Incentives Matter

Economics 101 – incentives matter.

But politicians often seem to forget this. Or simply ignore it. “Generous” unemployment benefits provide the perfect example. With the US government handing out enhanced unemployment checks, we ended up in a bizarre situation with high unemployment even as job openings hit record levels.

Both President Joe Biden and Treasury Secretary Janet Yellen insisted that the enhanced government unemployment benefits weren’t incentivizing people not to work. In a podcast, Peter Schiff said this notion is absurd.

Only government economists could fail to understand this obvious relationship. There is a preference for leisure over work. People would prefer to have leisure than work. The only reason they give up their leisure to work is because they need the money. Because otherwise, they can’t pay their bills. They can’t pay the rent. They can’t put food on the table. So, even though they would prefer leisure, they have to work. Well, if the government says, ‘No, you don’t have to work. You can have the leisure that you prefer and we’ll replace your lost income. In fact, we will actually give you more money to take a vacation than what you would earn if you gave up that vacation and went back to work.’ How can anybody not realize that there is a link here between these lucrative payments not to work and so many people choosing not to work?”

Politicians simply don’ have the power to overturn basic economics, no matter how hard they try. As economist Paul Prentice pointed out, you always get more of whatever you incentivize and less of what you disincentivize. “The supplemental unemployment payment does both—it incentivizes people not to work, and simultaneously disincentivizes them from working.”

Prentice lives in Colorado. He pointed out that as of mid-July, total employment in Colorado has yet to return to pre-lockdown levels. Personal income in Colorado has yet to return to pre-lockdown levels. Real GDP in Colorado has yet to return to pre-lockdown levels.

Furthermore, employment and income losses are concentrated among the poor and minorities. The last thing they need is an increased incentive not to work.”

GDP grew by 6.5% in the second quarter, but Peter Schiff called it “fake economic growth.”

We had no legitimate economic growth at all. All we had was people spending money. And one of the reasons that they spent more money.”

Prentice points out that real economic growth requires production. When you incentivize people not to work by giving them money to spend, it creates an illusion of prosperity that is actually undercutting the economy.

When fewer people work and fewer businesses operate at capacity, it is axiomatic that less income is produced. Government payments in lieu of earned income may help some individuals in the short run, but it harms the economy as a whole in the long run. One dollar of supplemental unemployment does not have the same economic impact as one dollar of production-based earned income.”

Unemployment benefits not only rot the foundation out of the economy, in the long run, they harm the very people they were meant to help, as Prentice points out.

Even for those who receive more in unemployment than by working, the short-term money cannot make up for the long-term loss of moving up the employment ladder, achieving seniority, and earning raises. At a sociological level, the loss of earned self-esteem that comes from gainful employment is incalculable. Generational damage will occur from children not observing the social benefits of employed parents.”

Unemployment benefits look good on the surface. That’s why politicians love them. But they come with all kinds of unseen consequences. Prentice sums up the damage done to Colorado’s economy by that state’s enhanced unemployment benefits.

The unintended economic consequences to Colorado of paying people not to work go far beyond the immediate impact of reduced employment. From where will the money come? Taxes on job creators? That harms all Coloradans as fewer jobs will be created. The government printing press? That harms all Coloradans through increased inflation. From Communist China buying more US Treasury debt? That harms all Coloradans by making us more beholden to a country that has shown itself to be a global enemy of freedom.”

You can ignore the laws of economics. But you can’t ignore the consequences of ignoring the laws of economics.