Thursday, May 21, 2020

Do Unemployment Benefits Cause Unemployment? Part II

Geez, I thought we covered this a decade ago.

A decade ago, we had a recession.  But since human economic memory is 18 months, tops, that never happened so there was nothing to be learned from it.  Oh, and there are no such thing as speculative bubbles- right?

Believe it or not, in some markets, there are still bidding wars on houses - and by that, I don't mean San Francisco or Austin - but some fairly rural areas of the country.  A friend of mine wants to sell his house and downsize, and saw three other nearby properties go under contract with more than three offers on each!   So I said to him, "good time to sell your house!" and he replied, "Well, we're in no hurry, and with the market like this, why sell?"   Sadly, I think it will not work out for him - this post-virus panic-buying will turn into post-recession panic-selling in short order.  We are still living in a dream world of overpriced stocks, overpriced houses, and visions of "v-shaped" recoveries.  It ain't gonna be that simple.  It wasn't the last time - a decade ago, and that was like a mild cold compared to today's flu.

The last time around, Congress decided to extend unemployment benefits for months and months - more than a year, in fact.  The net result was that a lot of people were making pretty good money on unemployment, and thus had less of an incentive to go back to work in a post-recession economy, where their real value in the labor market had been adjusted - downward.  The high-paying jobs that went away were found out to be unnecessary.  America shed a lot of levels of management and unnecessary hourly labor as well.

But eventually, the unemployment benefits ran out and eventually people went back to work.  A decade later, unemployment is at all-time lows - this despite the entry of women into the workforce (doubling the size of the workforce overnight) and automation and overseas outsourcing "taking away jobs" and all the other thing that were supposed to create joblessness.    Oddly enough, at that time of all-time-low unemployment, some people were seriously saying that the entire country should be put on welfare with "guaranteed annual income".  Go figure.

Funny thing that - when you pay people not to work, many make the informed decision not to work.  I know I did - the cost of health insurance versus Obamacare made it an easy decision to retire a few years earlier than I thought I would.   And yes, it is entirely possible that if Obamacare were abolished, I would have to go find some sort of job again.  The carrot... and the stick!

This time around, unemployment hasn't been extended - yet.  But the government has added a $600 bonus per week to the unemployment paycheck.  At first, I thought this was a typo - as the media has been pretty confusing on this.  Take this poorly-written ABC News article for example:
"Nationally, the average weekly benefit is around $370 a month. The average weekly wage is around $970 a month. So $600 is the difference between the two," Michele Evermore, a senior policy analyst for the National Employment Law Project, told ABC News. "And so $600 was passed to approximate 100% income replacement for a few months while the economy needed to be shut down to deal with the health crisis."
The weekly benefit is $370 per month or per week?  I mean, what the everloving fuck, ABC?  Geez, I make a typo or two and some reader is sure to jam it down my throat, and I'm not even being paid.  But the "mainstream media" puts out typo-ridden articles from Indian text farms (apparently) and no one gives a damn.  I guess because no one reads anymore.  But I digress.

The actual benefit is $600 a week - or up to that, depending on your State, and supposedly, you are not supposed to be making more than 100% of your pre-layoff income.  The problem is, of course, that many companies are opening up only on part-time hours, and thus if someone goes back to work, they arguably might make less money than before.   So employers struggling to "do the right thing" and keep people on the payroll with these forgivable "Payroll Protection Program" loans are often finding employees reluctant to go back to work.  Government intervention in the marketplace once again has unintended consequences.

And yes, people are suffering.  The employee struggles to make his mortgage payment.  His mortgage payment is onerous, because he was enticed to borrow as much as he could to chase a mortgage interest deduction, which in turn jacked up home prices accordingly.   And if he is renting?  The rents track the housing prices, which track the subsidized mortgages.   Just a thought, but one wonders if in a parallel universe where the government wasn't in the housing business (as the largest player, no less!) that houses and land might cost an awful lot less, only because we would not be chasing deductions and throwing money at houses as much.   But I digress.

$600 a week - that's pretty good money.  In the example above, they are talking about $1000 a week in benefits overall, or $52,000 a year, the median income in the United States and by the way, more money than I make.   Where's my hot meal?

Taking all that aside, where is the unemployment check for the business owner?  I mentioned before a friend who owns a bar in a college town.  She and her partner decided to expand, just before the epidemic, and bought a second bar.  Ouch.  The college closes early, they have to close the bars for two months (at least) and lay off all the employees.  Meanwhile, she had just refinanced her house, and the mortgage is coming due and employers don't get unemployment.   Yea, being an employer or business owner, sucks.   You do all this hard lifting and you get screwed and hardly make more money than your employees - who all think you are fabulously wealthy as a "business owner".   But I've seen her house - it is nice, but hardly a mansion, just a typical tract home that one of her employees might live in.

