Thoughts on Extending Unemployment Benefits

by: Bob McTeer

Paul Krugman argues In today’s (July 5) New York Times that the case for extending the duration of unemployment benefits is stronger when the unemployment rate is higher. Even if empirical studies show that extending benefits reduces slightly the incentive to seek employment, that argument is weaker (and crueler) as the ratio of job seekers to job openings rises to very high levels, as it is now. In effect, by withholding benefits to keep incentives high, we would be trying to incentivize the impossible. Here on the 4th of July weekend, that argument seems “self evident” to me.

This is not the only place where standard arguments and standard policies based on standard arguments seem cynical. So does the idea, prominent throughout the financial crisis and its aftermath, that business failure should be punished because the failure obviously was caused by knowingly risky behavior. It’s not just that populist fervor is anti-bailout; it’s also pro-pain and suffering. I submit that the it’s-their-own-fault-so-let-them-suffer-the consequences attitude may be close to fair under normal circumstances, but probably not in the midst of a severe crisis with massive contagion.

For example, if five banks fail during the year, it’s likely there were five separate sets of reasons and that management probably deserves most of the blame. However, that may not be the case if 200 or 2000 banks fail because most held mortgage-backed-securities they thought were safe because of their AAA ratings, and because the strict application of mark to market accounting for those securities in a frozen market wiped out their capital on a massive scale.

Some houses collapse because they were “built upon the sand” and some collapse because they were in the path of a tsunami. I’m just saying there is a difference, and that withholding assistance in the latter case can hardly be justified on noble, moral-hazard grounds.

This came to mind as our legislators tied themselves in knots during the financial reform debate trying to eliminate too-big-to-fail without actually helping anyone. Their rhetoric suggested (1) they want to see failures in the future, and (2) they want only pain and suffering to result.