America's Misplaced Compassion

When nations move into war mode, free markets come under pressure. Lawmakers and interest groups tend to use the wartime culture of unity as an excuse to push through all sorts of expansionary and centralising plans that would be hard to justify during peacetime. These outlays tend to become permanent. The war threat may recede, but the new programmes live forever.

That's the grand Hayekian theory. It also happens to play out in reality. Consider unemployment benefits in the context of September 11. Following that disastrous day, lawmakers became concerned that the disruption following the attacks of that day would push unemployment - especially long-term unemployment - to historic levels. A military crisis would generate an economic one.

This theory had some logic: terror or the prospect of war do generate economic uncertainty, which can slow hiring. But the lawmakers' argument was also an emotional one, which could be paraphrased as follows. 'Americans, collectively, were hurt in a unique way on September 11. Americans, collectively, therefore deserve unique compensation. That compensation will come through - among other things! - more generous unemployment benefits.'

Congress therefore acted. On top of the usual 26 weeks set by federal law, and additional weeks that can be provided by individual states, workers won the right to an extra 13 weeks of cash courtesy of Uncle Sam. The extra cash was said to be a one-off deal, prompted by the national crisis. It's worth noting that by the time these benefits came into effect (March 2002) the economy was growing again at a zippy rate. The much-feared economic disaster had not materialised.

Indeed, the proportion of persons unemployed for more than 26 weeks last winter was smaller than in previous recessions, according to economist Ron Bird, who crunched the numbers for the Employment Policy Foundation. But never mind: with social welfare, as with greeting cards, it's the thought that counts.

Fast forward to today. The compassion bonus is set to retire. But, naturally, lawmakers would still like to renew it - and may do so before this month's election recess, even though they claim they do not have time to pass many other pieces of legislation.

The economic justification for this action is close to nil. Current unemployment, at 5.7 per cent, is well below the 7.8 per cent of the 1992 recession. Even 'hidden unemployment', the number that reflects discouraged workers who are not seeking jobs, is relatively low. Official data show 4.5 million 'discouraged workers' in the workforce in August 2002, down from 4.6 million in March. In addition, notes the EPF, 'the August 2002 figure is significantly below the record high of 6.7 million in January 1994, and less than the overall 1994-2002 average'. Finally, says Mr Bird, the current median period of unemployment is 8.4 weeks, versus ten weeks in 1994.

Bottom line: Voters have come to like the benefits, and so have lawmakers. America continues to 'feel bad' as a nation, and so continues to seek various consolations.

The net result is that the US is in the process of institutionalising and mandating a 50 per cent increase in unemployment benefits at a point when it doesn't particularly need one. The total cost is hard to quantify since a lot of the cash for unemployment comes out of state coffers, but could run, overall, to about an extra $10bn per annum, reckons Mr Bird. For that amount of cash, to give you an idea of scale, the US could take any number of job-creating steps, including, for example, reducing the capital gains tax or eliminating the estate tax forever. But of course, there's no money for that. There's a war on, remember?

It all goes to show that steps taken to mitigate disasters can also contribute to them.

© Copyright 2002 Financial Times

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