INSIGHTS: IS THE SUPPLEMENTAL UNEMPLOYMENT PAYMENT HELPING OR HURTING COLORADO?
GUEST COLUMNIST: Paul Prentice, a Senior Fellow at the Independence Institute and a former Chief Macroeconomist at the U.S. Department of Agriculture under President Reagan. Reprinted with permission.
One of the most important principles of economics is that people respond to incentives. You get more of whatever you incentivize. You get less of whatever you disincentivize. This is irrefutable. The supplemental unemployment payment does both — it incentivizes people not to work, and simultaneously disincentivizes them from working.
The number of people who have dropped out of the labor force in Colorado, those who are not actively seeking employment, remains near record highs even as open jobs go begging.
Employers cannot find sufficient workers to restart their businesses, or to expand existing operations back to full capacity. They face higher costs by having to entice people out of unemployment. After a full year of partial economic lockdown in Colorado, this is holding back our recovery.
According to U.S. government data, employment in Colorado has yet to return to pre-lockdown levels. Personal income in Colorado has yet to return to pre-lockdown levels. Real GDP in Colorado has yet to return to pre-lockdown levels. Furthermore, employment and income losses are concentrated among the poor and minorities. The last thing they need is an increased incentive not to work.
Another important economic principle is that income is created by production. When fewer people work and fewer businesses operate at capacity, it is axiomatic that less income is produced. Government payments in lieu of earned income may help some individuals in the short run, but it harms the economy as a whole in the long run. One dollar of supplemental unemployment does not have the same economic impact as one dollar of production-based earned income.
Progressives imagine that they can ignore the laws of economics.
But they cannot ignore the consequences of ignoring the laws of economics. They imagine that their policies that pay people not to work, do not result in fewer people working. They are shocked, shocked, at the very suggestion.
With supplemental benefits, many people receive more in unemployment than they earned in their previous job. And, although even more people receive less in unemployment that at their previous job, the differential at the margin is frequently not enough to incentivize a return to work.
A recent article in the Wall Street Journal makes my point, “Unemployment Rolls Shrink Faster in States Cutting Aid.” Businesses see an increase in job applications as jobless aid is reduced. That is based on data — what used to be called “science.”
Even for those who receive more in unemployment than by working, the short-term money cannot make up for the long-term loss of moving up the employment ladder, achieving seniority, and earning raises. At a sociological level, the loss of earned self-esteem that comes from gainful employment is incalculable.
Generational damage will occur from children not observing the social benefits of employed parents.
The unintended economic consequences to Colorado of paying people not to work go far beyond the immediate impact of reduced employment.
From where will the money come? Taxes on job creators? That harms all Coloradans as fewer jobs will be created. The government printing press? That harms all Coloradans through increased inflation. From Communist China buying more U.S. Treasury debt?
That harms all Coloradans by making us more beholden to a country that has shown itself to be a global enemy of freedom.
I am reminded of a saying by one of my favorite economists, Murray Rothbard: “It is no crime to be ignorant of economics, which is, after all, a specialized discipline and one that most people consider to be a ‘dismal science.’ But it is totally irresponsible to have a loud and vociferous opinion on economic subjects while remaining in this state of ignorance.”
ON THE ECONOMY: ROLLERCOASTER
John Dunham, Managing Partner, John Dunham & Associates
Nights flying down 10, nearly 2 AM. Happiness begins. Days lifted in haze, we were just a phase. We were just pretend (Just pretend). I remember no lows and highs, we threw our hands up, palms out to the skies. It was fun when we were young and now we’re older, those days when we were broke in California. We were up-and-down and barely made it over, but I’d go back and ride that roller coaster. So begins the song Rollercoaster, written by Ryan Tedder, Jack Skelton, Casey Smith, Jonas Jeberg and Michael Pollack and performed by the American boy band, Jonas Brothers on their 5th studio album, Happiness Begins in 2019.
A rollercoaster really describes the current American economy. In July, the self-appointed Business Cycle Dating Committee of the National Bureau of Economic Research, went out on a limb and determined that April 2020 was the trough of the current recession/depression. This means that the downturn (or that first plunge on the Cyclone) lasted for just two months, the shortest on record.
On top of this, the US Department of Commerce, Bureau of Economic Analysis (BEA) released preliminary 2nd quarter GDP figures, and low and behold, the size of the US economy in real terms is back to where it was at the end of 2019. This means that the actual downturn lasted for just 5 quarters, This compares to over three years for the 2007 recession, and nearly three years for the 1982 recession.
GDP growth was reported to be 6.5 percent in the 2nd quarter, which was well below the predictions of Wall Street economists. Yours truly estimated that the economy would grow slightly slower, at about 6 percent.
Interestingly, the BEA calculated annualized inflation to be roughly 6.1 percent which is much lower than what the CPI has been showing, suggesting that real GDP growth was overestimated, and may likely fall a few decimal points by the time final numbers are released.
The growth in GDP over the last two quarters has been driven by consumer spending, which was in-turn driven by government borrowing. It is always important to remember that the way the BEA calculates the size of the economy is not based on production, but rather on consumption, which is the opposite of what GDP should really be. That said, consumer spending accounted for all the growth in GDP during the last two quarters. In fact, it accounted for more than the reported growth as all of the other categories subtracted from GDP. Last quarter, spending on capital fell, inventories fell, net exports fell, and even non-transfer spending by the government fell. In effect, the entire economy is being propped up by government printing presses.
The last stimulus was a spending package of $1.9 trillion, all of it borrowed money. Considering that on an annualized rate, the economy grew by only $302.5 billion, it is obvious that this was completely fueled by new debt rather than new production. This fact is also bourn out by rising prices, longer shipping delays, and continuing unemployment. In fact, the GDP report itself shows the effect of all of the government largess. In its reporting on income the BEA includes transfer receipts, which are for the most part government payments (including things like social security, SNAP benefits, housing vouchers, etc.) In 1999, this amounted to about $1.7 trillion (net), or 8.0 percent of the economy. In 2020, transfer payments soared to $2.8 trillion (13.8 percent of the economy) and remained at about that level in 2021.
Simply put, during the 2nd quarter of 2021 very little was added to the actual economy, and trillions were added in new debt. If, more likely when, the infrastructure bill passes, and some part of the spending package proposed by the Biden Administration passes, we could continue to see good GDP numbers, while the underlying structure of the economy continues to erode. That is of course, unless large parts of the country are again shut down, leading to another giant dip in GDP.
I always liked to ride on old wooden roller coasters like the Coney Island Cyclone, not so much because the ups and downs were so scary, but rather because they seemed so rickety. The idea that the thing can fall out from under you is kind of an adrenaline rush. But I like to see my economy more solid. As of now it’s more up-and-down and barely making it over, that old rickety economic rollercoaster.