12/02/2010

America's Welfare State

We've seen this movie before.

Reporting from Washington —

With 2 million jobless workers set to lose unemployment benefits this month, the kind of extension that Congress routinely approved in the past has fallen victim to partisan deadlock — and the consequences could be serious for the U.S. economy.

The benefit payments have helped millions of families make ends meet. But they have also pumped billions of dollars into the financial bloodstream of the nation's economy as it has struggled to regain its footing after the worst recession in more than half a century.

Extending the payments, which average $310 a week, is seen by many experts as a way to prop up consumer spending, which accounts for 70% of the nation's economic activity.

"In terms of bang for buck that you get, this is one of the most effective things the government can do," said Justin Wolfers, a professor at the Universit of Pennsylvania's Wharton School.

How much bang for the buck do we get? If benefits are not extended, here are the possible consequences—

Annual economic growth could fall by one half to nearly 1 percentage point.
Up to 1 million more people could lose their jobs.
Hundreds of thousands would fall into poverty.
Let's move away from politics and talk about Reality. Jobless benefits prop up the Real Economy where you and I live. They are the most important support we have. The long-term unemployed are this close to the abyss. Only those weekly paychecks stand between them and a free-fall into nothingness. And without the spending they enable, perhaps another million people would lose their jobs. That's the best indicator of what kind of economy we have become—a welfare state.

But then there is the question of how we will pay for extended benefits. Unless cuts are made elsewhere in the federal budget, the government must borrow money to pay for the extension. Thus we have a welfare state we can not afford.

Looking at the bigger picture, the most important recipients of state welfare live on Wall Street, as Fed governor Thomas Hoenig reminds us in Too Big To Succeed.

During the 1990s, Congress, with encouragement from academics and regulators, repealed the Glass-Steagall Act, the Depression-era law that had barred commercial banks from undertaking the riskier activities of investment banks. Following this action, the regulatory authority significantly reduced capital requirements for the largest investment banks.

Less than a decade after these changes, the investment firm Bear Stearns failed. Bear was the smallest of the “big fiveâ€