Marginal Effects Of Unemployment Insurance

There is a lot of discussion in the popular press by economists, politicians and others about the economic effect of extending the term of unemployment insurance.

One should look at the marginal effect of unemployment payments versus no unemployment payments.

Some unemployed are in two wage earner families, have savings, have retirement funds, can rely on family or friends for help, or can borrow until they get re-employed. In these cases, unemployment payments substitute government unemployment spending and debt for private spending. There is no increase in overall consumer spending but there is an increase in government debt.

For the destitute unemployed, there are other government programs, such as food stamps, Medicaid, Disability benefits, Social security for the older unemployed, etc., which become available. In these cases, overall government debt does not increase by extending unemployment payments. The debt just switches program budget categories.

So, the question is how many people fall into the categories not covered by those with available resources and those eligible for other government programs.

To have no income or liquid savings and be ineligible for a government program generally means one has illiquid assets, such as a house, jewelry, auto, etc. whose value exceeds the eligibility thresholds. These programs require converting the assets into cash and spending down, which unemployment insurance does not require. In these cases, one will substitute government debt of unemployment payments for private spending, but overall consumer spending will not increase.

Unemployment substitutes government money for private funds and may increase government debt, if an unemployed individual without resources is illegible for other government programs.

The above is similar to a comment I posted on "Basic Econ: To Stimulate One Group, You HAVE to De-Stimulate Some Other Group, Net Effect = 0" on Carpe Diem by Mark Perry.