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Alan Blinder
says that one way to goose fiscal stimulus
without adding to the deficit would be to let the Bush tax cuts expire, and then use the incremental revenues to extend unemployment benefits. People on unemployment almost surely will tend to spend a higher portion of the incremental dollars they’ll receive, he argues, than would the big earners who would have effectively gotten a tax cut. Fine. I buy that. But do critics have a point when they worry that extending unemployment benefits will simply incent the unemployed to put off a serious job search?
Economic research suggests they are right, though one shouldn't exaggerate the magnitudes. Furthermore, the work disincentives are only part of the story. Remember, we provide unemployment insurance for humanitarian reasons (to aid the afflicted) and to support the economy (by maintaining spending).
I’ll take that as a “yes.” I agree one shouldn't exaggerate the extent of the perverse incentive created by extending jobless benefits, but one might at least try to quantify it. Also—and not to sound callous—what does “aiding the afflicted” have to do with deficit-neutral stimulus enhancement? For myself, I have a hard time seeing how paying people more money to not work will help meaningfully spur job growth. Alternative I'd like to see Blinder discuss at some point: temporarily cutting the payroll tax. The tax is regressive, so the new stimulus dollars will skew toward those with a higher propensity to spend rather than save them, and you don’t get the backwards incentives that extending jobless benefits creates. . . . .
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