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The Myth About the Economic Impact of Unemployment Benefits Extensions

The Long-Term Drag Outweighs the Short-Term Boon

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If it seems counter-intuitive that paying people to not work actually raises the output of a nation, that's because it is.

Nevertheless, a number of major media outlets have repeatedly quoted reputable economists as saying that the best way to boost the nation's economy is to continue extending aid packages to America's unemployed workers. Depending on the economist, the quoted return is anywhere from $1.61 to $1.90 for every dollar spent on extending unemployment benefits.

The logic here is that recipients of unemployment benefits tend to spend the money soon after receiving it, and they spend it on essentials such as groceries and bills, rather than on frivolities like dining out or going to the movies. Since the benefits are spent this way, it creates a ripple effect that actually helps drive the economy.

Unfortunately, the positive impact of these benefits on the economy is neither sustainable nor viable over the long term. Although the short-term benefits provide an immediate relief, it is the kind of relief an addict feels after a fix. The initial high will eventually fade and the pain of withdrawal will settle in worse than before.

In fact, the addiction analogy works on a number of levels when it comes to extending unemployment benefits. Although the relief felt by both the economy and the addict is real, the source of the relief is artificial. Rather than experiencing the genuine economic relief that comes in the form of an increased demand for goods and services, the federal government is infusing the economy with borrowed capital that must eventually be paid back. This means that even after the economy begins to recover, the effects of the recovery won't be felt by the bulk of Americans until this borrowed money is repaid.

The six-month extension passed by Congress and signed into law on July 22, 2010 cost $34 billion. The 13-month extension passed by Congress on Dec. 17, 2010 cost $57 billion. Certainly, the economy will see a brief increase in 2011 because of these extensions. Fortunately, these additions to the multi-trillion federal deficit were borrowed at a very low tax rate, but it wasn't zero. And even if it were, that money is still part of the federal government's debt burden.

In 2007, the federal debt accounted for 36 percent of the gross domestic product. By the end of 2010, the federal debt burden accounted for 62 percent of the gross domestic product. So, while the GDP in 2011 may see a slight increase thanks to the extensions passed in 2010, the American people will be paying for that brief period of relief for decades to come.

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