Summers Does an About-Face on Unemployment Insurance

Back in 1999, Larry Summers was still just a lowly economics professor whose academic credentials likely meant more to him than any political motivation. When he wrote against government unemployment insurance he was probably writing what he truly believed in at the time.

As opposed to now… as director of the National Economic Council, and wholly caught up in political wrangling, he’s singing a different tune. It doesn’t come as much of a surprise that Summers, once a staunch opponent of unemployment benefits and extended welfare, has recently made an about-face on the subject.

From The WSJ:

“Mr. Summers […] resorts to that all-purpose economic explanation known as ‘aggregate demand.’ In 2010 as opposed to 1999, the harmful incentive effects of extending jobless payments to an unprecedented 99 weeks don’t matter. He says the point now is to stimulate the economy by increasing consumer “demand.”

“This is worth parsing because it gets to the heart of what’s wrong with Obamanomics. The Summers argument is that increasing unemployment insurance increases aggregate demand and thus reduces unemployment. This is because he and the neo-Keynesians believe that the impact on macroeconomic demand of this jobless spending outweighs the microeconomic harm on individual incentives.

“In other words, if government pays people for not working, then more people will work. Subsidize unemployment and you will somehow get less of it. But if this were true, we could lower unemployment even more if we increased jobless benefits to $100,000 a year per person to cause an even greater surge in demand.

“More fundamentally, Mr. Summers’s demand effects across the economy are illusory because every dollar the government pays to someone in jobless benefits must be taken from someone else in higher taxes or borrowing. If this income transfer means taxing a productive worker more to pay someone for not working, the economic harm far outweighs any demand benefit. If you want to know why the Obama stimulus has spent so much money for so little return in growth or job creation, this is it.”

The government spending programs just keep coming. The justification seems to remain the same, that we can just spend our way to a stronger economy, to full unemployment, and to any other goal we’d like to achieve. Right… we have a pretty good sense of how this will work out.

Visit The Wall Street Journal’s coverage of Summers’ spectacular reversal to read more.


Rocky Vega,
The Daily Reckoning