Unemployment Checks Are The Best Form Of Economic Stimulus

I’m so excited, I can’t stand it!  So excellent to hear the White House agreeing with Congressional Republicans to extend tax cuts for 2 years through 2012!  As a concession, the Republicans agree to extend unemployment insurance for another 13 months.  That’s not quite the  “Shock & Awe Yeah” proposal I have of 260 weeks of unemployment benefits, but 155 weeks is still pretty damn good!

Deploying an enormous unemployment insurance safety net could very well jump start the economy or bring us back to socialism.  I take the former stance, as a bullet-proof safety net causes employees to work harder, take more risks, and be more creative since they no longer have to fear losing their jobs.

Getting 13 months of extra unemployment benefits after getting 99 weeks sounds like a lot.  That said, if you were unemployed, hell yeah you’d want to the extra 13 months!  Now that compromise is here between our nefarious, I mean selfless leaders in Washington, the next step is dealing with all this QE2, QE3, QE4 nonsense!  There are much better ways to spend $600 billion than buying back US treasuries to stimulate the economy.

THE NEXT STEP

Instead of spending billions more on quantitative easing, spend billions directly on unemployment instead.  You address the problem straight on and help stimulate the economy as well.  If you cut taxes for “the rich”, they are likely to just save their increased disposable income.  But, if you give $300 a week to someone who is unemployed and basically doing everything they can to survive, you can bet your bottom dollar they will spend the majority of the $300 on food, clothing, and shelter!  The issue is whether or not those who are collecting are “doing everything they can to survive.”  Not all, but most are.

Many argue that 99-155 weeks is already a long enough time to be collecting unemployment benefits.  My question to those who criticize is whether they’ve ever been in the same situation before?  If not, then perhaps best not to judge.  Take my millionaire friend Greg, for example.  He’s been collecting unemployment checks for over 70 weeks now as it’s pretty tough finding a comparable job making $200,000 a year.  Yes, he can probably work at McDonald’s for $25,000 a year, but is that rational with his experience and savings?  No.

Greg went to Cabos, Mexico to vacation for three weeks in November because companies weren’t hiring.  Can you blame him?  Now that it’s December, things are as dead as a door knob and he’s thinking about going to Hawaii until the new year.  It’s just as easy for Greg to hunt for jobs online in sunshine, than during the cold and rainy weather of the mainland.  That’s rational thinking to me.

SPEND MONEY ON UNEMPLOYMENT NOT HOCUS POCUS ECONOMICS

If the most important issue at hand is unemployment, then the Fed should spend money directly on alleviating unemployment!  It’s inefficient to try and stimulate the economy via treasury buying to try and lower rates to then hope consumers borrow and spend.  You’ve got to then hope higher spending leads to higher corporate earnings, which leads to expansion and increased hiring.  Talk about taking the scenic route!

Providing liquidity and low interest rates is definitely a must to generate investment spending, however it’s unnecessary to spend the entire $600 billion or whatever the QE amount is just on treasury buying.  The 10-year yield is now back up to 3% after QE2, which means the initiative has completely backfired since the 10-yr yield was at 2.4% before the $600 billion deployment!  Spend money directly on the unemployed and you will not only help those who need help the most, you’ll see a large majority of that money get spent immediately back into the economy!

Readers, what do you think about the initiative of directing money straight to the unemployed rather than trying to manipulate assets and interest rates?  Where is my logic flawed?

PS Who cares about the growing budget deficit when we got a 3 year unemployment insurance net and tax cut extensions for all to look forward to in 2011 and beyond!

Regards,

Sam

Sam started Financial Samurai in 2009 during the depths of the financial crisis as a way to make sense of chaos. After 13 years working on Wall Street, Sam decided to retire in 2012 to utilize everything he learned in business school to focus on online entrepreneurship.

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Comments

  1. says

    Sorry for the totally unrelated question Sam, but did you receive many entries for the scholarship? I’m really charged about that–great work. As for other members, thanks for building it as well.

  2. says

    I wonder how long the next extension will be for? You may still get your 250 weeks Sam, don’t give up hope.

    I am thrilled about the tax cut extension, but that might make me evil, I am not sure.

