Sense and Nonsense About Extending Unemployment Insurance

In a post last week, I remarked that, "In the world of fiscal policy, you could have left the planet for a year and not missed a beat."  The post repeated my criticism, made frequently over the last 30 months, that there is a better way to deal with downturns than becoming mired in discussions of temporary, ad hoc stimulus plans.

But in the world of supply-side economics, you could have left the planet for much longer and not missed a beat.  The latest quote making the rounds is this one, from Senate Minority Leader Mitch McConnell:

"That's been the majority Republican view for some time," Minority Leader Mitch McConnell told TPMDC this afternoon after the weekly GOP press conference. "That there's no evidence whatsoever that the Bush tax cuts actually diminished revenue. They increased revenue, because of the vibrancy of these tax cuts in the economy. So I think what Senator Kyl was expressing was the view of virtually every Republican on that subject."

Paul Krugman provides what should be considered very persuasive evidence addressing McConnell's claims about the economy and revenues.  Derek Thompson at The Atlantic and Ezra Klein at The Washington Post are taking issue with the claims about what Republicans believe.  They have compiled lists of statements by Republican economists that assert that tax cuts do not pay for themselves.  The most comprehensive list I have seen is here, in a blog post that reacted to an op-ed President Bush wrote in The Wall Street Journal in January 2007.  I have an entry in that list (linked by Thompson, copied by Klein) that was a reaction to the same op-ed.

What is unfortunate about McConnell's statements is that they overshadow the sensible points that Republicans should be making at this point.  Senate Minority Whip John Kyl came close, quoting here from the TPMDC post that quoted McConnell above:

"CBO's been wrong before," Kyl said. "It's not a stimulus for the economy, to try to help people through tough times. It's a necessary evil, in a sense. We'd like not to have to raise revenue in order to pay people for not working--or not to pay them for not working, but because they can't get work."

Kyl concluded:

To me you shouldn't look at it as an economic matter, it's a humanitarian matter. You got people who are out of work, who can't find work, you want to help 'em out. Families need help. That's why you provide it. You don't do it because it's going to stimulate the economy. You have to borrow the money in order to pay the folks. That borrowing has huge costs. They are adverse economics costs. So it's not a good thing for the economy. It's a bad thing for the economy but it's still the right thing to do for other reasons.

The stimulus argument for extending emergency unemployment benefits during a recession is simple: If unemployed people lose benefits, then they stop spending money, which shrinks the economy, and costs more jobs. Extending the benefits forestalls that. Kyl says that, while there is a political and humanitarian benefit to giving constituents unemployment benefits, the government deficits they engender do more harm to the economy than systemic unemployment could.

The first statement of his conclusion is correct -- the rationale for spending money on extended unemployment insurance is humanitarian, not economic.  The reason you do it is to provide help to families.  It is a bad thing for the economy -- you are paying people who are doing no work for you.  As a mechanism for spending the government's resources, that is worse than paying people because they have done work for you.  So even though those receiving extended unemployment insurance payments will spend them, boosting aggregate demand, that is not much different from any other mechanism that the government might use to boost aggregate demand, including a better way to deal with downturns.