April 9, 2020. New unemployment claims surged to 6.6 million today in face of the COVID-19 shut down.
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.
“More importantly, if you care about improving the quality of life and living standards over time, the essential question is always about creating broad-based, sustainable economic growth. What are the conditions that are most likely to help the economy get bigger, stronger, and more resilient? At the top of the list is a government which promulgates simple, predictable, and widely enforced rules; spends within its limits and doesn’t pursue arbitrary trade wars and military interventions; and doesn’t bog down the future with an ever-increasing mountain of debtthat tamps down growth and freezes out investment. Near the bottom of the list is something that is part of Sanders’ policy repertoire: Announcing bold new plans (Medicare for All! Free College for All!) without evenpretending to know how to payfor them.“
From a microeconomic perspective, there is some genuine disruption for affected federal bureaucrats, even if they eventually will get full – and lavish – compensation for their involuntary vacations. And some federal contractors are being hit as well.
There’s also a debate about the macroeconomic impact, with some making the Keynesian argument that government spending is somehow a stimulant for the economy.
In this interview, I tried to make a more nuanced point, explaining that we should focus more on gross domestic income (GDI), which measures how we earn our national income, rather than gross domestic product (GDP), which measures how we allocate national income.
Harold Furchtgott-Roth, in a column for the Wall Street Journal, analyzes the potential macroeconomic consequences of the shutdown.
Does the U.S. government shutdown endanger economic growth? It has led to missed paychecks… Yet these employees represent approximately 0.5% of all American workers… The effect of the furloughs on gross domestic product is likely small. …U.S. GDP is more than $20 trillion annually, or approximately $55 billion daily. The daily compensation of furloughed federal workers is about $52.5 million, or less than 0.1% of GDP.
And now for the meaty post of the week! Seriously, this is a fantastic piece by The Grump Economist, John H. Cochrane, senior fellow at The Hoover Institute.
Here’s a sneak preview:
What’s causing the big drop in the stock market, and the bout of enormous volatility we’re seeing at the end of the year?
The biggest worry is that this is The Beginning of The End — a recession is on its way, with a consequent big stock market rout. Is this early 2008 all over again, a signal of the big drop to come?
Maybe. But maybe not. Maybe it’s 2010, 2011, 2016, or the greatest of all, 1987. “The stock market forecast 9 of the last 5 recessions,” Paul Samuelson once said, and rightly. The stock market does fall in recessions, but it also corrects occasionally during expansions. Each of these drops was accompanied by similar bouts of volatility. Each is likely a period in which people worried about a recession or crash to come, but in the end it did not come.
Still, is this at last the time? A few guideposts are handy.
“Governments should copy Switzerland and impose a spending cap. Iexplained this systemin a column for theWall Street Journalback in 2012.”
…85% of its voters approved an initiative that effectively requires its central government spending to grow no faster than trendline revenue. The reform, called a “debt brake” in Switzerland, has been very successful. Before the law went into effect in 2003, government spending was expanding by an average of 4.3% per year. Since then it’s increased by only 2.6% annually. …politicians aren’t able to boost spending when the economy is doing well and the Treasury is flush with cash. Equally important, it is very difficult for politicians to increase the spending cap by raising taxes.
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