    Regarding unemployment, I truly wish they made the unemployed really prove they are looking for a job. It is so easy to file and get extensions. All you have to do is click a button and say ‘Yes I tried to work!’, ‘Yes, I was available for work!’. Then you get the ‘Well then you get 687.00 dollars in your bank account in two business days. Congratulations’. Maybe they should just wire the money to Cabos for people like your friend and others?

    • says

      I donno, somehow I think this 13 month extension is the last of it!

      You’re not evil for being thrill for a tax cut extension! It’s quite awesome!

      Is it really that easy to collect $687? Maybe a good strategy is to try and get laid off if you KNOW it is your last year of working, so you can collect 1-3 years of unemployment even if you have no intention to work?

      • says

        But shouldn’t I be paying for everyone else through willingly paying a lot of taxes?

        Oh, it is incredibly easy to collect unemployment. Sign up online, post a resume online, go in to an office for a little paperwork, and you are set for years! Every other week you just have to answer 5 questions saying you looked for work, didn’t have a job, weren’t in school or receiving a pension and voila, you get a check automatically deposited. No standing in lines (unless it is at the mall spending your money). What a deal!

        • says

          But here’s the thing, unemployment eventually runs out. We can’t collect for a year, wor for 1 year, then collect for one year over and over again, can we?

          We can all get unemployment insurance if we time it right (right when we want to retire).

        • says

          Oh very true. I know someone who worked at a company that was cutting people left and right. He planned on retiring the following year, so he asked to be cut so he could collect unemployment and then transition into retirement. Worked out perfect. Were you his financial adviser? :)

  3. says

    You aren’t doing someone a favor by keeping him out of a job for 3 years. Skills are deteriorating, employers don’t typically like to see a long period of unemployment on a resume, and many studies have proven that being employed is better for your mental health than being unemployed.

    If unemployment runs out, those people are going to have to spend their savings until they run out, and then they will get picked up by other social services. It’s a fact, our government gives money to basically anyone who asks for it if they don’t have money, regardless of an employment or unemployment situation.

  4. Mars says

    Uh, the Fed has no way of spending money directly on the unemployed.

    Note the size of the compromise deal. It’s being projected that we’re going to spend 900 billion either in revenue loss or direct spending. In exchange, we’re going to completely write off a large class of business expenses, cut the estate tax level, and give people making over 250,000 their special tax cuts. The real benefit is going to be the social security rate cut. For someone making the average of 40,000 a year they’d save 8,000. Maybe this time they’ll actually notice that their taxes have gone down. We haven’t offset these in any way shape or form. Let’s not get into the power dynamic where unemployment gets extended for one year and the tax cuts two. Hopefully now the groups that have been sitting on their money for the past two years will go out and spend that money since they’ve supposedly been waiting to see what will happen with their taxes long term and now that they know that they have their cuts for at least two years…oh wait.

    I’d like to share two charts that explain why I’m dismayed whenever I hear that the solution to our problems is more tax cuts:

    http://blogs.reuters.com/felix-salmon/2010/12/06/chart-of-the-day-u-s-taxes/

    http://www.heritage.org/budgetchartbook/current-tax-receipts

    The honest truth is that more tax cuts = less government revenue and less centralized spending. With one of the lowest tax rates of the developed world and crumbling infrastructure, I don’t want to see how badly our competitiveness will fall as we continue to lower our tax rates.

    We’ve also now ingrained the idea that there is no such thing as a temporary tax cut. Once your taxes fall that is now your god-given default rate. Do we really understand that we went to war and then cut our taxes? I can’t help but look at the 900billion bill tag and say not worth it. Especially knowing that this is just the next step towards making the tax cuts permanent and those are project to cost 4 tril in revenue in next 10 years which is all the budget group managed to save through some fairly draconian cuts. The kickstart we give the economy in the short run is just going to accelerate the slow bleed of innovative companies to other countries that invest in infrastructure, R&D, and general development.

