The Republicans' Holiday Gift to President Obama

by Alan Reynolds at www.cato.org

A proposal by House Republicans to roll back the maximum duration of unemployment benefits from 99 weeks to 59 passed the House by 234 to 193. If such a plan also passes the Senate, that would be politically ideal for President Obama.

Reducing the amount of time people can collect unemployment benefits would clearly cut the unemployment rate below 8 percent by election time, greatly improving the President’s chances for reelection. Yet the President could nevertheless pretend not to appreciate this generous gift and instead castigate Republicans for being as cheap as Scrooge and as mean as the Grinch. From Obama’s point of view, that’s an ideal combination.
The link between longer benefits and a higher unemployment rate has long been well known to economists thanks to international experience and economic research. Germany, for example, cut the maximum duration of unemployment benefits to 52 weeks a decade ago. The result? Germany had an unemployment rate of 6.9 percent in November despite economic growth no faster than in the U.S.

When it comes to economic research, a good place to start is with Alan Krueger, now the head of the President’s Council of Economic Advisers, and his sometime co-author Bruce Meyer of the University of Chicago.
At Princeton, Krueger conducted a 2008 study with Andreus Mueller which found that “job search increases sharply in the weeks prior to benefit exhaustion.” In 2002, Krueger and Meyer wrote an exhaustive 100-page chapter in the renowned Handbook of Public Economics entitled, “Labor Supply Effects of Social Insurance.”. They found that, “unemployment insurance and workers’ compensation insurance... increase the length of time employees spend out of work.&rdquo. The effect was quite large in the case of unemployment insurance — “substantially larger than the labor supply [responses] typically found for men in studies of the effects of wages or taxes on hours of work.
A more recent study by Meyer alone found “the probability of leaving unemployment rises dramatically just prior to when benefits lapse.&rdquo. Another study that Meyer did with Lawrence Katz of Harvard estimated that “a one-week increase in potential benefit duration increases the average duration of the unemployment spells... by 0.16 to 0.20 weeks.” apply that formula to the difference between 99 weeks of benefits since November 2009 and 59 weeks in the House bill and the Republican plan could shrink the average length of unemployment spells by 6-8 weeks.
When people spend less time collecting unemployment benefits, they stop being recounted again and again in the monthly unemployment survey. Regardless whether they accept a less-than-perfect job when the benefits run, or try self-employment or retire early, the unemployment rate falls.
How large was the effect of extended benefits in raising the unemployment rate. Most estimates have been around 1 to 1.5 percentage points, although Harvard’s Robert Barro estimated the effect might be twice that large.
In 2010, the White House and the Congressional Budget Office seized upon the lowest estimate they could find: A brief from Rob Valetta and Katherine Kuang at the San Francisco Fed which suggested that extended unemployment benefits had added only 0.4 percentage points to the unemployment rate by December 2009. Unfortunately, that study ended just one month after the 99-week benefits began to be gradually adopted (it was 73-79 weeks before that). By December 2010, the same economists found extended benefits had added 0.8 percentage points to the unemployment rate, and that estimate would likely be higher if updated again.
Suppose the President ends up being “forced” to sign a bill that limits unemployment benefits to 59 weeks next year. If that merely shaved 0.8 percentage points off the unemployment rate (a low estimate), President Obama could then be facing next year’s presidential campaign with an unemployment rate well below 8 percent... He can’t possibly thank the Republicans for this extraordinary gift at the moment, but maybe he could a year from now.