We'll get to our analysis shortly, but to be fair to Mr. Sanders, here's a little more of his demagoguery:

I call Senator Sanders' clarion call for Corporations to pay more taxes a bit of demagoguery because he appeals to innate biases and prejudices without being specific or logically analyzing the issue. Clearly, without any other information, your gut reaction would be — duh! of course they should pay their fair share of taxes. But with a little more information; and some logical and philosophical discussion, you may not be so quick to jump on this bandwagon completely.

Yes, a bit of philosophical discussion of Capitalism is warranted before we get into the specifics of corporations paying taxes, because without an understanding of Capitalism and its role in economics we won't be able to make good economic decisions. Years ago, this wouldn't be necessary. But today, Capitalism is under assault. We're bombarded with anti-capitalism propaganda on a daily basis. Corporations are demonized like never before.

You've probably seen a variation of the pass-along email below that I received recently.

A powerful quote. By Honest Abe no less. But as is typical with emails such as this, it is false. See Snopes. But be honest. It resonates with you, does it not? It's hard not to conjure up those negative anti-corporation feelings that the quote intends us to have. That's the nature of being human. We tend to react as propaganda would have us react. That's why demagoguery that appeals to our prejudices and biases is so effective (and so often used by Politicians). But it's also why we have to always be on guard for it lest we allow ourselves to be manipulated.

Speaking of being manipulated, have you seen Michael Moore's (one of the best propagandists since Leni Riefenstahl) very successful documentary "Capitalism: A Love Story"? It's another great example of an effective but specious attack on the free market enterprise system (he favors socialism). He blames Capitalism for the recent recession.

Senator Sanders is also a self-declared Socialist. Hence, he tends to be skeptical and distrustful of Capitalism. He thinks governments do a better job allocating economic resources. I, of course, disagree. I think the overwhelming evidence has been in for a long time. Countries that embrace Capitalism do well. Countries that don't, do less well, to say the least. Capitalism has provided this Country with 250 years of the greatest prosperity the world has ever known. Corporations are simply the vehicles through which Capitalism can work its magic. I want Corporations to do well. My 401K wants them to do well. My retirement is depending on them doing well.

Nevertheless, the assault on Capitalism continues relentlessly — abetted by Politicians sympathetic to Mr. Sanders' views. Many of these politicians believe, and perhaps some of you, to some extent anyway, that the recent recession was a breakdown of Capitalism; or worse, that it was a natural consequence of Capitalism. Nothing could be further from the truth.

Understand that Capitalism is not a political system like Democracy. It's an economic system requiring Democracy as a necessary condition for its existence. That's because it's based on the recognition of individual rights including property rights in which property is privately owned. You are free to see a customer need or want and start a business to fill that need or want. And if you work harder and/or smarter than others, you can be successful and accumulate more property and wealth. This makes Capitalism a very efficient economic system for providing goods and services. Far more efficient that statist systems like Socialism and Communism.

But, no system is perfect. Like any economic system, or statist system like Socialism for that matter, Capitalism can also result in some undesirable side effects. You see, competing in a free market enterprise system is tough. You have to work hard and work smart. Waste can't be tolerated. You have to provide the best product at the lowest cost — consistently. If you don't, your competition will; and you may find yourself out of business. This is a good thing. It's why private industry can provide twice the benefit at half the cost that anything the government can do.

But this relentless competition and striving to reduce costs can sometimes cause companies to push the envelope a bit too far — sometimes with negative consequences. An airline, for example, may push the limit on maintenence so that it can lower its price to gain market share. But when a plane goes down due to mechanical failure, it's little consolation to the lost souls that a capitalistic system will eventually put this company out of business due to the public's lost confidence in it.

Likewise, unfettered competition will sometimes lead to monopolies and monopolistic practices intended to preserve and perpetuate their monopolies. This reduces or eliminates competition which in turn reduces or eliminates customer choice as well as unjustly and adversely affecting consumer pocketbooks (gouging). History has shown that free market enterprise and the competitive spirit will eventually kill off monopolies, but a lot of wasted time, money and consumer abuse take place in the meantime. And that's not a desirable situation.

So, to get the most out of Capitalism, we need good rules and a good rule keeper — a referee if you will. The rules are regulations and the referee is the government. The better the rules and the more competent the rule keepers, the better Capitalism will work and the more society will reap the rewards of this robust economic system which is the best and most efficient allocator of scarce economic resources the world has ever seen.

This shouldn't be that difficult. After all, the purpose of the rules is simply to ensure robust competition, provide a level playing field for all competing parties, protect the participants as well as the public from unfair practices, and of course ensure public safety. And finally, do all this while not getting in the way of efficient free market mechanisms.

