Unemployment Benefits Are the Best Stimulus

groceries
Each dollar of unemployment benefits generates $1.64 in economic growth. Photo: Tetra Images/Getty Images

Federal unemployment benefits are the best economic stimulus. That's because funds are pumped directly into the economy, boosting growth.

Unemployment benefits provide a lifeline to the jobless when they need it most. They give those without jobs enough money to supply the basics of life. These benefits prevent the breadlines and tent cities seen during the Great Depression.

These federal benefits boost economic growth.

The unemployed use the money to buy basic shelter, food, and clothing. As a result, every dollar spent on unemployment benefits stimulates $1.64 in demand. (Source: Moody's Economy.com study)

How can $1 create $1.64? That's because of the ripple effect. For example, a dollar spent at the grocery store pays for the food. It also helps pay the clerk's salary, the truckers who haul the food, and even the farmer who grow it. The clerks, truckers and farmers then buy groceries, which pays more staff, and on it goes.

This ripple effect keeps demand strong, creating added benefit. Stores keep their employees to supply the goods and services the unemployed need. Every $1 billion spent on unemployment benefits creates 19,000 jobs, according to a Congressional Budget Office study. Without these benefits, demand would drop. Then retailers would need to lay off their workers, increasing unemployment rates.

 

Unemployment benefits work fast. The government just writes checks, which immediately goes into the economy.

During the final quarter of 2008, unemployment programs paid $34.9 billion in benefits to eight million unemployed workers. That boosted economic growth by $57 billion. Every month in extended benefits costs taxpayers $10 billion.

But, it generates $16.4 billion in economic growth.

Why Unemployment Benefits Work Better Than Tax Cuts

Unemployed benefits are more cost-effective than other methods of stimulating the economy. Republicans usually advocate income tax cuts. The cuts will give more money to businesses that will then hire new workers. That argument is known as supply-side economic theory. President Reagan used it to end the 1981 recession. See Did Reaganomics Work?

A U Mass/Amherst study found that unemployment benefits were more productive. The research showed that $1 billion dollars in tax cuts created 10,779 jobs. That's fewer than the 19,000 created if the same funds went to the unemployed. That's because those who have a job will only spend half of their tax cuts. Since they receive income, they can use the tax cuts to pay down debts, save, or invest the rest. For more, see Do Tax Cuts Create Jobs?

Studies showed that each dollar from the 2008 Bush tax rebate only generated $1.19 in additional economic growth. Looked at this way, the $168 billion from the Bush rebates generated $200 billion in demand.

(On a side note: One of the advantages of the Bush tax rebate was that it was sent out in checks, which people promptly spent.

The Obama tax cut didn't show up until tax time. Most people didn't even realize they received it.)

Reductions in the tax rate may ultimately damage the economy. Every dollar in lost tax revenue only creates 59 cents in economic growth. That's because people usually don't realize they're getting a break until tax time. Since they are paying out money in taxes, they are less likely to spend anything extra. It just doesn't feel like a bonus. As a result, people are more likely to save anything they get or use it to pay down other debts.

To compare unemployment benefits to all types of expansionary fiscal policy, see Unemployment Solutions