Laffer’s Laughing

Arthur Laffer recently offered his thoughts on the Unemployment Benefits in the Wall Street Journal opinion pages…. What kept coming to mind is, how are we even having this conversation? And by conversation I mean, how can we look at the empirical evidence concerning unemployment benefits and still somehow draw the conclusion that extending them will be a good idea?

How is giving more cash to an unemployed person going to stimulate the economy? Is the unemployed person creating wealth? How about jobs? No?

No Kidding.

Indeed, if you are unemployed you are either searching for an opportunity or you have given up. In each case, the extra funds would go toward putting food on the table, not stimulating the economy – to compound the negative effect, the buyer would be spending less on food than if employed. In essence,

band-aid = unemployment benefits

This is not an argument against band-aids, but you wouldn’t put one over a broken leg. Why not stimulate the economy instead?

Laffer puts forth a tax holiday – all taxes – on hold – 18 months….

How does this compare? Turns out the tax receipts for 18 months, corporate, private, individual sum to the $3.6Billion that has so far been spent on “stimulating” the economy with unemployment benefits.

Mathematically let’s compare:

Band-Aids1. Tax holiday – The IRS requires quarterly payments and they’re rather fussy about getting it in cash. A small business paying 30% on corporate taxes now has an extra $450,000 in cash for every $1Million in annual profits over 18 months. That’s enough to replace the roof over the server room, thereby hiring roofers, have plenty left over to add 2 full time mid-level staff so they can bid on larger projects and expand the firm, and possibly give the employees a nice bonus. Statistically, small and local business owners give back when they can. They just need the cash to do so….

Versus

2. Extend unemployment benefits – Each family receives a nominal amount more. As studies from Washington’s last stimulus package demonstrate, American families aren’t as lazy/dumb as some might portray – the families spend what they must and save what they can. Yes, save. In interviews they express gratitude for the help, but in many cases would simply rather get back to work. They feel a little bit better for a little bit longer.

Is a little bit better for a little bit longer good enough?

Pushing the idea of extending benefits demonstrates a failure to understand the logic as well as the simple mathematics. In scenario 2, unemployed families get a little bit more. But, at the expense of the roofer, 2 mid-level staff and staff bonuses in scenario 1. The business owner continues to pay taxes and will not have the cash to do the extra activities. No stimulus.

No matter how much you hurt today, hurting tomorrow is ten times more painful. If you want to get back to work, you want to find a boss who has the authority and incentive to hire you . . . and the cash.
Photo Attribution: LarimdaME

Published bykatemckeon

You can try anything one time in Texas . . . after that we may shoot you. -Kate McKeon

1 Comment

  • Lucy

    July 20, 2010 at 12:11 pm Reply

    Never though of scenario 1, sounds pretty cool actually…

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