Why It's Time to Rethink Unemployment Benefits

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Two gentlemen asked Ebenezer Scrooge for his "liberality" to help the destitute.  Scrooge immediately asked if something had perhaps happened to the prisons, the union workhouses, and the treadmill, all means of punishing the poor.  When assured that these institutions were in fact all active and busy, Scrooge rubbed his hands together and chortled, "I'm very glad to hear it!"  An economist answering questions about unemployment benefits always feels a bit like Scrooge.  Because the answer to the question "Couldn't we do more to help the poor?" is always, "Yes, but..."

So, should we rethink unemployment compensation?  Yes.  But...

More "liberal" unemployment and welfare benefits (the two are blurring, at least in the public mind) create more unemployment.  People respond to incentives, that's all there is to it.  So: a.  If welfare and unemployment payments are higher, the incentive to find work in the sort of low-paying entry jobs people start out in are lower. b.  If welfare and unemployment payments are "extended," as is now being proposed, then people will delay their job search.
No, not everyone.  It is easy to find examples of people who don't act this way.  But most people do act this way, most of the time.  All of the impassioned anecdotes in the world don't change the facts, supported by studies.  You can find some of the best studies summarized (I should say, "Summerized") in an article by Obama Administration economics adviser Larry Summers.  You may not like this fact, just like you may not like gravity.  But gravity pulls us toward the earth, and unemployment benefits that are large and long pull us toward unemployment.
There's another problem.  Unemployment insurance, as it stands now, is funded by a tax on employment.  The more people a business employs, the more the business has to pay in unemployment insurance.  What could go wrong with THAT brilliant plan?  If we increase benefits, and extend benefits, we are placing a large tax on hiring.  France and Germany have found that this problem is severe, and France in particular last year tried to make it easier to hire and fire without paying a large tax.  The effort was blocked for political reasons, but the unintended consequence was that employers are very reluctant to hire new workers.
Still, I said "Yes, but" not "No!" above.  There is an argument that I have not heard much in the public debate, and I think that we should consider it.  The "social contract" in the European Union, at least in most countries, is that the poor and unemployed can expect a safety net of social programs, including some money to live on, housing, and health care.  The "social contract" in the U.S. is different.  We tend to focus on free trade and open markets, with the consequence that consumers can buy products from all over the world at extremely low prices.  Most people, because they are employed, benefit from this bargain.  Computers, radios, televisions, socks, shoes...  All of these have seen dramatic price declines, controlling for quality and inflation, in the last 30 years.  Two cheers for globalization!
But only two cheers, not three.  The benefits of globalization go to most of us.  But the costs of globalization are not widely shared.  Instead, the loss of jobs has been concentrated in a few sectors, such as steel, heavy manufacturing, textiles, apparel, and consumer electronics.  If our "social contract" is based on capturing the benefits of globalization, don't we, the many winners, owe those who lost their jobs through no fault of their own some consideration?
Economists justify globalization this way:  The "make or buy" decision should be based solely on cost.  If we can buy something more cheaply than we can make it, then free trade makes MOST people better off.  And the gains to the gainers exceed the losses to the losers.  But the unemployed victims of globalization are not "losers," they are just people who worked in industries that were once strong, and are now weak, due to the rapid transformation of the global economy.
There is no good argument to subsidize the industry, mind you.  If we can buy textiles more cheaply from other countries, there is no reason to tax our consumers just to "create" artificial jobs in a dying industry.  But why is it okay to tax our unemployed workers just so our consumers can have cheap products? 
We may need to rethink unemployment compensation.  26 weeks of benefits is enough to help a worker who has been laid off from a cyclical industry, because that worker may be rehired and that worker's skills are still valuable in the marketplace.  But if that industry has disappeared from the U.S., the worker needs a longer period of support and opportunities for retraining to become a productive part of the new economy.
Even Scrooge might agree with that.