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Unemployment Rate Drops after Cutting Unemployment Benefits - As Predicted!

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Well now, who could have seen this coming? Back in December 2013 there was a mighty battle taking place in Washington, D.C. over whether or not to continue extending unemployment benefits for the long-term unemployed. Conservative and Libertarian-leaning politicians believed that the benefits were no longer affordable and/or needed. Liberal politicians, including Barack Obama, were suggesting that the benefits were still needed to sustain the so-called economic recovery and that cutting them off would be "just plain cruel," per Obama himself.

Obama also suggested that not extending the unemployment benefits would be a drag on the economy and that businesses will "hire fewer workers." House Minority Leader Nancy Pelosi stated that it would be "immoral" to not extend unemployment benefits. This of course follows her previous statements back in 2010 that unemployment benefits are the "biggest stimuluses" to the economy. Give the liberals some credit, while they generally flunk badly on economic theory they clearly excel at accusatory extremism.

But extremism rarely translates into reality, and the same is true in this case. In the first six months of 2014, employers have hired more new workers on average than in any other six-month term during Obama's presidency. The average was 231,000 new jobs per month according to figures from the Bureau of Labor Statistics (BLS). The job gains in the months of April and June were both in the top five best months during the Obama era. And the six-month drop in the unemployment rate from 6.7% in December 2013 down to 6.1% in June 2014 was the second biggest six-month drop in the same era. So much for those cruel, immoral and other doom-and-gloom scenarios that were painted by Obama, Pelosi and their liberal colleagues in politics and the media.

Now the interesting part of all these job gains, and it should be noted that many of them are part-time jobs, is that these figures were achieved in a six-month period that included a GDP contraction of 2.9% in the first quarter of 2014. Any kind of significant job growth does not typically correlate with periods of economic decline. But what is clearly driving the job growth is that unemployed people are finally seeking work because the unemployment benefits are finally drying up. This is a perfectly reasonable and foreseeable result and in fact it was foreseen, not least of all by this writer nearly five years ago.

In November 2009, I wrote an article entitled, "Congress Votes to Extend Joblessness" in which I argued that extending unemployment benefits would result in greater levels of unemployment over longer periods of time. That is exactly what happened at that time. The unemployment rate remained at or above 9% until October 2011, when it finally decreased to 8.8%.

After posting that article, I was attacked by several people who commented that I was 'heartless,' 'insensitive,' 'lacked humanity' and 'had not been forced to walk in the shoes of the unemployed.' That sounds a little like those extreme 'cruel' and 'immoral' declarations noted above, right? Give liberals some credit for their consistency of thought as well. They do like their talking points!

Following those attacks, I wrote another article entitled, "UPDATE: Congress Votes to Extend Joblessness" in which I first discussed my own history with unemployment and then provided additional information about the correlation between unemployment benefits and levels of unemployment. In that article, I included a portion of a piece posted by David R. Francis on the Library of Economics and Liberty website in which he wrote:

Lawrence H. Summers, chief economist at the World Bank, and chief economic adviser to Democratic presidential candidate Michael Dukakis in 1988, reaches similar conclusions. Summers, along with Harvard economist Kim B. Clark, found that unemployment insurance almost doubles the number of unemployment spells lasting more than three months, thereby encouraging long-term joblessness. Summers and Clark suggest that unemployment insurance benefits cause many of the long-term unemployed to have high "reservation wages." Translation: to accept a job, these unemployed workers insist on getting a high wage, and if they aren't offered that wage, they stay on unemployment insurance as long as possible.

As noted at the time, Summers was the Director of Obama's National Economic Council. That article from Francis was written in 1992, but what Summers believed then to be true is still true today. In layman's terms, it could be called the 'Cousin Eddie' theory. In the movie, "National Lampoon's Christmas Vacation," there is a scene in which the characters of Clark and Ellen Griswald are discussing her cousin Eddie, who has been out of a job for over seven years. When Clark ask how he could not find a job in all that time, Ellen responds that "He's been holding out for a management position."

Cousin Eddie was able to hold out for that management position because his wife was working multiple jobs to bring in some income and support the family. But if his wife had left him and he no longer had a steady income stream, then maybe even cousin Eddie would have accepted other jobs that were available, maybe even a non-management job. That is likely what is happening right now throughout the nation. The unemployment benefits stream has ended or is ending, so many people are starting to take the jobs that are available rather than the jobs that they really desire.

While nobody should celebrate the fact that people are accepting undesirable jobs, it must be noted that getting back into the labor market will help previously unemployed people regain the job skills and working habits that they had before, which will in turn lead to better opportunities in the future. Plus, they shift to becoming people who are contributing to the economy by paying income taxes rather than just being a drain on it by accepting unemployment benefits. And that, in stark contrast to Nancy Pelosi's asinine theories about jobs and economic growth, is how the economy will actually start to really grow again. This could have all started years ago - almost five years ago, in fact, had anybody been paying attention.

Rob Binsrick

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