Obama's Advisers Clash on Unemployment Benefits

It’s never too early to critique a President’s speech, so why wait until he’s given it?  President Obama’s September 7 jobs speech is certain to take a new run at the longtime favorite: extension of unemployment benefits.  You’ll recall noted would-be economist Nancy Pelosi described how effectively unemployment insurance creates jobs, as did would-be economist and Press Secretary Jay Carney.

It’s a wonderful thing, irony!  I say that because Obama’s recent nominee for Chairman of the Council of Economic Advisers also happens to be an expert on the topic.  Princeton professor Alan Krueger has published several papers about it (Krueger 2011Krueger 2008Krueger 2002).  Remarkably, the actual economist on the President’s team doesn’t agree with the aforementioned would-be economists.

In 2002, Professor Krueger’s study found that more generous unemployment benefits resulted in longer spells of unemployment, measuring an elasticity of -1.0.  This elasticity means that a 1% increase in unemployment benefits results in a 1% increase in length of unemployment.  Professor Krueger’s 2008 article refined the analysis, teasing out the effects of laid off workers expecting recall and the actual unemployment benefit received (as opposed to the legal maximum).  These refinements showed that the actual effect was even greater.  Elasticities were between -1.6 and -2.2.  This means that an increase in unemployment benefits by any given percentage, say 10%, will increase the length of unemployment by 16% to 22%.

To put this in perspective, Professor Krueger analyzed the hypothetical situation of an unemployed worker moving from the state with the lowest weekly benefits to the state with the highest weekly benefits: the study concluded that the worker would reduce the time spent looking for work by 54 minutes per day (pg 15, Krueger & Mueller, 2008).

I am not the first to notice the irony.  In a demonstration of spin that would make Tim Groseclose proud, the Huffington Post and HotAir.com recently also commented on Krueger’s findings.  Predictably, each took their own slant.

The HuffPo article steered away from Krueger’s findings in 2002 and 2008 (described above) and instead focused on his 2011 working paper.  The paper explores some specific details of job searching during unemployment, and HuffPo focused on the fact that job search time declines as the length of unemployment increases; then the article offers a very reasonable explanation: that people get better and exhaust the stock of job opportunities.  The author uses an attention getter (“unemployed get more sleep!”) but then sets the reader’s mind at ease with the commonsense conclusion.  Picture the Scotland Yard Bobbie repeating: “Nothing to see here.  Move along!”

One has to wonder, how does the author miss the point?  We have a President advocating a policy that his recently-named adviser has shown is counter-productive.  And HuffPo bypasses that for a “no duh” point about how people search for jobs?

On the other hand, HotAir didn’t miss the opportunity.  Citing two Heritage Foundation pieces (2008 article) (2011 blog) HotAir’s author Tina Korbe pointed out the irony and predicted whether the President will follow Nancy Pelosi and Jay Carney’s advice or Alan Kreuger’s research.  What’s your guess?  We’ll find out on September 7th (correction, now the 8th).