When borrowing is a good idea

There is an element of the economic downtown that unfortunately aggravates the prospects for recovery. In Massachusetts, employers fully fund the state's unemployment insurance fund. During periods of high unemployment, payments made from this fund go up, and employers are asked to help keep the fund balance current.

In this chart from the Associated Industries of Massachusetts, you can see this during the increase in insurance benefits paid during the recessions of the 1970's, early 1990's, 2002, and currently.

During these hard times, when unemployment claims go up, the state faces a deficit in that fund and has to consider whether to raise the unemployment tax. You can see that in this chart.

Massachusetts is currently considering a very large increase -- 40% -- in the unemployment insurance tax, from an average of $638 per employee to $897. Statewide, this would represent an increase over 2010 of $662 million. This would go into effect on January 1.

Of course, a recession is precisely the worst time to raise such a tax. It would be better if accruals into the fund could be timed more smoothly and in a counter-cyclical fashion.

There is an alternative: To borrow from the federal unemployment fund, at zero interest. From the point of view of the state's employers, the alternative is clearly the way to go.

This approach has no adverse impact on the families in the state who benefit from unemployment insurance, but it provides a reasonable opportunity to smooth out the effects of the recession, making it more likely that a recovery will not be stalled.