Tag Archives: Unemployment Insurance

Government Spending Has Shrunk…When You Ignore 44 Percent of Government Spending

Floyd Norris has made an astounding discovery. When you don’t count 44 percent of government spending, it appears that government spending has shrunk in recent years.

Writing in the New York Times, Mr. Norris asserts:

Spending by the federal government, adjusted for inflation, has risen at a slow rate under President Obama. But that increase has been more than offset by a fall in spending by state and local governments, which have been squeezed by weak tax receipts.

In the first quarter of this year, the real gross domestic product for the government — including state and local governments as well as federal — was 2 percent lower than it was three years earlier, when Barack Obama took office in early 2009.

The operative phrase here is “real gross domestic product for the government.” What Mr. Norris neglects to note is that real gross domestic product for the government is only about half of what governments actually spend. And when you look at total spending, it is actually up over the last three years, not down.

Let’s begin with government gross domestic product (GDP). This is the portion of government spending which is counted by the Bureau of Economic Analysis (BEA) when it tabulates national GDP. It consists of government consumption expenditures and gross investments. You can think of it as the tab for all items that the government buys on the open market: salaries of public employees, purchases of weapons for the military, investment in infrastructure, etc.

Among other things, however, government GDP does not include transfer payments such as Medicaid, Medicare, Social Security, Unemployment Insurance, Earned Income Tax Credits, Supplemental Nutritional Assistance, Housing Assistance, Supplemental Security Income, Pell Grants, Temporary Assistance to Needy Families, WIC, LIHEAP…you get the point.

It turns out that real spending on everything other than government consumption and gross investment is up about 19 percent since Obama took office. And this is more than enough to offset what’s going on with consumption and gross investment. Thus, total spending is up 7.7 percent in real terms.

You can see this in this chart*:

There’s nothing wrong with using government GDP figures. They are used all the time to estimate things like the government purchases multiplier. And they are also helpful in understanding whether government is growing faster or slower than the private sector. But Mr. Norris does his readers a disservice to casually conflate government GDP and total government spending. How many people reading his column would know that he left out 44 percent of what government spends? Or that when you include that 44 percent, total spending actually rose over the last three years?

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*Technical note: when the BEA calculates real government GDP, it uses chained 2005 dollars. It does not calculate real total spending, offering only the nominal figures in Table 3.1. I have therefore used 2005 inflation conversion factors found here to convert total spending from Table 3.1 and government GDP from Table 1.1.5 into real figures. When you do it this way, real government GDP actually rose slightly (0.41 percent) under Obama. In other words, the 2 percent drop in real government GDP looks like a slight increase if you use a different inflation conversion method.

Does unemployment insurance fuel economic growth?

Congress faces a year-end deadline on unemployment insurance. Currently, in states with the highest levels of unemployment, jobless benefits last for nearly two years. Extensions of benefits began in 2008 and have continued throughout the economic downturn. These extensions are set to expire, leaving all workers with the standard six months of benefits. President Obama has told Congress to make further extensions a priority:

“With millions of Americans still looking for work, it would be a terrible mistake for Congress to go home for the holidays without extending unemployment insurance. . . . Taking that money out of the economy now would do extraordinary harm to the economy.”

Here, the president is arguing that because the unemployed are likely to spend money that they receive rather than save it, the Keynesian multiplier will be high for unemployment benefits. Some evidence does support this hypothesis, suggesting that in the best case scenario, providing unemployment benefits can increase short-run economic output. However, this Keynesian view ignores the long run consequences of government provided unemployment insurance.

As jobless benefits continue to lengthen and unemployment insurance is funded with debt rather than payroll taxes, this program morphs from insurance to welfare. When policymakers make the case that unemployment insurance needs to be extended to protect the jobless and to spur the economy as a whole, they tend to ignore the perverse incentives that are inherent in the program. Unemployment insurance pays people not to work, and research has shown that longer unemployment benefits lead people to go without work for longer. Just before benefits end, the unemployed are most likely to find a job. By reducing the incentives for the unemployed to seek work, extended unemployment benefits prevent economic growth because they keep some people from working and adding to GDP.

While the federal government helps fund unemployment benefits, the unemployment trust funds are managed at the state level. Even before the economic downturn, many states lacked the reserves in these funds to handle an uptick in the number of unemployed workers. States are largely now funding unemployment insurance with loans from the federal government. A recent study from the Tax Foundation finds that states will be paying off these loans for years to come, facing higher interest rates as they continue to borrow increasing levels.

As Ben VanMetre wrote last week, rather than extending these flawed benefits, Congress should take up unemployment insurance reform. Eileen Norcross and I have argued that Unemployment Insurance Savings Accounts would provide the security of the current system without the unintended consequences. Under UISA, workers would contribute to individual savings accounts that they could access upon becoming unemployed. Because individuals would own their own accounts, they would not face incentives to remain unemployed in order to collect more benefits. Extending jobless benefits will not help either the economy as a whole or the unemployed in the long run, and turning unemployment insurance into a need-based program will only worsen its perverse incentives. Real reform would create improved incentives for all involved.