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Unemployment Insurance? Or Guaranteed Wages?

The Cost of Wrong Choices

By Shlomo Maital

US politicians, led by POTUS (President of the United States) are congratulating themselves for the $2.2 trillion bailout (Care Act), bringing relief to Americans out of work.

But let’s look at this more closely. US unemployment has leaped from a 40 year low, to what the St. Louis Federal Reserve believes could be as high as 32% (higher than the 24% unemployment rate in the Great Depression of the 1930’s). So the right approach is: Extend unemployment benefits. Right?

Wrong!

A New York Times article by leading economists  Emmanuel Saez and Gabriel Zucman makes this case:

“Instead of safeguarding employment, America is relying on beefed-up unemployment benefits to shield laid-off workers from economic hardship. To give just one example, in both the United States and Britain, the government is asking restaurant workers to stay home. But in Britain, workers are receiving 80 percent of their pay (up to £2,500 a month, or $3,125) and are guaranteed to get their job back once the shutdown is over. In America, the workers are laid off; they must then file for unemployment insurance and wait for the economy to start up again before they can apply for a new job, and if all goes well, sign a new contract and resume working.”

So clearly – the ‘extend unemployment insurance’ approach is NOT a solution. In the US, the right policy is to protect jobs. The wrong policy, the one adopted, is to pay pittances to those thrown out of work, in large part owing to government ‘shelter at home’ policy. The NYT continues:

“This dramatic spike in jobless claims [in the US] is an American peculiarity. In almost no other country are jobs being destroyed so fast. Why? Because throughout the world, governments are protecting employment. Workers keep their jobs, even in industries that are shut down. The government covers most of their wage through direct payments to employers. Wages are, in effect, socialized for the duration of the crisis.”

Socialized? SOCIALIZED!!!!???? Oh my, there’s that word, socialism. Yikes.

The US has a huge problem with semantics. Let’s be clear. Socialism is an economic and social and political system, in which the means of production, distribution, and exchange are owned by the government. By paying wages to employers, governments are NOT implementing socialism, but preserving capitalism, by keeping employers and their companies alive, for a few months. That’s it!

America, open your windows (how often have I said that!). Check out Europe, “Old Europe”, as US Presidents like to say.

“Some countries — like Germany, with its Kurzarbeit system, a policy aimed at job retention in times of crisis — already had the government infrastructure in place to send workers home while the state replaced most of their lost earnings. [Kurzarbeit, ‘short work’, shortens the work week for all to distribute the hours among more people]. But several nations with no experience in that area — like Britain, Ireland and Denmark — were able to introduce brand-new employment guarantee programs on the fly during the epidemic.”

There is a fundamental problem with using unemployment insurance as the main bailout tool:

“Even if unemployment is generously compensated — as it is in the $2.2 trillion bill Congress passed — there is nothing efficient in letting the unemployment rate rise to double digits. Losing one’s job is anxiety inducing. Applying for unemployment benefits is burdensome. The unemployment system risks being swamped soon by tens of millions of claims. Although some businesses may rehire their workers once the shutdown is over, others will have disappeared. When social distancing ends, millions of employer-employee relationships will have been destroyed, slowing down the recovery. In Europe, people will be able to return to work, as if they had been on a long, government-paid leave.”

There is a basic hidden assumption in the US Care (bailout) Bill. It is based on liquidation – let businesses go broke, they screwed up anyway, we’ll re-establish them when all this blows over. Wrong!!!

  “A liquidationist ideology seems to have infected minds on both the left and the right. On the right, opposition to government grants to businesses is grounded in the view that markets should be left to sort out the consequences of the pandemic. Let airlines go bankrupt; shareholders and bondholders will lose but the airlines will restructure and re-emerge. The best way government can help is by slashing taxes, according to this view. The relief package includes more than $200 billion in tax cuts for business profits. This view is misguided. There is nothing efficient in the destruction of businesses that were viable before the virus outbreak. The crisis cannot be blamed on poorly managed corporations. Government support, in the case of a pandemic, does not create perverse incentives. Bankruptcies redistribute income, but in a chaotic and opaque way. And while bankruptcy might be a way to deal with the economic fallout of the pandemic for large corporations, it is not well adapted to small businesses. Without strong enough government support, many small businesses will have to liquidate.”

   Wrong-headed American policy impacts us all. In the good old days of the global economy, from the 1950’s onward, whenever the world economy slowed, America’s economy was the locomotive. Burgeoning spending by eager US consumers created demand that pull other economies out of the mud, worldwide. That was a crucial role America played.

  Today? We’re going to need America and China both, as locomotives, to pull us out of the Depression COVID-19 is causing. China seems to be coming out of it. Well done. But the US?   Not under current policies. Sooner or later, policymakers will recognize their error. But the US President NEVER admits error and doubles down on wrongheaded statements and policies. So don’t count on the US correcting its fundamental MASSIVE mistake.

      World, we’re on our own. America will sink, under a mountain of unemployment applications.

Blog entries written by Prof. Shlomo Maital

Shlomo Maital

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