Monday, July 19, 2010

The real issue is not whether cutting unemployment benefits (or, more accurately, not extending those benefits) will slow spending (it will, at least for those who no longer would receive checks) but rather the effect of not extending benefits will have on the millions upon millions of people who haven't been unemployed for so long that they're facing a cut off of benefits... and I could make a good case that the positive effects will more than offset the negative effects... in other words, the long term unemployed are the eggs that need to be broken in order to get the omelet (economy) cooking again.

Here's the rationale:

The money that would leave the system by those no longer receiving checks is minuscule compared to the money not being spent by those with jobs. These people are holding off spending in no small part because they see government as taking actions that prolong the troubles. Pressuring banks to hold off foreclosures doesn't make the housing problems go away, it only delays the day of reckoning. An endless stream of unemployment benefits doesn't force the unemployed to do what is necessary, whether it be accept lower paying jobs or moving to a better environment. And these non-spenders aren't going to start spending as long as they think government is doing more of the same, they want to see a sign that things are different.... and not extending unemployment benefits would definitely be a step in the right direction. The amount of new spending by those who are now sitting on their hands would dwarf the cutbacks in spending by those not getting extended benefits.

In fact, it isn't the spending that is critical to recovery, it is the confidence that is key. Spending follows an uptick in confidence. Do things that make people more confident about the future and they'll go out and spend, they'll go out and borrow, they'll go out and hire people. But keep doing things that make people worry and you're not going to help.