    We have a spending problem, but the spending problem isn’t in the domestic programs we’re always cutting. Our spending is at historic highs in relation to GDP and very little of that money is going back into the people paying it. Discretionary spending is 12% of the budget. The money is in the defense budget we ballooned out of control. The war expenses we still haven’t bothered to find a way to pay for. The Social security surplus that we’ve been collecting and counting as income and have to pay back. (Though really I don’t think we should, we’re dealing with deficits because the boomers spent their money on themselves. Why should they get paid twice?)

    It’s in medicaid and medicare spiraling out of control because we refuse to do anything real about the out of control growth of medical expenses, or even the shunting of low income workers to the government by companies. I almost wish we’d just cut them. Once people realized just how much of their living expenses were actually being covered by the government and not work there might actually be a return of unions and the collective bargaining that’s key in making sure that low level employees get a fair share of company payroll in relation to executives.

    If we aren’t going to cut medicare and medicaid, then we either need to control the growth of medical expenses and fix it so that there are viable alternatives that are either not the government or the government but running surplus. Competition with only private insurers has already shown that their is no real incentive to keep costs down since as middlemen they get to pass any raises on. In this compromise I don’t see anyone with the political will to do either.

    • says

      The solution isnt tax cuts, it’s simply tax cuts coupled with much less government spending. Give people back their money and let them decide what’s best for them and stop the waste in Washington!

      Resolving the AMT issue is awesome too for the middle class 21 million who would be affected!

      • Mars says

        WHY tax cuts period? See this is the problem, what government spending are we planning to cut and what waste? Right now we’re spending about 5% higher of the GDP than normal, but that’s largely because we’re at war. If we stopped funding the war we would cycle back to equilibrium IF we were taxing at clinton levels.

        People glibly say cut “government waste”, but then they’re really hard pressed to find that waste to cut. If the tax cuts are made permanent the shortfall with be three times the expected Social Security bill and would cancel out all of the money we’d save if we followed all of the deficit committee’s proposals exactly. Discretionary spending is at 12%, even if we cut it all we wouldn’t balance the budget. Quick fact check: taxes are at historic lows, our taxes are the 3rd lowest of the developed countries, yet we still expect that the bills we already racked up will be paid…somehow. Exactly when will taxes be “low enough”? Really this is about starving the best until we cut all social programs.

        “Give the people back their money” is just a slogan. It should be “Get the people to pay their bills”. The reality is that individual spending is inefficient and drives administrative costs up, not down. Thereby why our highly individual school systems spends more per student to return worse outcomes, why we’re charged an arm and a leg for the privilege of having a piece meal public transportation system, and why we pay through the nose for one of the developed worlds slowest communication networks. Going into the future we’re going to be a large collection of mom and pop stores going up against the equivalent of the massive chain stores represented by China.

        PS: Also just to note, unemployment hasn’t been extended beyond 99 weeks, we’re just continuing the extension to 99 weeks that the federal government covers. Also since the 99 weeks number only applies to the hardest hit states, places like MA which have already recovered to under 8% unemployment are functioning at the 26 week number.

        • says

          Actually, I think you are incorrect on your unemployment assumption. The goal is to HELP and SAVE those whose unemployment has run out after 99 weeks or whatever amount they qualify for, for another 13 months. Otherwise, it defeats the purpose as 5 million would lose all unemployment insurance at the end of the year.

          Where are we cutting? Easy, defense.

        • Mars says

          Its not an assumption, I already posted a link and it seems to have disappeared. The federal government only pays for unemployment above the default 26 week mark and only in the hardest hit states. Unemployment was not about to run out for the 99ers. It already has for most of them. Unemployment was going to run out for anyone over 26 weeks because the government would stop footing the bill.

          http://ac360.blogs.cnn.com/2010/12/07/white-house-seeks-democrats-backing-for-tax-deal/?iref=allsearch

          As for “cut defense” first that would require someone to actually do it. Second if we cut it all it might balance the budget, and only for today and not in the long term. Third I can’t help but notice that whenever anyone says that they’re going to cut “pork” what actually gets cut are my local school and library budgets. It is not “waste” if they’re programs you should actually want to fund, and costs you less to fund centrally. It would be as productive as if I cut the “waste” from my home budget by stopping water and electricity payments.

  5. says

    The unemployment rate in 1948 was 3.8%. Today it is over 9%. In 1948, we manufactured stuff. Today we don’t.

