As signs of the economic recovery become fainter and as mid-term elections draw near, the tenmptation to continue prime pumping the economy will increase. The most obvious target for new government spending is unemployment insurance. Proposals to extend unemployment insurance to an unprecedented 99 weeks (almost 2 years!) are circulating Congress, and supported by the White House. As respected economist Robert Barro notes, handouts from the public purse of this size can only lead to further deteriotation in wealth creation, killing any little momentum left in the economic recovery.
I do not suggest that we do away with unemployment insurance; the current 26 weeks is generous by first world standards, let alone global standards. However, as with any spending program, which cannot be killed, thought must be given to the long term effects.
In this case, the government has two ways it can go. It can put more money into the hands of people who are unemployed, which means taking it out of the hands of those who are or it can keep more money in the hands of people who are currently employed. Both programs will lead to more consumer spending. However, only one program, the latter, will have the additional effect of encouraging investments and innovation. The former program will reduce investment and innovation, hence, compromise the nation's capacity to create wealth. It will reduce the incentive for individuals to return to the labor market or for those currently underemployed to stay employed. The former program will effectively retard the necessary restructuring in the labor market.
As we struggle to rid ourselves of this painful mess we must keep a weather eye for our children's future.
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