Unemployment Payments and Economic Growth

I read this quote and had to respond:

"The Congressional Budget Office has estimated that each $1 spent on unemployment benefits generates up to $1.90 in economic growth."

First, let me take away any possible suspense on where I stand on this by saying that, while this may be true, it is misleading at best, most likely intentionally misleading, and a blatant lie at worst.



Unemployment benefits are paid out of taxes collected (depending upon how the states choose to do it) by the federal and/or state governments. Those taxes are paid by businesses. Whenever taxes are paid by businesses they are passed along to consumers in the form of increased prices for products. This leaves the business with what it deems a reasonable profit.

What this means is that the average consumer, instead of paying $1.00 for a widget, pays $1.05 for a widget. This also means that the consumer now has $.05 less to buy anything else. So, while we see the consumer buy the widget for $1.05, we don't see the consumer fail to buy the piece of candy for his daughter for $.05. So, the tax has a negative impact upon the economy at least equal to the tax itself.

I say "at least" because the candy maker decides not to produce as much candy. Not only is the one consumer not buying the $.05 candy, but hundreds of other consumers (also impacted by a loss of buying power due to the tax) also don't buy the candy. So, the candy maker decides to not employ one worker for 1 hour. This costs the worker minimum wage of $7.50. That worker doesn't buy $7.50 worth of product and the whole process repeats itself.

As you can imagine, the exact impact upon the economy of a simple $.05 tax is difficult to quantify. However, it is clear that the $.05 tax has a greater impact on the economy than $.05.

This is how the CBO gets to the idea that $1 given to someone for them to spend can have a greater than $1 impact on the economy. They put this process into reverse and try to come up with an estimate (using tons of math) on the positive impact on the economy.

So, you ask, why did I sound so negative in the first place? It sounds like the CBO just did a reasonable thing...right?

No. Whenever a tax is collected, there is a net economic loss. This is always true.

Why? Because whenever the government takes money, runs it through "the system" and then gives it to someone else (or even back to the original payer) there is some cost to "the system". You might start with $1 going in, but when you run it through "the system", you end up with only $.50.

So, the government takes in $1, but only ends up with $.50 to spend, plus they have caused more than $1 harm to the economy.

So, to give away that $1 in unemployment, they have collected $2 and have caused more than $2 worth of harm to the economy.

That is how this statement is misleading. The $1 in unemployment already did more than $2 worth of harm, but now is going to do $1.90 worth of good to the economy.




The CBO should know this and should use even more math to figure out the initial negative impact upon the economy before calculating the positive impact of unemployment payments, and then tell us the whole story.

For example, let's say they determine the $2 in taxes that they collected cost the economy a total of $3.80. Then, they determine that the $1 in unemployment payments will generate $1.90 in economic growth. So, they should report that for every $1 in unemployment payments the economy lost $1.90 overall.

This is why I said earlier that this might be a blatant lie at worst. Most who have studied economics would understand this. Everyone at the CBO should understand this.



The ease of being able to detect the lie is easy, when you take the CBO statement to the (very logical) extreme. If $1 in unemployment payments generates $1.90 in economic growth, why not tax at 100%, pay everyone unemployment, and generate 190% of the economy?

The implication in the CBO statement is that the government (somehow) by taking money from someone and giving it to someone else has helped the economy without actually producing a single thing. Clearly, this belief is a load of crap.





"But that $.50 cost for 'the system' didn't just disappear. When the government takes in $1 it has $1, not $.50. It may use that money to pay salaries or other things. Doesn't that generate economic growth?"

Yes and no. When a government employee is paid, a certain amount is taxed and the rest can be spent. However, no actual economic productivity or growth has happened as a result of the salary paid to the government employee. So while, yes, the government employee is buying things like food, clothes and other items, thereby growing the economy, every penny of that salary came from a tax that was paid (ultimately) by the consumer. So, we run into the same problem with a government employee salary as we do with unemployment payments.

Additionally, every government employee is one that is unavailable for the private sector to employ. "But that doesn't matter in an economy with such high unemployment!" you might say. However, that would be missing the fact that many government employees could be highly skilled individuals who could contribute to actual production, even more so than some other people who are employed. The additional productivity of the otherwise employed government employees would reduce the costs of goods and services.




So, to wrap this up...

Whenever the government unnecessarily (not necessary to improve productivity (and I have never known the government to improve the productivity of anything)) puts its hands into something (or any other person/group unnecessarily puts his/her/their hands into something) there is a net harm to the overall economy. Once the money goes through government hands, there will always be a net loss to the overall economy, even if the government were to turn all money back to the original payers of the tax.


If you would like to learn more, please read Economics in One Lesson:

http://www.amazon.com/Economics-One-Lesson-Shortest-Understand/dp/0517548232/ref=sr_1_1?s=books&ie=UTF8&qid=1320563107&sr=1-1


Aloha.