The CBO apparently assume hard core Keynesian theory as its main basis for its decisions about what would have benefit. I don't.
The tax cuts will not be financed with debt, or with anything else. You don't finance tax cuts, they are spending. You finance spending. Increasing the deficits because you finance less of the spending with taxes would result in additional debt, which would have negative effects as the government needs to borrow that money leaving less available for private sector use.
But the same thing happens when the government taxes the money away from the private sector. Less is available for private sector use.
And extended unemployment benefits would also increase the deficit, while at the same time reducing the marginal incentive for the unemployed to become employed. That should be intuitively obvious to anyone with a basic standard of economic, but its also backed by actual real world experience.
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Why Denmark Is Shrinking Its Social Safety Net
By LIZ ALDERMAN
View from Europe
Denmark has long held the title of the best place on earth to be laid off. With an expensive, generous welfare state, and the world’s most lavish unemployment insurance scheme, virtually no one falls through the cracks upon losing a job.
But the government unveiled an unpleasant surprise in June, when it halved the country’s whopping four-year unemployment benefits period to help mend its finances after the financial crisis.
The reason: Danish studies show that the longer a person goes without a job, the harder it is to find work. Many people get a job within the first three months of entering the system, but many more wait until just before benefits expire to take anything available.
“So you need to have a period of unemployment that is as short as possible,” Claus Hjort Frederiksen, the finance minister, told me recently in Copenhagen.
Consider this 2009 chart from Denmark’s Labor Market Commission:
It shows that between 2005-7, the number of people who got jobs during their four years of benefits — the green line – rose at the beginning before dropping sharply, then spiked as benefits were about to run out, only to plummet after. The red line shows similar behavior in 1998, when Denmark’s benefit period was five years.
“It shows that people are not seeking all the jobs they could get, but just the jobs they would like to have,” said Steen Bocian, chief economist at Danske Bank.
That luxury has become too dear as Denmark exits a two-year downturn.
In addition to halving the unemployment benefits period, the government is pinning high hopes on job activation programs, one of the three pillars in Denmark’s famed “flexicurity” model. Employers have carte blanche to hire and fire, and in turn, the jobless are guaranteed benefits if they attend retraining and job placement programs tailored to prepare them for work where labor is scarce.
A 2007 study by the Danish Economic Council gave momentum to the government’s recent move. In 2006, it conducted an experiment for people who hadn’t gotten a job within 18 weeks of unemployment, requiring participation in job search assistance programs, training and frequent meetings with jobs officers for at least three weeks. A second group was left alone. Those in job activation had an exit rate from unemployment about 8 percentage points higher than the control group. After 40 weeks the exit rate was 3 percentage points higher.
These changes are not without problems in a country where people are accustomed to a benevolent nanny state. But they are probably still a ways off from stripping Danes of their other title as being among the happiest people on earth.
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18 Readers' Comments
1. Tzimiskes
Albany
August 16th, 2010
12:29 pm
The sharp benefit cut offs never made sense to me. Why not have it slowly decay so that there is an increasing incentive over time to look for work? Something like a decline in benefits of 1% a month perhaps. Seems an easy way to provide a decent safety net while setting up the incentives to encourage work.
2. Phyllis N.
Albany, NY
August 16th, 2010
12:40 pm
This simply reinforces that fact that people are lazy, and are happy to have other people pay for their expenses if they can get away with it. It is not clear to me why governments have not realized this before now.
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