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Sunday, June 27, 2010 10:00 PM

Consumers Get It, Keynesian Clowns Don't - 63% Believe Congress Should Worry More About Deficit than Boosting the Economy

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Last Thursday Congress failed to pass legislation extending jobless benefits.

Is Congress finally listing to the US Public? Not quite. It took a GOP filibuster to "Just Say No" in spite of the fact that by a margin of 63% to 34% more citizens are worried about keeping down the deficit than boosting the economy.

Please consider Jobless Bill Dies Amid Deficit Fears

Spooked by concern about deficits, the Senate shelved a spending bill that included an extension of unemployment benefits, suddenly cutting off a federal cash spigot opened by President Barack Obama when he took office 18 months ago.

The collapse of the wide-ranging legislation means that a total of 1.3 million unemployed Americans will have lost their assistance by the end of this week. It will also leave a number of states with large budget holes they had expected to fill with federal cash to help with Medicaid costs.

On Thursday, Senate Democrats failed to secure the 60 votes needed to break off a GOP-led filibuster. Sen. Ben Nelson (D., Neb.) voted with Republicans in a 57-41 roll call. Senate Majority Leader Harry Reid (D., Nev.) said this third vote on the matter would be the last, allowing the Senate to move on to modest legislation cutting taxes for small businesses.

Sen. Reid lashed out at Republicans immediately after the vote, saying they had "turned a deaf ear" to jobless workers. "This is not a good day for America," he said. The leader said the Senate would turn next to a small-business tax bill, and give up for now on efforts to push forward with the jobless-benefits extension. Asked whether it could ever be brought back to the floor, he snapped: "You are going to have to talk with Republicans."

"The principle Democrats are defending is that they will not pass a bill unless it adds to the deficit," Sen. McConnell said. The bill would also have provided aid to cash-strapped states, created a youth summer jobs program, and renewed several lapsed tax breaks, including a credit to support business research.

The last version of the legislation had a price tag of $85.5 billion. That was down some $20 billion from last week and well below the more than $120 billion bill initially brought to the floor. Even after the changes, the bill added about $35 billion to the deficit, roughly the cost of the six-month extension of jobless benefits in the bill.
Jobs vs. Deficits

Congratulations to the Republicans for doing the right thing. It is also what taxpayers want as the following Wall Street Journal chart shows.

Congratulations also go to US citizens who have had enough of Keynesian economist clowns as wall as Obama administration clowns.

How will this Affect the Unemployment Rate?

Assuming the WSJ chart is correct and assuming the legislation is not revived (both reasonably good bets), inquiring minds wonder what 2 million people losing benefits will do to the unemployment rate.

ZeroHedge comes up with the wrong rationale in As 1.3 Million Americans Are About To Lose Their Jobless Benefits This Week, The Unemployment Rate Will Surge To 10.5%
As a result of this huge hit to endless governmental spending of future unearned money, the WSJ reports that "a total of 1.3 million unemployed Americans will have lost their assistance by the end of this week." Furthermore, the cumulative number of people whose extended benefits are set to run out absent this extension, will reach 2 million in two weeks, and continue rising.... Worst of all, as these people surge back into the labor force, the unemployment rate is about to spike by nearly 1%, up to 10.5%.
Expiring Benefits Will Spike Unemployment? Not Quite

While I agree that the unemployment rate has not yet peaked and will see 10.5% and more likely 11% or more, expiring unemployment benefits is certainly not the reason.

To get unemployment benefits you have to be unemployed. To be unemployed you have to be in the labor force.

Expiring benefits puts downward pressure on the unemployment rate for several reasons.

Three Reasons Expiring Benefits will Help the Unemployment Rate

  • Some of those 2 million workers will stop looking for a job. As soon as they stop looking, they will be classified as Marginally Attached Workers or Discouraged Workers and thus drop out of the labor pool. If they do not need a job badly enough to look for one, they should not be collecting benefits.
  • Some of those at or approaching retirement age will opt to go on Social Security. Poof. They will no longer be part of the labor force.
  • Finally, there will be pressure on many of those workers to take a job, any job, to have money coming in.

To understand the actual net effect, one would need to have accurate age demographics of those receiving extended unemployment benefits and also accurately judge how many drop out of the labor force by giving up or better yet, act by taking any job they can get.

All of those pressures act to reduce rather than increase the unemployment rate, and for all those reasons, Republicans did the right thing.

Nonetheless, I expect the unemployment rate has not yet bottomed as many of those fresh out of high school or college looking for jobs will not find them. I also think a double-dip recession is on the way (assuming of course the NBER declares the end of the last one). That is by no means a given.

Mike "Mish" Shedlock
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