A holiday from taxes, that is. All taxes. For 18 months. It’s “economist” Arthur Laffer’s prescription for getting the unemployed back to work:
… Since late 2007 the federal government has spent somewhere around $3.6 trillion to stimulate the economy. That is a lot of money.
My suggestion would have been to take all $3.6 trillion and declare a federal tax holiday for 18 months. No income tax, no corporate profits tax, no capital gains tax, no estate tax, no payroll tax (FICA) either employee or employer, no Medicare or Medicaid taxes, no federal excise taxes, no tariffs, no federal taxes at all, which would have reduced federal revenues by $2.4 trillion annually. Can you imagine where employment would be today? How does a 2.5% unemployment rate sound?
It sounds like Laffer has tripped down the yellow brick road a few too many times. And speaking of the deficit, Say WHAT? (Emphasis is mine.)
For over a month, Republican-led filibusters have successfully blocked unemployment benefits legislation because it would add $33 billion to the deficit. Laffer’s $2.4 trillion revenue cut would increase the deficit by nearly 100 times that amount. After Laffer suspends all federal taxes, only $1.2 trillion would remain, the equivalent of what would be needed to pay for Social Security and Medicare. But because Laffer is eliminating the FICA tax, Social Security and Medicare would be cut. Funds would be greatly restricted for anything else, from national defense to veterans’ benefits to crime-fighting and prevention. But not to worry, says Laffer, defunding the government would magically cause unemployment to plummet to 2.5 percent.
I’m guessing that Laffer has never been involuntarily out of work for six months or longer with a family to support and no money in the bank. Because that is the only way that his remarkable ignorance about unemployment benefits could even begin to make sense. (Emphasis and bracketed commentary are mine.)
The most obvious argument against extending or raising unemployment benefits is that it will make being unemployed either more attractive or less unattractive, and thereby lead to higher unemployment. Empirical research supports this view. [But he does not provide any of this “empirical research.”]
The Democratic retort is that the economy today is so different from the past that we have to suspend our traditional understanding of economics. With five job seekers for every job opening, the unemployed are desperate for work and increasing unemployment benefits will have very little if any disincentive effect. This view hinges on a total change in employee behavior from “normal” times to the current period of “the Great Recession.”
On the face of it, the idea that higher unemployment benefits won’t lead to more unemployment doesn’t make much sense. Imagine what the unemployment rate would look like if unemployment benefits were universally $150,000 per year. My guess is we’d have a heck of a lot more unemployment. Common sense and personal experience indicate higher unemployment benefits will make unemployment less unattractive and thereby increase unemployment even in the Great Recession. As the chart nearby clearly shows, since the 1970s there’s been a close correlation between increased unemployment benefits and an increase in the unemployment rate. Those who argue that things are different today don’t have the data to back up their claims.
Take a look at that sentence I bolded, in the paragraph above. What kind of nincompoop thinks that if unemployment payments of $150,000 a year make the recipient disinclined to look for work, then unemployment payments of $15,000 a year must do the same? And who is talking about increasing the amount of unemployment checks anyway? The issue is extending the length of time that jobless Americans can continue to receive their unemployment benefits, not making each payment higher!
TBogg does a really good slice and dice on the $150,000 yearly unemployment benefit, plus another inane Laffer analogy:
The average unemployment check in America is $293 which, when multiplied by fifty-two weeks, is $15,236 per year which is very close to $150,000 if you round up, so everyone should quit their jobs! Yay! Funemployment!
Laffer adds:
To see these effects clearly, imagine a two person economy in which one of the two people is paid for being unemployed. From whom do you think the unemployment benefits are taken? The other person obviously. While the one person who is unemployed may “buy” more as a result of unemployment benefits, the other person from whom the unemployment sums are taken will “buy” less. There is no stimulus for the economy.
But it doesn’t stop there. While the income effects sum to zero, the substitution effects aggregate. The person from whom the unemployment funds are taken will find work less rewarding and will work less. The person who is given the unemployment benefits will also find work relatively less rewarding and will therefore work less. Both people in this two-person economy will be incentivized to work less. There will be less work and more unemployment.
Because if you’re making, say, $50,000 a year at your boring dead-end job, how can you resist the sweet allure of $15,000 a year, a soft couch, and more Oprah and Ellen than you could shake a stick at.
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