Rahn describes a new study that draws this conclusion by economists at the Federal Reserve Bank of New York. From Rahn:

The irony here is that President Obama and the congressional Democrats kept voting to extend the unemployment benefits, which had the effect of keeping unemployment far higher for a much longer time than if they had not done so. …

The money to pay the unemployment benefits had to come from higher taxes on the employed; greater borrowing, which sucked potentially productive capital out of the economy; or money creation, which undermines the value of money for everyone. All of these are big economic downers. As the Fed researchers explained: ‘Our results lead us to expect that the stimulative effect of higher spending by the unemployed is largely offset by the dramatic negative effect on employment.’

Incentives are powerful. The recession itself was largely induced by government policy — deductible mortgage interest, community lending programs, favorable regulatory rules for bank mortgage assets, subsidized lending through Fannie Mae and Freddie Mac with increasingly risky credit standards — that encouraged over-investment in housing fueled by excessive mortgage debt. Here is a summary of a recent paper showing that “real estate lending booms are chiefly responsible for financial crises and weak recoveries.” But the government’s role in the sluggish recovery goes well beyond that, and the extended jobless benefits are one more example.

Rahn goes on to discuss the myriad ways that government inhibits employment growth; in particular, he emphasizes the continued burgeoning of federal regulation during the Obama administration. The government plays a broadly obstructive role in the process of economic growth and alleviating poverty, as Sacred Cow Chips has emphasized in the past:

More often than not, government policies erect obstacles to employment (e.g., taxes, wage floors, licensure, regulations, mandates, and negative work incentives created by many aid programs). Reversing those entanglements is imperative if we are to foster broad self-sufficiency.