When You Subsidize Something, You Get More of It

April 9, 2020. New unemployment claims surged to 6.6 million today in face of the COVID-19 shut down.

Prediction:

The joblessness rate will remain high until July when subsidies for non-work end.

Timing is key. The study of recessions shows us that employment usually rises (mysteriously) when unemployment benefits end. The connection should be obvious, especially for millions whose unemployment is more than their previous wages. This is the case for a family member of mine who is making $600 more per month now than before he was laid off.

This is why Germany’s approach during the recession of 2008 made sense. They paid employers to keep people on payroll. This had psychological and economic benefits.

Without question, remuneration/compensation to pay bills for those who’s jobs have ended due to mandated shelter at home and mandated closures (gov’t should reimburse those it shuts down) is justified. From the employer’s standpoint, unemployment benefits act like a tax on labor in addition to wages for each employee; they essentially have to pay premium to make it worthwhile for employee to return.

Sure, workers realize the benefits are temporary and many, if they liked their jobs, will return sooner if called back. And the astute workers will save the excess unemployment payments or pay off debt; most will spend it or, worse, incur more debt. History tells us that many will delay returning to work as long as possible if they are making more by not working. And who could blame them. This can force employers to hire possibly less qualified people at a higher wage than the value they produce.

And furthermore, history also tells us that as unemployment remains high, the political response is to extend the unemployment benefits longer, further prolonging recovery; and the cycle is perpetuated.

On the macro-economic level and policy level, this is why we need incentives to become a nation of producers and savers, rather than spender and debtors. From a tax policy perspective, we must stop punishing savings and investment and create incentives to save and proper disincentives for debt. This includes a “debt brake” for the federal government like they have in Switzerland.