Tuesday, March 17, 2020

Unemployment insurance pandemic conundrum

Should the government make unemployment insurance more generous and easier to get in the pandemic recession? Well, yes, but it's not ideal, and a good point on which to ponder the difference between a pandemic recession and a conventional recession.

To get unemployment insurance, you have to actually lose a job (in most cases) and you are supposed to be looking for a new job. In the pandemic recession, lots of people will be temporarily furloughed - -think airline pilots or flight attendants. But assuming, and helping to ensure, that the economy comes roaring back, we don't want airlines to fire pilots and flight attendants, and we don't want them walking around looking for new jobs at other shut down businesses. It would be  much harder for airlines to get going again; the employees lose health insurance (!) and other benefits, and people out looking for work are spreading viruses around.

Yes, there are some open jobs now. Amazon is looking for workers, as much activity moves online. Anyone with medical skills should be helping at hospitals. And face-mask and sanitizer companies are hiring. But this cannot make up for the large number of Americans who will be sitting on the sidelines for a few months.

So, we want unemployment and other benefits for people who aren't technically unemployed, but whose companies are shut down for the virus and can't afford to keep paying them.

Why don't we always have that, you might ask? Well, our social programs have a lot of rules and for good reasons -- to manage the inevitable unintended consequences and moral hazards of normal times and normal recessions. Government paying salary and health benefits of furloughed workers would give companies a big incentive to routinely furlough employees instead of giving them vacations. Around the world, unemployment insurance and many other benefits are  coupled with job search or training requirements, to avoid the massive overuse experienced before those requirements were put in place. But we don't want them now.

So our problem is that a pandemic shutdown requires a different set of detailed micro rules and regulations about who get what when. Good old Keynesian stimulus and standard automatic stabilizers are completely inappropriate. Incentives matter, now as much as ever, not just cash.

Here we economists are very clever. Marginal revolution links to many clever ideas to get us through the crisis, new programs and new rules and new ways of getting money to where it is needed. I've blogged a few dozen clever ideas too.

But it is nearly impossible to ask bureaucracies to make things up on the fly in a crisis, and invent an implement new rules in a matter of weeks, even if politicians could agree what those programs should look like. This is the lesson of Graham Allison's Essence of Decision masterpiece on the Cuban missile crisis. (If you're looking for good self-isolation reading this is a great one. It also shows how important it is to have a President who can make cool decisions in a crisis, when all his or her advisers are screaming nonsense. The many pandemic books are also great reading. We have been here many times before and it's always the same chaos.) That is the lesson of 2001, when we discovered that half the emergency responders didn't have the other half's phone numbers. That's why when this is over, we need a serious pandemic economic plan, one that gets practiced and refined, and not just another big report that gets shelved and forgotten.

At the cost of repetition, there will be other pandemics.


  1. The government needs to stop taking money in income taxes and giving back in the form of charity (unemployment insurance is a euphemism, because rates you pay have little to do with chance of unemployment)

    Rather than a social-safety-net, people need a personal-safety-net. In other words, governments should care about how wealthy people are.

    There is a huge problem with a government that has a profit-sharing revenue model, and loss-sharing expenses. It amplifies the effects of economic health on the fiscal health of the government.

    Rather, the IRS should let people pay late without penalty indefinitely. That way, if you need the money, you can use it, and pay an effective wealth tax in the form of eventual interest payments. If you don't need the money, pay your taxes. This would enable people to put together the savings they need to weather a bout of unemployment.

  2. Sending out cash, which is a good idea, is better than tying payments to some condition, such as being unemployed, or employed, or smart, or stupid. Treat everyone the same, and maybe that way make it credible that this sort of stuff happens only in emergencies.

  3. I feel like we are all one strategic mistake from catastrophe with the West’s approach to Covid-19. JFK and Cuba certainly does provides a cautionary tale. As the failure of The Bay of Pigs invasion became imminent, JFK said to his adviser Ted Sorenson:

    “All of my life I’ve known better than to depend on the experts. How could I have been so stupid to let them go ahead?”

    I really hope we don’t find this situation repeated.

  4. Check this out: https://en.wikipedia.org/wiki/Short-time_working

  5. A worker who is laid-off, but not terminated, qualifies for unemployment insurance benefits. A self-employed individual whose business is shut-down by government decree (restaurants, bars, fitness clubs, etc.) does not qualify for unemployment insurance benefits. The self-employed individual who established the business, now shut-down by government decree, just a short 6 months earlier and who has franchise fees to pay, triple-net lease obligations to meet, and payroll taxes to remit, and is now faced with no income with which to pay those costs, is not worthy of consideration? Note that it is government, in an abundance of caution over a health epidemic, that has effectively put the self-employed uninsurable small entrepreneur on the ropes. Vae victis! is the best that we can offer?

    Does government not have some obligation to mitigate the impact of its actions, to ease the collateral damage its policies inflict in the name of serving the greater good? Probably not.

    The entrepreneur is at fault for not considering all of the risks entailed in starting the business and planning accordingly. Government has limited capability and capacity, esp. at the state and local levels, to provide safety nets for all who require them.

    Triage is the operative state of affairs now, in health-care and in economics. Vae victis! indeed.

  6. In Canada, currently, all quarantined workers get automatic unemployment insurance. Programs for small business owners and self employed are currently being deployed. And nobody is losing health care.

  7. "Government paying salary and health benefits of furloughed workers would give companies a big incentive to routinely furlough employees instead of giving them vacations."

    I grew up in Indiana when that conservative State was forced to routinely pay unemployment benefits to autoworkers furloughed every year for model year retooling or shutdowns for a few weeks to bring supply down to demand, because next door Michigan, Ohio, and Illinois would get all the industry because they were more generous in providing UE.

    The UE benefits were in addition to union benefits paid for continuously through shutdowns, and the wage replacements paid by the companies, I think passed through unions.

    Since the 80s, MBAs told corporations workers were commodities so they should be fired at the drop of a hat because cheaper and better workers are easily hired within days of business improving.

    But UE benefits have been drastically cut to prevent workers from being fired under the dictates of MBAs who claim workers are a commodity and all identical.

    So, the history suggests cutting UE has only increased the firing of workers, not reduced it. Then when hiring sufficiently skilled workers for lower wages is a problem, going to another cheaper labor market, the South,Mexico, Korea and Taiwan, then China, now Vietnam, Africa, ...

    As a boomer, now age 72, who talked with my dad about his youth in the 30s and 40s, with government influencing so much of his peers opportunity, I find the above argument to be myopic as if all of history happened since the 70s and 80s.


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