But there are two problems with this arrangement: 1) the rules, and 2) the referee.

The rules are created by Congress and with the consent of the President, signed into law. But congress is made up many people of many different opinions. Some, like Senator Bernie Sanders, are Socialists or lean heavily in that direction. They don't believe much in Capitalism or are skeptical and mistrustful of it. They tend to believe that the Government can either do things better than the private sector, or that it should so heavily regulate Industry that much of the efficiencies are lost. It's as if the referee tells the team what plays to play, which players can go in, if one side has bigger men than the other, then they should trade team-mates. This metaphor is obviously ridiculous, but the point is made — Government is better at screwing things up than in Governing.

On the other hand, you have some members of Congress who would have almost no regulation. These people have total and complete faith that Capitalism will always produce the the best results, even to the point of encouraging widespread corruption and price fixing. And then there are all those in between. Obviously, this makes it tough to get good rules agreed upon and signed into law.

But that's not the worst of it. Politicians are all about getting and maintaining power. And businesses would rather not work as hard as unfettered Capitalism would have them work, at least all the time. So they'll look for short-cuts. They'll often ask the referee (via lobbyists and campaign contributions) for specific competitive advantages, or simply for government assistance (subsidies). Unfortunately, the referee (Government) is all too happy to accommodate this arrangement — keep me in power and I'll be in a position to dispense favors.

This may be beneficial to the businesses and the Politicians, but it adversely skews the efficient allocation of scarce economic resources. The game is now, to some degree, rigged. The best team may not win. But when this happens, you shouldn't blame Capitalism. It's the referee that's the problem, just like it would be if an umpire took a bribe to call balls when strikes were thrown. So when the referee is either incompetent or bought off to advantage particular favorites, the system is distorted and you get undesireable results.

That is exactly what happened in the last recession. You've got government setting goals in home ownership, encouraging (almost forcing) lenders to ease lending requirements, looking the other way when problems occur. The system is now distorted. But distortions and bubbles always correct themselves eventually. Unfortunately, sometimes the correction can be of mammoth size and that hurts (real estate bubble?). But again, the fault is not Capitalism. It's the government that has let us down.

And one more thing. It does little good to establish bureaucracies to police the rules (regulations) if they are inept. The Comptroler of Currency, Office of Thrift Supervision, SEC, Treasury, FDIC, Federal Reserve, Consumer Agencies, etc. etc. etc., were all incapable of seeing the bubble that the government created in housing. More than a dozen times Congress asked to audit or at least regulate Freddy and Fannie to the same degree as banks were regulated, even after substantial evidence of fraud was uncovered. Yet nothing was done.

And with all the ridiculous amount of reporting required by Sarbanes-Oxley, and additional reporting required by the SEC, no one was able to stop Bernie Madoff, inspite of the fact that people put evidence of wrong doing directly in front of the SEC (as well as FBI) which could be verified by the most superficial of audits. Apparently, watching porn on their computers was as productive as it gets at the SEC.

The upshot of all this? If you want to get this Country going again, then unleash the dogs of Capitalism. This requires better rules and better referees. Rules that grease the Capitalist skids by having low taxes on capital investment, avoiding excessively burdensome regulation, and opening markets here and abroad, and particularly incentivizing building here rather than abroad. This will create a climate in which investment is profitable and hiring is a prerequisite for it. The outcomes would be high economic growth, employment and prosperity. This will in turn lead to higher government revenues and the means to not only eliminate the deficit, but to begin paying off the monstrous, growth killing debt that burdens us. Alas, it's sad, and a bit appalling, to see how many Politicians just don't get it — either they don't understand Capitalism and what it's done for and could do again for this Country, or just don't believe in it.

Ok, with the philosophic aspects of Capitalism out of the way, let's now tackle the issue at hand: Should corporations pay more taxes? or any taxes at all? And as a corollary, why are the above listed Corporations paying little or no Federal income taxes given that the Federal income tax rate is 35% (currently the highest statutory rate in the world)?

You say income taxes are different. They're a little different. But if an income tax is added across the board, in a competitive market the effect is necessarily the same. Taxes are just another line-item expense to Corporations. Add the same line-item cost to all competitors and nothing is changed. They add up all these line-item costs and add a reasonable return on their shareholder's money (yours and my money) and set the price accordingly. All competitive prices move up by that line-item. Don't pay us (shareholders) our expected return and we'll go someplace else with our hard-earned investment money. That sends the stock price spiraling downward, deprives the company of additional money and sets the stage for downsizing — or worse. Simple as that. That's how free market enterprise works.

