Last week President Obama said:
But there’s an economic case for [extending additional unemployment insurance benefits], as well. Independent economists have shown that extending emergency unemployment insurance actually helps the economy, actually creates new jobs. When folks like Katherine have a little more to spend to turn up the heat in her house or buy a few extra groceries, that means more spending with businesses in her local community, which in turn may inspire that business to hire one more person — maybe Kathy.
By leaving out one word, President Obama got this exactly wrong. The missing word is temporarily.
The “helps the economy” case for increased government spending on additional unemployment benefits is a traditional fiscal stimulus argument: if the government increases spending, people will have more income. They will then spend some/most of it, generating more income for others, and so on. Depending on the type of spending, economists estimate/guess the fiscal multiplier of a dollar of increased government spending (or tax cuts!), then calculate the increase in GDP that will result. From this they estimate the increased employment that will flow from the government’s fiscal stimulus.
Economists like to argue about the size of multipliers for various types of fiscal stimulus. But as best I can tell, they don’t argue that a temporary fiscal stimulus results in temporary economic growth. Once government stops spending money, the beneficial growth effect, however big or small it may be, dissipates.
Now the hope of a traditional fiscal stimulus is that it jump-starts an economy stuck in a rut, providing a big enough temporary boost that the recovery becomes self-sustaining even after the stimulus is withdrawn. Think of it like a strong cup of coffee early in the morning. If all goes well, the initial jolt gets you going enough that you maintain a high energy level even after the caffeine hit has worn off.
It is quite difficult to make such an argument for such a small proposed policy change. An additional $25 B in government spending, in a $16.6 trillion economy, doesn’t come close. It would be like hoping that one sip of coffee will jump start your day. Qualitatively the argument can hold, but it’s not big enough to be credible (assuming you buy the assumed fiscal multipliers in the first place).
President Obama should have said “extending emergency unemployment insurance temporarily helps the economy.” But he didn’t say that because it’s a much weaker argument. By omitting this key word, he implied that this policy is unambiguously good for the economy as a whole, and not just for the recipients of the added benefits.
President Obama then doubled down on his flawed argument by adding:
That’s why, in the past, both parties have repeatedly put partisanship and ideology aside to offer some security for job-seekers with no strings attached. It’s been done regardless of whether Democrats or Republicans were in the White House. It’s been done regardless of whether Democrats or Republicans controlled Congress. And, by the way, it’s been done multiple times when the unemployment rate was significantly lower than it is today.
In the current legislative context “with no strings attached” mostly means “without cutting other government spending, either now or in the future, so there is no net deficit increase.” President Obama wants to increase government spending by $6 B over the next three months (or $25 B over the next year when it inevitably gets extended) without any budget offsets. Deficits and debt would be higher if he gets his way.
His problem is that this turns his fiscal stimulus into a net economic loser over time. If you buy the Keynesian models, the initial positive bump to GDP from the fiscal stimulus is temporary, but in exchange for that you get a permanent increase in debt because you’re not offsetting the added government spending.
That added debt creates an additional fiscal burden (higher interest payments) and the higher budget deficits create an economic cost as well, as lower national saving leads to a smaller future capital stock, slower productivity growth, and lower future wages.
So, even in a CBO-scored view of the world, in which fiscal stimulus works and fiscal multipliers are big enough to matter, a temporary, not-offset increase in government spending like that proposed by the President, results in:
- a temporary increase in economic growth and jobs;
- a permanent increase in debt and net interest costs;
- and a net decline in economic growth and income over time, as the short-term benefits dissipate and the long-term costs gradually accumulate.
This does not definitively mean you shouldn’t do the policy, by the way. You might conclude that a little added growth and job creation now is worth a bigger economic and fiscal downside in the future. Or you might think the compassionate benefit of helping the unemployed is worth the aggregate downsides of a policy that is a net fiscal and macro negative over a longer timeframe. The President said this yesterday when he said that helping some (unemployed) Americans is more important than economic growth for all Americans. Even if you agree with the President’s value choices, that does not excuse his flawed economic arguments.
If you limit your view to only the next year, then what President Obama said is true: the traditional macro models show increased economic and job growth from his proposed policy change. A more comprehensive, longer view allows you to see both the costs and benefits of the President’s policy, and you have to decide whether slamming a couple of Red Bulls now is worth the caffeine crash later.
Although, given the size of this policy, maybe this is more like taking a couple of sips of Red Bull. While the President got his economic arguments precisely backward because he ignored the out-year costs, this is a debate about a fairly small policy change. Relative to a $16+ trillion economy, this really isn’t big enough to matter much either way.
Still, that doesn’t excuse bad economic arguments.
(Official White House photo by Pete Souza)