The unpleasant truth about unemployment insurance

Everything called insurance is not insurance. Unemployment “insurance” is no more than a state tax levied on employers with the tax receipts deposited into a sinking fund (aka trust fund) with the federal government on behalf of the particular state in question. No insurance is involved. Then why call it “insurance”? Unemployment insurance was developed in 1935 during the FDR regime. For political purposes, FDR liked to use and purposely attached the term “insurance” to many of his ill-conceived alphabet-soup programs. For example, FDR constantly referred to his social security scheme as “insurance.” The scheme social security is not insurance. Then why use the term “insurance“? It’s a form of political dupery trying to give a scheme credibility. (1)
The sinking fund known as unemployment insurance can be measured in two ways: (a) financial stability, (b) generosity of pay-out [benefit]. The calculation regarding financial stability is known as the average high cost multiple. The average high cost multiple is suggested to equal 1.0 to withstand any cyclical downturn and consequential unemployment. In the fourth quarter of 2007, North Carolina’s average high cost multiple stood at 0.23, which was the worst average high cost multiple in the Richmond Federal Reserve district–meaning that politicos had under-funded the program in a significant manner. (2)
The second measurement regarding generosity of pay-out [benefit] is known as average weekly benefit amount as a percentage of average weekly wage. The higher the percentage, the more generous the benefit. Within the Richmond Federal Reserve district North Carolina has the second highest generosity of pay-out. This means that politicos in North Carolina had not only under-funded unemployment insurance; they had over-promised unemployment insurance. (3)
Considering the above information regarding under-funding and over-promising, when the Great Recession hit, politicos, through the mechanism of government in North Carolina, watched their sinking fund, which finances unemployment benefits, evaporate. What next? No money – no benefits? “Despite rapidly falling trust fund balances, states were still statutorily bound to continue paying benefits to qualified unemployed workers, even if that balance fell to zero.” You have to love the brilliance of legislation spawned by politicos at large. You create a plan and if the plan fails you must continue, statutorily, with a failed plan. Absolute nitwitery! (4)

The benefits continue to be paid by the state borrowing money from the federal government. Hence, the broke borrow from the broke. Not only does the state pay interest on the borrowed money; if the state does not pay back the money in a timely manner [balance continues outstanding], a penalty interest factor is then applied. The penalty interest factor also escalates the longer the balance remains unpaid. Who pays this penalty? Politicos through the mechanism of government conveniently pass on the penalty to…..wait for it….employers. (5)
As with any other unfunded or under-funded benefit, we come to the Greece effect. The benefit must be slashed and the tax associated with the past benefit and newly slashed benefit must be raised. That is, past politico promises based upon over-promising and under-funding reach the day of reckoning. Of course the day of reckoning is rather distasteful for James and Jane Goodfellow as they find they have been duped yet again. Then there is the case of further politically framing the dupery, that is, cutting benefits, being caused by evil uncaring people [extend and pretend]:
Jobless Benefits Face Cuts in N. Carolina – NYT
“North Carolina lawmakers approved deep cuts to benefits for the jobless on Wednesday, in a state that has one of the nation’s highest unemployment rates. In a debt-reducing effort, the Republican-controlled legislature voted to cut maximum weekly benefits to $350 from $535, a 35 percent drop; reduce the maximum number of weeks for collecting benefits to between 12 and 20 weeks from 26 weeks; and tighten requirements to qualify. The cuts would begin with new jobless claims on July 1.” (NYT) (6)
One can certainly pretend that cuts are uncaring, evil doing. Then again one can also consider politico X merely under-funded and over-promised as a political constituency-building exercise and politico Y is left to clean up the mess. Is it also uncaring and evil to promise the un-promise-able? When one arrives at the Greece effect, which is the final outcome of all unfunded politico promises, one finds political dupery and nitwitery has left one with a hollow promise.
Maybe it is best to identify “extend and pretend” programs now, rather than later. Maybe, just maybe, Social Security, Medicare, Medicaid and a vast myriad of federal, state and local schemes are merely pretend schemes devised by politicos for politicos.
(1) FDR’s Folly, How Roosevelt and His New Deal Prolonged the Great Depression, Jim Powell, Three Rivers Press, 2003.
(2) The Great Recession and State Unemployment Insurance Funds, Regional Focus, Richmond Federal Reserve, District Digest, first quarter 2012, pg. 45.
(3) ibid
(4) The Great Recession and State Unemployment Insurance Funds, Regional Focus, Richmond Federal Reserve, District Digest, first quarter 2012, pg. 46.
(5) The Great Recession and State Unemployment Insurance Funds, Regional Focus, Richmond Federal Reserve, District Digest, first quarter 2012, pg. 46 and 47.
(6) Jobless Benefits Face Cuts in N. Carolina, New York Times, Times Digest, 02/14/2013

Bill Heasley, a local economist, writes an occasional column for the Guardian.

One Response to The unpleasant truth about unemployment insurance

  1. algernon27284 says:

    Thanks for a lucid description of the situation, something generally absent from our contemptible mainstream media. And thanks to Republicans in North Carolina for having the fortitude to do the right thing.

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