Time for Reform of Unemployment Insurance

L. Randall Wray I have been working my way through the Financial Crisis Inquiry Report (the final report of the National Commission on the Causes of the Financial and Economic Crisis in the United States). Call me old-fashioned, I bought the book—a steal at fifteen bucks. I have seen some critiques. The dissenting minority reports are a real hoot—and my colleague Bill Black has completely torn apart the apologetics supplied by the American Enterprise Institute through its mouthpiece, Peter Wallison. But the report of the majority contains a lot of good analysis, and I will be writing about it in coming columns. What is important for the current blog is the report's conclusion that the crisis was preventable, and that blame should be placed firmly in the laps of Wall Street's “captains of finance” and Washington's “public stewards” who were supposed to regulate in the public interest. The report names names—the rogue's gallery that is still, mostly, firmly in control: Timmy Geithner, Benny Bernanke, Bobby Rubin, Larry Summers, and Alan Greenspan—in addition to the CEOs still in charge of the biggest villain “systemically dangerous” financial institutions. They are the ones who are responsible for the crisis that wiped out $11 trillion of household wealth, for the 13 million households who will lose their homes, and for the 26 million Americans currently out of work, forced to work part-time, or who have given up hope of finding a job. And, yet, Geithner and Bernanke funneled—literally—tens of trillions of dollars to prop up Wall Street's blood-sucking vampire squids just long enough so that they can pay outsized bonuses to the crooks still in charge. And what about the nation's unemployed? They are running out of benefits. Two interesting reports highlight state-level problems with unemployment insurance: one by the National Employment Law Project, and the other jointly issued by the NELP and the Center on Budget and Policy Priorities. The first documents that 9 states are leaving nearly $1 billion of federal funding on the table, neglecting to participate in the 2009 American Reinvestment and Recovery Act that extends unemployment benefits to unemployed workers in states with high unemployment—for 34-73 additional weeks targeted to workers who have run out of state benefits. (The states are Arkansas, Iowa, Louisiana, Maryland, Mississippi, Montana, Oklahoma, Utah and Wyoming.) The program is fully funded by the federal government—so it is hard to fathom why the states would punish their workers. Here's the problem. State and local government employers typically choose not to pay federal unemployment taxes for their workers ($56 per employee per year), opting instead to pay benefits dollar for dollar should the workers become unemployed. Since state and local governments have been laying off workers in this downturn, they now have to reimburse their state unemployment insurance trust funds for benefit payments. If they extend benefits for workers, they are on the hook for extra reimbursements for unemployed public employees. The reimbursed amounts are relatively small—they averaged 2.7% of the state unemployment benefits paid out during 2010. If they extended the benefits, and taking the typical transition from unemployment to either employment or to the out-of-the-labor-force category, the states would probably find the extra budgetary costs would be about half that—let us say, 1.5% of unemployment benefits paid. So they are giving up almost a billion dollars that would go to approximately 236,000 citizens of their states in order to avoid state costs of maybe $15 million. It is “penny wise, pound foolish” since an injection of $1 billion into these 9 states would increase state tax revenues by stimulating spending. Aside from budgetary myopia, the other possibility is that these states are actually promoting unemployment to discipline labor—purposely depressing wages and weakening trade unions. The only other possible explanation is a misplaced “putting your money where your mouth is” attempt to reduce the federal budget deficit by refusing Uncle Sam's dollars. I'm sorry, that is foolish—sort of like checking that box on your 1040 to make a donation to the IRS to reduce the budget deficit. And that leads us to the second report. The CBPP and NELP propose that the federal government postpone loan payments by states that had to borrow from the feds to pay unemployment benefits. Both states and the federal government levy unemployment insurance taxes on firms. States accumulate reserves in good times, and then run down their UI trust funds when unemployment is high. Thirty states ran out of funds and had to borrow from the feds to pay UI—a total of $41 billion by the end of 2010, and a projected $65 billion by 2013. Under current law, states must repay their loans within two years; if not, the feds raise federal UI taxes on employers in any state with an outstanding loan. Those rate hikes will begin later this year, or by early 2012. Note it is even worse than this, because those tax hikes only cover principle; to pay interest, the states will probably raise state UI taxes on firms. Needless to say, this is not the time to begin raising taxes on employers. Hence, the report proposes to postpone those tax hikes by allowing a moratorium on both principle and interest payments—for about two years. The federal government would also provide incentives for states to submit a reasonable plan for rebuilding state UI trust funds, in particular by increasing tax rates (later) and the taxable wage base. The report claims that the plan would not increase the federal budget deficit because state trust funds are held in a federal account, so the increase of the trust funds would offset the federal government's revenue loss. There's more to the report, but I will not go into the details. (www.cbpp.org/cms/?fa=view&id=394) To be sure, postponing tax hikes in current economic conditions is a good idea, and something the Obama administration will probably support. But does it make sense to tax employers to build up trust funds to finance UI to cover rising claims in an economic collapse? Recall from above that rising unemployment was caused by Wall Street and Washington. Why should employers all across the country have to pay higher taxes to deal with a problem they did not cause? Now, I can see some argument for linking UI taxes to layoffs by firms—such as seasonal layoffs by firms that shed workers in the off-season, who then hire them back when business picks up. Those firms are “free-riders”—shifting costs to the rest of the society, which must support the temporarily unemployed workers. By imposing higher taxes on such firms, we make it more expensive to shift those costs. But in a recession, firms are forced to lay-off workers because of macroeconomic performance. It does not make sense to tax firms in good times on the prospect that Wall Street and Washington will run the economy into the ground and cause massive unemployment all across the country. Nor should we tax them after the fact to pay for the follies of our nation's “captains of finance” and “public stewards” who fail to serve the public interest. I can also see some argument for state-imposed UI taxes to pay “Cadillac” unemployment benefits. Whether those ought to be imposed on firms is a matter I will ignore here—but I see no obvious justification. Let us say there is a federally-established UI benefit (whether a flat benefit per worker, or a benefit related to wages), and that states can choose to add a premium. Since states really do need revenue to “pay for” benefits, it makes sense to tax somebody to pay for that. But the federal government is sovereign. It does not need UI taxes to pay UI benefits; nor can it spend tax revenue. (That is not the same thing as saying that it does not need taxes! Taxes drive money—they create a demand for the sovereign's currency.) It can pay UI benefits in exactly the same way it makes any other payment: by crediting the recipient's bank account. It does not need to raise business employment costs in order to do that. As Bernanke said in testimony to Congress, the Fed bailed out financial institutions using keystrokes that credited their accounts at the Fed. Trillions and trillions of dollars worth. That is the way the government always spends—whether it is buying toxic waste from Wall Street and jets from Boeing, or paying benefits to Social Security recipients. The states' UI debts to the federal government can be wiped out in a keystroke. And no trust funds are required to ensure that the federal government can pay out UI benefits the next time Washington decides to create an economic crisis that causes millions of Americans to lose their jobs, homes, and financial wealth.