    The issue is basically very straightforward, nothing complicated. What’s needed is political will. What do we need – cheap stuff with no jobs or relatively expensive goods with lots of jobs?

  6. RT says

    I dont think the 13 month extension is actually on top of the 99 weeks. This merely extends the ability to draw 99 weeks for another 13 months.

    • says

      You think so? That is an interesting point and you might be right! Can you double check that for me? I’ll check as well. But gut says NO as the point is to help those whose benefits are running out. Thx.

    • says

      Don’t we win if we don’t plan to have grandchildren?? :)

      Not everybody knew they’d compromise. Ask Investor Junkie who’ll be taking me out for a sushi toro dinner in SF if the bill passes before NY! Things could fall through tho, but doubt it!

      • says

        I followed the Estate Taxes pretty closely and didn’t know it would be part of the compromise. I NEVER would have guessed that the exemption amount would go UP AND the % taxed DOWN! It was a tax that literally effected the top 2% and now it will only effect the top 1% lol

  7. says

    I had a feeling that they would compromise, but to be honest I’m not sure how I like it. I’m glad that they did something with the estate tax, to take away the uncertainty of the whole thing. I’m now curious to see if a bunch of people with large estates (either due to land holdings or cash) will stop life prolonging treatment before the end of the year. The Congresswoman in my state even came out and said many of her residents were considering it to pass on more to their children.
    As far as the unemployment insurance extension, I hope that it will get pulled back down to a more reasonable level once the economy starts heating up.

  8. says

    How about using some of that money to entice small business owners or entrepreneurs to start up their own businesses? I think that offering grants for small businesses to get off the ground might be a better economy booster than continuing to pay unemployment benefits for such a long period of time. But then again, maybe I’m just an idealist.

    • says

      They did intro some benefits for small business owners in terms of tax incentives I believe. I think there are plenty of organizations that offer grants for new businesses no? I think we just have to search.

      There is A TON of money out there, just like the Yakezie Scholarship. We just need to connect to those who are looking.

  9. says

    It seems to me that whether they extended unemployment benefits or not, they would still spend 900 billion…just on programs for the homeless, fighting crime, drug abuse and all the other social ills that come along when people cannot find a job and have no way to pay the rent. Isn’t a cash payout easier than managing social welfare programs? It’s probably cheaper in the long run too. And the bonus of a stimulated economy doesn’t hurt. Some of it comes back to the government in taxes paid, sort of like a rebate. Some of it helps the bottom lines of companies who also pay taxes on that money coming in.

  10. Jslugger says

    Unemployed people spend money, best bang for the taxpayer buck. People lose sight of the fact that unemployment is not FREE money; every worker pays for the insurance. You have to have worked to receive the benefits. No one that works wishes to not have a sustainable income that covers their needs and wants. The opposition argument that unemployed people don’t want to work is silly $100-300 per week is barely subsistence.

  11. says

    You hit right on. Unemployed individuals will utilize all their benefits to purchase their daily necessities. Most of them will not even have room to save because what they receive in unemployment is so much less on what they used to earn. Thus, helping stimulate the economy through spending. It’s tough to be unemployed since you are getting so much less on the benefit. In addition, it could also give a toll on your psychological well-being if you’re searching for a job that is just not there.

  12. Jslugger says

    Exactly Ken, unemployed people are not making MORE money that when they were receiving a paycheck to support their lifestyle; so they are going to spend their insurance money and have an incentive to find another job to make more money than they get on employment.

    These people WANT to work , maybe a small percentage of them are in denial about the quantitative value of and demand for their skill sets but they do want to work and earn their living and the longer they are out the tougher they are on themselves psychologically.

  13. says

    I’ve always had mixed feelings about unemployment. But given the current extenuating circumstances, exceptions can be made.

    I think I agree with you that giving a check to people who are out of work will stimulate the economy, if and only if, the individuals receiving the check are doing everything they can to survive.

    The problem is figuring out what percentage of people are doing so. Given the inherent limitations of bureaucracy, figuring this out would probably cost more than it’s worth or take much longer than it’s worth.