You will see a lot of pain in the coming months - not from employees, but from employers, as they lose their businesses to bankrutpcy, one by one.  And that means, in many cases, they lose everything, as their business was often their sole investment - something they put every last dollar into, hoping to make a living and maybe someday, sell and retire.   That ain't happening now.   The employees?  Collecting 100% sitting at home playing video games and when the money runs out, they will find a job with someone else, doing pretty much the same sort of thing.

Of course, this is not to say that unemployment benefits should be abolished, or even that some sort of supplement isn't necessary - if nothing else, to prime the pump of the economy for a while until things get going again.   But eventually, this subsidy has to go away.  Again, like the lifting of lockdown restrictions, the question isn't "if" but "when" and people can reasonably disagree about "when" when is, but cannot reasonably argue about "if".   Eventually the training wheels have to come off, regardless of the consequences, and leaving them on too long only creates dependency.

It is an apt analogy, and I am sure you have seen it.  I experienced it myself, as a child, preferring the ease of training wheels to the hassle and risk of learning to ride on two wheels.  My Dad finally took them off (with much yelling) and I learned how to ride a bike.   When we travel to some campgrounds, you see this effect still - and it is embarrassing sometimes to see a family where one child is clearly too old to have training wheels, and often a younger sibling has already made the transition to two wheels, while the older one holds back. 

Keeping the training wheels on longer doesn't help, and in fact, holds back.   The funny thing about training wheels is they don't train you for anything but dependency.   You don't "learn" how to ride a two-wheeler from training wheels, but rather learn to rely on that crutch to bail out out.  You don't learn how to balance a bicycle because you don't have to.   You can use training wheels for ten years - it won't make you a better bike-rider - it won't, in fact, make you a bike-rider at all!

During the last recession, a friend of mine was laid-off from a $100,000-a-year plus executive job.  That job was his livelihood and his life - his identity was tied up in it, in terms of status, prestige, and his position as a provider for his family.   When he lost that job, and that type of job went away for good, he just couldn't fathom it.  He was offered some jobs in other fields, but it took him nearly three years before he broke down and accepted the new job - which turned out to be more rewarding, have more status, and pay more than his old one!   But again, when a door is closed, a new one is often opened, but we stare at the old door and fail to see the new opportunity offered to us.

Of course, there is more to these stimulus payments than helping people out.  The government is trying to defuse several bombs at once, before they go off.   If massive numbers of people are suddenly without money, and cannot afford food, riots will break out in the streets.   And if no one is buying, well, prices will collapse, as they have with gasoline and oil - damaging businesses as well.  So throwing money at people - in the short-term - prevents civil unrest and further damage to the economy.   But in the long-term, it is not a solution as Andrew Yang proposes.  You know Andrew Yang - the tech billionaire who is barely a millionaire and actually not in techYea, he has the answers.  Another one of those people who think they can run for President, without running for any other office first.  But I digress.

The point is, we can't just keep printing money forever, as eventually, money will become worthless.  And I don't say this as some sort of made-up philosophy or wild guessing, but based on world history for generations.  Whether it is Wiemar Germany or Perón's Argentina, or Maduro's Valenzuela today, when you keep printing money, the laws of supply and demand apply to money as well as goods.  When there is a lot of money in circulation - too much - it is viewed as being worth less and less, and pretty soon, prices edge up and inflation takes off.   I already lived through one era of 10% inflation, I'd rather not go through that again.

Even if you are on the receiving end of these government checks, it doesn't matter.  Unless there is a cost-of-living adjustment automatically figured in, eventually your check becomes worth less and less, until it is worthless.   Even with COLA payments, the inevitable is only forestalled.  Eventually, the economy is in ruins and the government goes broke and chaos ensues, and few people benefit from chaos - most suffer.

In the coming weeks you will hear calls to rein in these supplemental payments as well as other forms of relief (such as a proposed second "relief" check sent to all Americans). Mitch McConnell has already raised the issue, and once again, Republicans will be pilloried bashed as a convenient Piñata by Democrats as "heartless bastards" who put "profits over people."  I guess that is the problem with being the only adult in the room, sometimes, is that when you say it is time for the party to be over, the drunken crowd cries "boo!" 

But once again, the legitimate debate isn't "if" but "when".  You can make arguments about when these subsidies should subside, but not "if" they should or not.  Because perpetual subsidy would eventually destroy everything and everybody.   The sooner "when" is, probably the better.  Dragging this out too long will have a damping effect on economic recovery.   Then again, way-too-soon is almost as bad, too.

But sometime - and hopefully sometime soon.