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Bad economics

Extending federal unemployment benefits would increase the already massive U.S. budget deficit and give the jobless a reason to not search for work as energetically as they might otherwise. So is there any good reason Congress should approve the extension?

Short answer: Yes.

Why? Because it is both the compassionate and the economically smart thing to do.

Since June 1, when federal unemployment benefits began to expire, an estimated 1.7 million people have lost this compensation. Legislation for an extension until the end of November is before Congress, but lawmakers left for their Fourth of July recess without acting on it.

Deficit hawks say the cost of the extension-an estimated $40 billion-is one the nation simply cannot afford. In fact, with the economy struggling to stay in positive territory, not approving the additional benefits could prove more costly. Experts say that for every dollar spent on unemployment benefits, the economy’s output gets a boost of roughly $1.50-and possibly more.

The argument that unemployment compensation is a disincentive for the jobless to seek work is nothing new. However, there is something new on this point-research from the Federal Reserve Bank of San Francisco that indicates this effect is only slight, especially under current conditions.

Those conditions-possibly the worst U.S. job market since the Great Depression-have left an estimated 15 million Americans unemployed; nearly half of those have been seeking work for at least six months.

And the number of job hunters is roughly five times the number of available jobs.

In order to grow, businesses need consumers. Removing jobless benefits from people who have been unemployed for months and face no near-term prospect of new work is a sure way to trigger a sharp decline in consumption and send the economy in the direction of a double dip.

The nation’s lawmakers surely know this, but some see political advantage in resisting the extension. With any luck, the recess afforded them the opportunity to return home to their districts so they could hear firsthand from people who know how desperately these added benefits are needed.


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