Extending Unemployment Insurance

Robert Barro of Harvard has an interesting op-ed piece on the Wall street Journal website about extending unemployment insurance.  His view is that it has done more harm than good by keeping the unemployment rate high.  He postulates that the unemployment rate would only be 6.8% instead of 9.5% if benefits were not extended to 99 weeks.  His reasoning is that this extension subsidizes unemployment.  He notes that in March 2009, 3.9 million jobs were created and 4.7 million Jobs lost, a net 800,000 job loss.  Put that way, it does not sound so bad, but it is when compared to a healthy economy.

Professor Barro bases his calculations on a comparison of this recession to the 1981-1982 recession.  the impact of the 1981-82 recession was a mean duration of 17.6 weeks of unemployment and a share of long-term unemployment (greater than 26 weeks) of 20.4%.  The recent recession had a mean duration of 27.2 weeks and a share of long-term unemployment of 36%.  To Prof. Barro the 'culprit' is the extension of unemployment benefits to 99 weeks.

He states that had the extension in benefits not occurred and assumes the 'share of long-term unemployment had equaled the peak value of 24.5% observed in July 1983' then unemployment would be 6.8% instead of 9.5%. 

This is a spurious assumption.  The nature of the recent recession is not directly comparable to the 1981-82 recession, but is more comparable to the Great Depression.  We saw a major mortgage and credit market collapse forced business to begin massive layoffs.  State tax revenues dried up.  As Alan Blinder and Mark Zandi recently showed, the job losses would have been 3.6 million higher without the stimulus package, producing an unemployment rate of about 11.8% rather than the 10.1% of this recession and even the 10.5% of the 1981-82 recession.

Prof. Barro makes another claim of which I am skeptical.  He claims that the Bush tax policies were 'well-conceived and effective.'  In what way, By giving significantly lower tax rates to the wealthiest Americans, the wealthy gained a great deal in terms of real income growth while the rest of population saw marginal gains at best.  It is obvious that, like other periods of low interest rates, consumer spending was driven by increases in debt that eventually sent the savings rate close to zero if not below.  And then there is the deficit itself which was driven in great part by the tax cuts along with reckless government spending.

The Bush policies clearly were not well-conceived, unless of course you were already wealthy.