Tuesday, December 14, 2010

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.


Engineer on Medicare said...

The problem is that nobody wants to build up the fund to support the next recession. And if it built up too much the Massachusets legislature would skim it to pay some political hacks who got thrown out in the last election, or some "training" program created to get cozy no-bid contracts from the state.

Josh Archambault said...

Leaders on Beacon Hill certainly face a tough fiscal situation this year-- at least a $1.5 billion shortfall-- but for this state to add jobs, policymakers must be careful not to drown companies already struggling with big increases in health care insurance costs.

The logical conclusion is that with each additional dollar spent on unemployment & health care insurance, it is one less dollar free to hire a new employee.
Josh Archambault
Pioneer Institute

Cetus said...

Legislatures always conveniently
"forget" the counter-cyclical aspect of Keynesian theory. Everyone hold hands and sing "Kumbaya" as I tell you the story about the legislature that spent to stimulate growth during busts and scaled back spending and socked surpluses away during booms.