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Archive for February, 2012

Which came first, long term unemployment insurance or high rates of long term unemployed workers? This chicken or egg argument is hotly contested by economists.

It is a nightmare to want, but have no work. Few would argue that it is a reflection of a responsible and compassionate society to want to aid unemployed workers, particularly in recessionary environments when finding a job is especially difficult. States have traditionally provided up to 26 weeks of unemployment insurance for workers who have lost jobs through no fault of their own and are prepared to work. The average unemployment benefit is about $300 per week. However, individual benefit levels vary greatly depending on the state and the worker’s previous earnings. The goal is to replace about half of a worker’s previous earnings, subject to a maximum payment. Because the benefit is capped, UI benefits replace a smaller share of previous earnings for higher-wage workers than lower-wage workers. No one is living grandly on these amounts.

The federal government has a history of funding extensions to the traditional six month state unemployment benefit programs. The previous record for unemployment benefits was 65 weeks during the recession of the mid-1970s. In the past decade, federal supplements of 13 weeks were funded first in 2002, followed by an increase to 26 weeks (for a total of one year of benefits) in 2003. These temporary programs were restarted in April 2008, for 13 weeks, and increased in 2009 to a historically high 73 additional weeks, for a total of 99 weeks including state benefits.

Many argue that extended benefits represent a “moral hazard” that results in higher than expected long term unemployment rates. A look at real world data such as in the chart below shows that there were immediate increases in the rate of workers unemployed longer than 27 weeks as soon as the extended benefits programs were introduced. Were the results causal or coincidental?

Say’s Law states that “supply creates its own demand.” In other words, as in the movie Field of Dreams, “if you build it they will come.” The current program will cost federal taxpayers about $44 billion in 2012, and will provide assistance to about 40 million Americans. According to the “law of unintended consequencesextended benefits paradoxically have increased long term unemployment rates.

“…government assistance programs contribute to long-term unemployment [by] providing an incentive, and the means, not to work. Each unemployed person has a ‘reservation wage’—the minimum wage he or she insists on getting before accepting a job. Unemployment insurance and other social assistance programs increase [the] reservation wage, causing an unemployed person to remain unemployed longer.”

If extended benefits were not available, many workers would be forced to find and accept jobs outside of their fields of experience or at lower wages than they had preciously earned. While clearly painful for those individuals, that pain is a positive for our society. Government would spend less on benefits, and as those workers find “better” jobs at a later date in their fields or at higher wages, more turnover is created for other unemployed workers to find jobs. When someone quits, they make way for promoting and hiring. New employees bring new skills and ideas, and those lead to greater profits. High churn rates among American workers are often cited as a key underlying factor in the country’s economic success.

Many companies today try to avoid hiring workers who have been unemployed more than six months, believing that such workers have atrophied job skills and/or poor attitudes towards having and keeping jobs. Some employers, particularly of unskilled labor, say that many of the long term unskilled, unemployed are unable to pass their pre-employment drug tests.

Can the extended benefits program be improved so as to provide more disincentives to game the system? Should extended unemployment benefits be used to support those who can’t find a job they want, or should they support only those who can’t find ANY job through no fault of their own? The proposals currently being debated in Congress begin to cut back the duration of federal extended benefits and add hurdles for unemployment rates in the state of residence. Other countries such as Canada and Sweden have kept longer duration of benefits but cut back on the monetary value of the benefits as the duration increases. All of the proposals appear reasonable to Diogenes. What do you think? Are there other better ways to improve these benefits?

A friend recently decided that the US was doing almost everything wrong politically and economically. Over the years, as a successful entrepreneur and investor with a modest lifestyle compared to his assets, he had managed to accumulate enough wealth to retire comfortably. Concerned about being able to pass on that wealth to heirs, he had decided that estate taxes in America are confiscatory and intellectually repugnant. Having already paid millions in income taxes over the years, he considered that he had contributed more than his “fair share” and decided to vote with his feet, renounce his citizenship and move abroad.

The episode caused Diogenes to question if America is still the “land of opportunity” it has been for the world’s ambitious people for well over a century. Legal immigration in America is about a million people per year, the highest of any nation on earth, and roughly equivalent to the rest of the world combined. Immigrants have come here for the chance to build a better life not only for themselves, but also for their children and children’s children. It has been a significant factor in America’s dynamism to have cultural inputs from around the world contribute to a great “melting pot”. If you were a refugee of political or economic oppression, where would you go?

In posing the question, let’s assume you were one of the lucky few. You managed to escape being born in Congo, perhaps the poorest country in the world by per capita income, and had obtained a college engineering degree abroad so that you had options not available to most. Your family had died, you were not married and could start your life anew and build your future virtually anywhere. Where would you go?

One place to start would be to look at which countries have the highest per capita income. According to the IMF the United States is only about seventh in income, ranking below several much smaller countries. But average per capita income is not meaningful if wealth disparities exist and there are significant barriers to earning a higher income.

Perhaps you are ambitious to create wealth for yourself and future heirs. In that case, you might want to go to a place that is most economically free. The cornerstones of economic freedom are personal choice, voluntary exchange, freedom to compete, and security of privately owned property. On this criterion, many of the same countries rank near the top, although there are differences.

Interestingly, the countries highest on the list for economic freedom are not all represented in the list of countries where people are the happiest. But the 3 least economically free nations are not coincidentally the least happy countries in the world. (Burundi, Congo and Somalia).

Is wealth happiness? Is happiness economic freedom or a combination of community with economic opportunity? The UN attempted to define happiness by publishing its Human Development Index. The HDI measures happiness in different countries based on factors such as income, education, health, life expectancy, economy, gender equality and sustainability.

There are of course many ways to measure happiness. In late May 2011 the Organization for Economic Cooperation and Development, the Paris-based think tank supported by 34 industrialized nations, released its first-ever Your Better Life Index (BLI). The interactive database compares member countries along 11 separate lines, from indicators of wealth and income to measures of health, education, personal fulfillment, and leisure time.

Another interesting variation on defining a better life was developed by the Legatus Institute, a non partisan public policy organization based in London. After studying 40 years of data and outcomes, they settled on eight areas – the ingredients of prosperity: economy, entrepreneurship, governance, education, health, safety, personal freedom and social capital. Then they looked for reliable data from the likes of the Gallup polling organization that would let them rank countries on their performance in these areas. Add up the scores and you get the Legatus Prosperity Index.

In order to compare relative strengths amongst countries, Diogenes has compiled the top 15 nations according to each of the above measures.

Sources: IMF, Heritage Economic Freedom Index, UN, OECD, Legatus Institute

There are five countries that are present in all lists, and they are shown in various colors. In no particular order, they are the USA, Switzerland, Canada, the Netherlands and Australia. Each has their appeal and their drawbacks. As a patriot, if given a choice as our hypothetical refugee, Diogenes would choose to come to the United States. But then, this blog is Diogonesofny. We don’t know what Diogenesofsydney might say. Where would you choose to go? Are there other criteria that we should consider in making our decision?

P.S. The friend who went to one of those other four countries returned to the US after a few months abroad. He sheepishly told Diogenes that he was tired of $30 hamburgers and just plain preferred American living.