Thoughts from Keynes and Kuehn on Unemployment Insurance

The President recently signed an extension of unemployment insurance, so I thought it was a good time to share a somewhat surprising view of John Maynard Keynes on this sort of program. In the General Theory (1936), he wrote:

"It is curious how common sense, wriggling for an escape from absurd conclusions, has been apt to reach a preference for wholly 'wasteful' forms of loan expenditure rather than for partly wasteful forms, which, because they are not wholly wasteful, tend to be judged on strict 'business' principles. For example, unemployment relief financed by loans is more readily accepted than the financing of improvements at a charge below the current rate of interest; whilst the form of digging holes in the ground known as gold-mining, which not only adds nothing whatever to the real wealth of the world but involves the disutility of labour, is the most acceptable solution of all."

Of course, Keynesians have since reconciled themselves to unemployment insurance, but I thought this was an interesting objection from Keynes. And a very insightful first couple sentences on the irrationality of politicians.

I've generally been in support of strengthening unemployment insurance, but I find the concern about its impact on the unemployment rate to be valid - and it's something that increasingly concerns me as we continue to extend the program. My all-time favorite sentiment on unemployment insurance is from Martin Baily, who wrote that "unemployment may increase as a result of UI, but it matters less". We have to look at the impact on the unemployment rate as a trade off. Unemployment may increase with more generous benefits, but the discussion can't stop there. How does quality of life change as a result of the benefits? How important are the benefits for counter-cyclical spending and macro-stabilization? I'm getting increasingly leery of all these extensions - American unemployment insurance is beginning to look like the European safety net. But we have to be careful about too heavily emphasizing the impact on unemployment rate when the hiring rate is so abysmal. If hiring were stronger, pointing to unemployment insurance as the culprit might be more convincing. For now, it's on my radar but it's hard to get too upset about it. But if I had the choice between another extension or a stronger infrastructure spending bill plus a hiring tax credit, I'd choose the latter over more extensions to UI in a heart-beat.

I also wanted to share this Wall Street Journal piece that makes an important point about the benefits of a robust UI program. In this job market, job seekers jump on any offer that's made to them, regardless of whether it's the right match long-term. That's what's best for them now, but it could be trouble down the road. We want the right employer-employee matches made, and this article suggests that unemployment insurance can help provide the breathing room to make that match. If those matches are made out of recessionary desperation, you could see what Austrians call "malinvestment" of human capital, and what Arnold Kling has called a "recalculation" down the road when the mistake is revealed.

Life is full of trade-offs, and the unemployment insurance program is no exception. Decisions around this program are tough at a time like this - particularly after it has already been repeatedly extended. It's important to be honest about all the costs and all the benefits.