Guest Post: Unemployment Insurance Schemes And The Dependency Of Welfare

Submitted by James Miller of the Ludwig von Mises Institute of Canada

Unemployment Insurance Schemes And The Dependency Of Welfare

In the Garden of Eden there is no scarcity.  Food, clothing, and shelter in are abundance.  Resources merely fall from the heavens upon command.  It is economic paradise precisely because economics does not exist.  The universal laws that hold in the world of scarce goods vanquish in the land of the plenty.

The vision of Eden is the politician’s main source of employment.  That is, promising to lead the suffering masses toward utopia by government decree makes for great electoral results.  The voting fodder ignorant of economics falls in line to cast a ballot to grant themselves other people’s money.  But of course many voters don’t see it this way.  Their vision of the state is that of Eden.  They see the bureaucrats and enforcers capable of tapping an infinite pot of wealth to pass along prosperity to those subservient enough to put them in office.  This in turn has lead to the establishment of the welfare state and its plethora of entitlement programs.

For those who see the modern day welfare state as corrosive to the productive capacity of any given country, no where is this theory more evident than the scheme of unemployment insurance.  In a recent National Post article, the entitlement attitude was on full display:

Jenna Somerton views her layoff from a job at Algonquin College in June of 2010 as a blessing in disguise: She lived on employment insurance benefits for eight months, took stock and decided what she really wanted to do with her life.

Of course, she admits to taking advantage of her EI cheques at the beginning, after hunting for a job with no luck.

“I was thinking ‘Free money, the government owes me, I paid for school … I deserve this,” the 27-year-old Ottawa resident says now.

She soon got serious, using the subsidized income to hatch plans to start her own web development business. Some of her friends, she said, have not been so diligent.

“I’ve known lots of people on EI and I know a lot of them just stayed on EI and as soon as it ran out they started freaking out and then they started looking for jobs…. [The government] makes it so easy.”

In Ms. Somerton’s view, it is the government that owes her and she is rightly deserving of the “free” money.  Her error is unfortunately not unique.  The notion of the government not restricted by the amount of resources it is able to squander from the private sector is hardly touched on in what passes for informed opinion.  The reading of the editorial section in today’s highly regarded newspapers often contains numerous recommendations on what the state can and should provide.  What is never eluded to is the real cost of government expenditures.  While it is a simple task to rattle off the dollar cost of a program, to truly gauge the price of the state, one must look at what may have been foregone to provide for the payment of taxes.

The proper understanding of government is that it is parasitical in nature.  It can only spend what it first forcefully takes.  Because the political class is beholden to how much theft it can get away with before sparking an enraged uprising, it also invents new schemes to not be reliant on tax collection alone.  This includes borrowing and accumulating debt; which is nothing more than the promise of future taxes.  And there is inflation which benefits the first receiver of new money, that is the state, to spend freely before prices adjust economy wide.

Whatever the devious method, each comes at cost to the taxpayer.  Again, the nominal price of taxation by itself is easy to calculate.  What is often neglected is what the pilfered funds could have been used for if left in the necessarily more prudent non-public sector.  It was recently came to light how the great technological innovator Apple Inc. sets up branches in cities with low corporate tax rates in order to lower its tax bill.  This is of course a great thing as Apple, constrained in income by how much it receives from consumers, is a better steward of scarce resources then the state.  Apple’s tax avoidance is obvious.  The further technological innovations financed by money the government bandits don’t help themselves to is not readily apparent.

The general public is blind to this state of affairs.  Many have been conditioned through years of public schooling to see the state as Eden.  The short term benefits of government transfer payments override any conceivable long term gains of genuine wealth creation in the private sphere.

Decades of the predominant welfare state have not only created a reliable voting constituency dependent on handouts, it has perpetuated the Santa Clause-like image of the state.  What isn’t considered is the overall social degeneration that is a byproduct of the so-called “social safety net.”  As noted economist Thomas Sowell explains:

While liberals may think of the 1960s as the beginning of many “progressive” trends in American society, cold hard facts tell a very different story. The 1960s marked the end of many beneficial trends that had been going on for years — and a complete reversal of those trends as programs, policies, and ideologies of the liberals took hold.

Teenage pregnancy had been going down for years. So had venereal disease. Rates of infection for syphilis in 1960 was half of what it had been in 1950. There were similar trends in crime. The total number of murders in the United States in 1960 was lower than in 1950, 1940, or 1930 — even though the population was growing and two new states had been added. The murder rate, in proportion to population, in 1960 was half of what it had been in 1934.

Every one of these beneficial trends sharply reversed after liberal notions gained ascendancy during in the 1960s. By 1974, the murder rate had doubled. Even liberal icon Sargent Shriver, head of the agency directing the “war on poverty,” admitted that “venereal disease has skyrocketed” even though “we have had more clinics, more pills, and more sex education than ever in history.”

As for black economic advances, the most dramatic reduction in poverty among blacks occurred between 1940 and 1960, when the black poverty rate was cut almost in half, without any major government programs of the Great Society kind that began in the 1960s.

Why be productive and take of yourself when someone else picks up the tab?  This isn’t a cold hearted question but a basic recognition that in most cases, leisure and immediate pleasure are preferred to delayed satisfaction.

Back to unemployment insurance, no matter how much it is denied by entitlement apologists, there is no escaping the truth that if someone is paid not to work, they will generally not work.  As Murray Rothbard writes in his magnum opus Man, Economy, and State:

For almost all actors, leisure is a consumer’s good, to be weighed in the balance against the prospect of acquiring other consumer’s goods, including possible satisfaction from the effort itself.

People will always be economizing beings who make choices between how they spend their time and where they dedicate their labor.  The National Post article makes mention of this consideration among those on the dole as small business owners…

have found themselves competing with the EI system for workers who are weighing opportunity costs: Would I toil in a hard labour job for $10 an hour or not go to work for roughly the same amount of cash?

This reluctance to work was documented in a 2009 survey which found many businesses unable to hire those on the unemployment rolls:

A CFIB survey published in September, 2009, found 22% of small businesses owners had trouble hiring people who are on EI, as workers said they would rather continue collecting benefits than work in the more hands-on jobs. Another 16% said that in the past year, they had had an employee ask to be laid off so he or she could collect EI benefits (these rates were higher in Newfoundland and Prince Edward Island).

This is all a consequence of the welfare state which has institutionalized poverty instead of relieving it.  The real beneficiaries of entitlement programs are not the recipients but those who maintain their positions as gatekeepers to the money.  The saddening dependency of others and the government’s monopoly over coercive tax collection is what provides them a steady stream of income.

As long as the public still operates under the fallacious assumption that the state is costless, they will continue to vote themselves into destitution.  Living standards will decline as productivity gains begin to taper off.  A generation of the entitled will soon find themselves deserving of nothing because the real wealth producers will have long since abandoned their efforts to serve others.

Host bodies only ever have so much blood to give.