So, the simple truth of the matter is, adding corporate taxes of any kind necessarily raises prices on the products they make. And the problem with this is the higher prices are charged to anyone who buys the product, be they a billionaire or in poverty. This type of tax is called a regressive tax. It hits the people hardest who are least able to pay for it.

There is one unintended consequence of having a corporate income tax however. Since our Government can't raise corporate income tax rates on foreign companies, if our corporate income tax rates are higher than foreign corporate income tax rates, then United States corporations will be at a price disadvantage. That means U.S. Companies will sell less and Foreign companies who sell in the U.S. will sell more. American companies will have to cut production resulting in layoffs, less property taxes paid by closed plants, less collection of personal income tax resulting from those who are laid off and no longer earning income, higher government expenditures for unemployment, and a reduced economy in general since those laid off people will cut costs - buy less, aggravating an already bad situation. Again, that's how it works.

And oh yes, there is one more unintended consequence. Corporations, not being stupid and recognizing that we live in a global economy, will make sure that the next plant they build will be built in one of those low tax countries and employ their citizens rather than ours.

Let me re-emphasize that last paragraph. It's a global economy! Politicians need to get up to speed. Unbelievably, most aren't. I was listening to Governor Randell of Pennsylvania (D) the other day lamenting that corporations are paying far less of our taxes now than they did in the fifties and sixties. And that's true as you can see from the following graph which shows the trend is that corporations are paying less and individuals are paying more.

But in the fifties and sixties, the United States was the biggest manufacturer in the world. Nobody even came close. There was no competition. We made everything. But eventually, Japan began competing successfully. So did Germany. Today, it's a world economy. We don't manufacture things like we did before. And what we do, it's usually overseas. So while we got away with taxing corporations in the fifties and sixties, we no longer have that option. Not if we want to have full employment and a robust economy.

The Bernie Sanders' of the world don't like to hear this, but these are the facts. And as the late Senator Patrick Moynihan used to say, you are entitled to your own opinion — but not your own facts.

Before we move on, we need to address one more truth: The income that corporations earn is actually taxed not once but twice: once at the corporate income tax rate and again when the stockholders get paid their dividends on which they pay taxes or when they sell their stock and pay tax on any gains they may have made.

Isn't it interesting that if you start a company and organize it as an LLC or LLP or Sole Proprietary or General Partnership or Sub-chapter S Corporation, then the business is not taxed on its earnings at all. Those earnings are only taxes once at the individual income tax rate of the investors/owners. Yet organize it as a C-corporation and you get the double taxation.

Why is this so? Well, it appeals to those who persist in believing that taxing corporations is free money; that we don't actually pay it; that there are no adverse consequences to it; and that it doesn't adversely affect employment and the economy. Ignorance is bliss I guess. But education is better. So is logic.

This is clearly where Senator Sanders has an issue. And he's done a good job getting our hackles up by pointing to what seems to be a clear case of corporate tax scofflaws. But contrary to what Senator Sanders would have us believe, the aforementioned corporations are not tax scofflaws, nor shirking their tax responsibilities in any way. They're merely taking advantage of all the tax deductions that Congress (including Mr. Sanders) has made available to them for one reason or another, just like you and I do. As such, their average tax rate (or effective tax rate to use the vernacular of accountants) is less than the statutory rate or even zero. This doesn't make them bad any more than deducting our mortgage interest makes us bad.

Some of you with a bit more financial acumen than the rest of us might point to a bit of controversy about the definition of effective tax rate — should it include or exclude various items such as deferred taxes. We don't need to get down to the exact numbers so don't get bogged down in the details. It doesn't affect the main points or conclusions.

Mr. Sanders likes to talk in generalities. But let's get specific. Just what deduction does he want axed? He mentions banks — Bank of America and Citigroup. Well, we did just go through a financial sector crisis due to the subprime mortgage meltdown in 2007 and 2008. Banks held maybe a trillion or more dollars in toxic assets. Much of these were written off. Far more than their earnings. When a company's loss is more than its income, it is allowed to carryover this loss to future years thus reducing the tax liability in the out years. This is called a tax loss carryforward or Net Operating Loss Carryforward. This seems reasonable. Is Mr. Sanders against tax loss carryforwards?

GM isn't on the list but it was allowed to take a net operating loss of about $16 billion even though it received billions in TARP money and even though the company was reorganized which usually precludes net operating loss carryforwards. But a special allowance was made for GM. Was Mr. Sanders against this? If so, he should say so.

