21st Century Alchemy

Matthew Hoy
By Matthew Hoy on July 29, 2010

As I was running an errand earlier today, I was listening to a local talk show host interview my congresswoman, Lois Capps. It was the typical softball interview you expect from a small-town talk show host. But there was one statement made by Capps that I’d heard peddled before, but I couldn’t believe anyone other than Nancy Pelosi would utter it.

Capps said that unemployment insurance is “one of the most stimulative things you can do” and that for every dollar paid out in unemployment insurance $1.63 in economic activity occurs.

The basis of this claim appears to come from Mark Zandi, the chief economist at Moody’s. Zandi apparently gets this number by putting the $1 in a model and $1.63 comes out the other end. It’s magic! (I got this weird shiver when I thought about what would happen if you crossed Zandi’s model with the anthropogenic global warming models, but that’s a different story.)

On the other end of the spectrum you’ve got economist Robert J. Barro who believes the multiplier for the economic effects of unemployment insurance is not 1.63, but 0.80. (Actually, Barro thinks the multiplier is no higher than 0.80.)

But let’s set all of the economists and their models aside for a second and use what I like to call “common sense.” (Which is increasingly uncommon.)

The government gives $1 to an unemployed worker. He spends it and the “trickle-down” effect of that is $1.63 in the economy.

What is the effect of $1 I earn myself and spend on the economy? Is it less than $1.63?

It obviously can’t be. If the economic multiplier of my earned $1 is less than $1.63, then the government should just take all my money [don’t give them any ideas – ed.] and then give it back to me as a transfer payment and voila, it’s now 163% more economically effective than it was before.

Of course, there’s also the reductio ad absurdum argument – the economy would really boom if everyone lost their job and went on unemployment.

And let’s not even get into how a dollar taxed from me (or borrowed from the Chinese) somehow passes through all those levels of bureaucracy and comes out the other end worth more.

The right, wrong, or necessity of extending unemployment benefits to two years is beside the point here. As someone who’s actually cashed an unemployment check in the past year, I think that there’s certainly a place for a safety net of some kind. The issue here is whether unemployment insurance is a positive multiplier on the economy.

It isn’t. The fact that anyone thinks it is befuddles me. And I wouldn’t trust Mark Zandi with one red cent.

5 comments on “21st Century Alchemy”

  1. [...] So is this guy an economist? Doing the math, that works out to $33,141 on average for each part-time, temporary job. I’ve seen worse numbers, but honestly, wouldn’t that money have been better spent on unemployment insurance? [...]


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