    So there is inherent sizable risk in a plan like that. For right now, however, there may not be a better plan to stimulate spending. Waiting for people with discretionary income to spend money in an economy they have no confidence in is probably a road to nowhere.

  14. says

    Sam, not sure if someone got this earlier in the comments, but nobody’s getting past the 99 weeks. The extension was solely to extend the current cohort that was due to expire and not get the 99 weeks. It has to be extended for each tier. This tier would have only had like 26 weeks state I believe.

    And not to belittle the efforts of those seeking jobs – since many can’t find one, but…the aggregate data shows the closer to expiry people come to benefits, they tend to accept jobs quicker rather than holding out. So, the massive extension you’re a fan of (well past 99 weeks) just prolongs the inevitable at great cost.

  15. says

    You may be right on target on this issue but all this is all temporary.

    I have a bad feeling about 2012 when Obama steps down as the President and many of the social programs are taken away. All this in the midst of a financial crisis that will most definitely get worse as we get closer to 2012.

  16. says

    There’s a cost for all of this unemployment stimulus, I would not be thrilled knowing that I am paying a huge % of my income to support those who are taking advantage of this social security net by being lazy.

  17. says

    The fallacy of your argument, Sam, is that you are confusing cause and effect.

    The truth is, increased consumer spending is the *result* of economic growth — not the *cause* of it. So to say that unemployment benefits “stimulate” the economy is just not correct.

    However, extending unemployment benefits DOES serve to act as an incentive for some people to hold out as long as they can before finding “the perfect job” that pays more than most people think they are worth in the current market.

    Since the government must first take capital from the economy through borrowing in order to finance those unemployment benefits that leaves less money for entrepreneurs to invest money.

    Even worse, states are already borrowing money (California is borrowing $40 million per day) from the federal gov’t to pay out these extended benefits and will be forced to raise unemployment insurance taxes on employers to pay the loans back. That is less money available to hire new employees.

    Just think about it; if unemployment bennies *were* stimulative, the government could extend unemployment benefits indefinitely — to everybody whether they had a job or not — and our GDP would continue to expand even though everybody was out of work.

    All the best,

    Len
    Len Penzo dot Com

    • says

      Everything is relative. I am comparing unemployment checks with other forms of stimulus. What other form of stimulus is better and works the government’s money into the economy faster? Nothing that I can see. Please share.

      • says

        Hut! It’s not the government’s money, Sam. It’s *our* money and the
        government takes it and redistributes it — inefficiently, I might add.

        An unemployment check is not a stimulus. It is a drain on the private sector. All
        unemployment checks do is mask the symptoms of what ails the economy
        (unemployment), rather than curing the disease itself (too much gov’t regulation,
        high taxes, and bailouts that are keeping the weaker players in the market
        from being flushed away, which acts as a boat anchor on the economy).

        Lower taxes — especially on capital gains — would go a long way to fixing that.

        Len

        • says

          It’s the lesser of the two “evils.” I’d rather the gov’t give money to the unemployed, who are going to spend the money IMMEDIATELY in our economy, than spend the money indirectly on gov’t work projects which MAY help the unemployed.

  18. kelly says

    you dont get more weeks on top of the 99 you already recieved for that to happen they need to pass additional tiers thats why there is the group called 99ers that will not be helped by this current tax deal that the senate approved today…dont do to much celebrating if u recieved 99 weeks already u wont b getting any more as of december 15 2010

  19. Broke but no broken says

    Majority of people on unemployment are abusers of the program. The value of the dollar is in a consistent decline, unemployment only extends the life for a limited time. I am in the same boat I dont even have 300 to my name but have been consistently employed for the past 12 years. A lot of abusers are right here on this forum giving advice on how to take advantage of the program. I wish unemployment was an optional tax because I feel ashamed supporting lazy americans. Yes some might actually need it but not for years…. the longest it took me to find a job inbetween jobs was 3 months and that was because I was only looking and applying here and there.

  20. Mike says

    The joke’s on them. Who in their right mind would hire these 99ers to a job. By 2012 their job skills would deteriorate to such a point that they would become shunned by companies.

    “So what have you done these past couple of years”

    “ummmmm……”

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