To be fair to Senator Sanders, he is specific about one tax break. We don't tax corporations on business they have abroad. Furthermore, if they keep the money abroad (e.g. use it to build plants overseas - great for foreign employment), they never have to pay U.S. taxes. Clearly the unintended consequences of this is counterproductive. But, the problem is not with the corporations; it's with Congress and the Administration for implementing counterproductive tax policies. You see; where Sanders gets specific, he can make some good points. But how about other specifics?

Oil companies tend to be the whipping boys for politicians like Mr. Sanders, but as you can see from the graph to the right, Exxon actually has a higher effective tax rate than Microsoft and much higher than GE. But railing against Google, Yahoo and Microsoft as tax dodgers just doesn't arouse the same level of animosity as railing against Exxon and their ilk.

Notice the inconsistency between the Exxon effective tax rate in the above graph and Sanders' list where it says that Exxon paid no income taxes in 2009.

The graph is a 3 year average (2007 thru 2009). So in 2007 and 2008 Exxon paid substantial taxes. It turns out that Exxon over-paid in 2008 which it used to offset taxes in 2009. According to the company's income statement, in 2008 they made $45.2 billion in profit but paid 2.5 times as much in taxes ($116.2 billion). It breaks down like this: income taxes, $36.5 billion; sales-based taxes, $34.5 billion; "all other" taxes, $45.2 billion.

In addition, most of the profit was earned by the company's subsidiaries abroad. When they pay taxes in foreign Countries, they don't pay again in the U.S.

This is not to say they don't get substantial industy-wide tax breaks — they do.

Let's take a look at the worst offender on the list — GE. How does GE do it? Well, they task an army of accountants to scour the incredibly complex tax code (GE submitted a mammoth 24,000-page tax return) to find every deduction available to them. When I say army, it's almost literal. I understand they have almost a thousand tax accountants. A thousand tax accounts and a 24,000 page tax return! What an example of the ridiculous and wasteful tax code we have. And if GE doesn't find a deduction it wants, it tasks another army of lobbyists to get one.

Unfortunately, this is how business is done these days. Microsoft once prided itself on having zero lobbyists. Then the government nailed them with a billion dollar suit. For what? — For giving away free software with its operating system much like cars provide free radios in the base price. Microsoft learned its lesson and now spends hundreds of millions on lobbyists. GE knows how to play this game. The Financial Industry does too; they employ over 3,000 lobbyists — almost 6 lobbyists for every Congressman and Senator.

This is called industrial policy. Industrial Policy is where the government tries to encourage a certain behavior through the tax code. Every single line of the tax code is there to bring about a desired outcome. Sometimes the Government is the driving force pushing for desired outcomes. Sometimes industry convinces the Government to drive desired outcomes. That's the way Government does business.

So GE pays little or no tax because it aligns many of its businesses into areas that the government subsidizes; like for example windmills. President Obama wants Wind power. Wind power is extremely expensive and unreliable and needs an expensive smart grid so nobody wants it. The only way to get it is too heavily subsidized it. And GE is only too happy to accommodate.

Another company not on the list but receives billions in subsidies from the government is Archer Daniels Midland Company (NYSE: ADM). One substantial subsidy they enjoy is for producing ethanol. ADM is by far the biggest beneficiary of this industrial policy. The Obama administration wants ethanol and a lot of it. But again, it's non-economical; so to get someone to produce it, they bribe subsidize companies to produce it. And how!

Is Mr. Sanders against industrial policy? Again, instead of demonizing the evil corporations, lets agree on which industrial policy he's against.

So is industrial policy a good thing? Well, let's not talk good and bad for the moment but efficient and non-efficient. You see, Capitalism — free market enterprise — is the most efficient allocator of scarce economic resources. Interfere with free market forces and you usually get big inefficiencies and unintended consequences.

Take for example, Ethanol. It's inefficient, has a third less energy than gasoline, is as dirty or dirtier than fossil fuel, wears out our engines faster, doesn't mitigate climate change (some say it actually makes it worse), and worst of all, causes food prices to soar worldwide (a particluarly big problem in developing countries where people are starving). Most environmentalists, including Al Gore, are now against ethanol, at least corn (or food) based ethanol (other bases for ethanol like switch grass are just not practicable at this time).

How about wind, solar and biodiesel subsidies? Many of the companies that have been given hundreds of millions to develop these alternative fuels have gone bankrupt. Others have moved their plants to China. Am I crazy to think it's crazy to give China tax incentives to build solar panels and windmills to sell back to us? (See USA Energy Policy and my review of Power Hungry by Robert Bryce).

