Thursday, November 19, 2009

The GOP's no-exit strategy

Washington Post editorial "The GOP's no-exit strategy" (November 19th, 2009) bemoans a spate of procedural delays in the U.S. Senate.

As of last Monday, the Senate majority had filed 58 cloture motions requiring 32 recorded votes. One of the more outrageous cases involved an extension in unemployment benefits, a no-brainer in light of the dismal economy.

Passing extended unemployment may be a very unwise decision, and certainly is not a "no-brainer". Individuals respond to incentives, and an extension of jobless benefits from six months by an additional thirteen weeks adds to the shadow price of taking a job now, causing people to take their time looking for a new job. Given that during a recession with relatively high unemployment we expect labor supply to be relatively inelastic with respect to wages (i.e. it's hard to find a good job), we must conclude that even in search model, which would normally predict greater placement efficiency due to unemployment benefits (i.e. the longer everyone looks, the better the jobs they find), it takes a great suspension of disbelief to think that lengthening unemployment benefits makes sense in this economy.

Proper economic solutions would avoid the large implicit tax that individuals face when deciding to accept work or put it off for the future (in a manner similar to fixes for the welfare trap--partial reduction in benefits when one works, rather than complete reductions).

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