And once subsidies start, they take on a life of their own and are next to impossible to get rid of (I guess politicians can't admit to making mistakes). That's why we still have wool subsidies today that were put in place during the Civil War to ensure the supply of uniforms. It's also why wealthy singers and entertainers get large government checks because they own a lot of land on which they do not grow various crops. Up until a few years ago, our telephone charges included a surcharge originally put in place to pay for the Spanish-American war. We could go all day talking about the ridiculousness of our tax code and how it's hurting this country.

Some think-tanks have estimated that we waste $600 billion per year in lost productivity just complying with the tax code. And this doesn't even include the costs related to the mis-allocating of economic resources.

So I ask Mr. Sanders and everyone else — is paying these huge subsidies worth it? The carbon tax initiative didn't pass, but it has been estimated that it would have sucked about a trillion dollars out of our economy and transfer it to the rest of the world — and with negligible results (less than 1/2 of one degree by the year 2100 under the most optimistic assumptions?). Do we think China will stop building a new coal based power plant every week? Maybe we could pay them not to. After all, although China is our biggest creditor, we still give them foreign aid so anything's possible.

Seriously though, how can politicians seriously ponder policies that what some think-tanks estimate would add about $1,500 per year to the average household energy bill? Does anyone find that this was actually considered as scary as I do? Does anyone know we're broke? Why is the biggest debtor nation in the world expected to pay for the rest of the world?

Each case of Industrial policy is different and we all have to decide for ourselves their merits. But this I do know — Industrial Policy always, and I mean always, results in a trade-off between desired outcomes and the cost associated with the inefficient allocation of scarce economic resources that necessarily accompanies these policies.

My personal feeling is that we need to get back to what made us great — good old fashion Capitalism. Let government be the referee and force companies compete. Do this and you'll get the best and most innovative products in the world. And if we throw out the 60 or 70 thousand pages of tax code which no one in the world understands, and replace it with a page or two, we'd be well on our way to a balanced budget and a stronger economy....But don't hold your breath.

↑ Click Here to Hide Full Article ↑

The first thing that's abundantly clear is that both parties are once again behaving irresponsibly. No surprise here. This is an $858 billion deal over ten years — none of which is paid for. Not only is it not paid for, but they're loading it up with pork. "Harrah" Reid (called Harrah rather than Harry because he is trying to put a national gambling bill into the deal which greatly benefits Harrah's of Las Vegas. Oh, did I mention that Harrah's provided hundreds of thousands of dollars to Reid's recent re-election campaign?) is particularly egregious in this regard. But he's not alone. There's tax breaks for Rum Producers with factories in Puerto Rico, Bio Mass tax breaks, motor sports, hydrogen car incentives, green homes, windmills, Indian employment credits, ethanol (the left, right, government waste critics, greenies and even Al Gore now agree that ethanol was and is a big mistake. Apparently, only the government is still in the dark), etc. etc. etc. It's disgusting.

Take a look at the National Debt clock to the right. We're $14 trillion in debt and on course to double it in 10 years; triple it in 15. And it's sucking the life-blood out of our Country. The Debt commission just released a report showing the gravity of the situation and made modest proposals to cut the national debt by $4 trillion. And everyone just yawns.

And by the way, the $14 trillion is only the national debt. There is anywhere between $70 and $100 trillion more in unfunded liabilities — promises made by the goverment that it can't expect to deliver. And this is just the Federal government. The States are in abysmal financial condition as well; as are municipalities. California is the worst. The Fed's giving them about $8 billion/yr to just get by. But their debt and unfunded liabilities are estimated by some at over $150 billion. Yet they keep irresponsibly spending money and ordering expensive mandates in the obvious hope that the Fed will be forced to bail them out (as other irresponsible States want as well). But there's no more money, inspite of the fact that the government printing presses are hard at work devaluing the dollar and inviting inflation.

Debt is the most serious issue facing this Country. It's like a freight train comming right at you. If we don't get serious about it real quick, we're going to be in real trouble. We see riots in Greece, England and France, and we think that can't happen here. But it can! Sticking our heads in the sand until it's too late does not a plan make. It's insanity! We need to wake-up and wake-up fast.

If you catch the debt monster early enough, you can cut back on expenses. Tighten the old belt so to speak. But when it gets to far along, you can't cut enough. As a country, we're going to have to tighten out belts big time to be sure. But that's not enough. If we're going to get out of this, we need to grow the economy. But growing the economy is difficult if all or our endeavors go to paying interest expenses rather than for plant and equipment. But grow we must. That means focusing on efficiency, productivity, and incentives. But most important of all is to 1) stop digging the hole, and 2) get going on the right tract as soon as possible.

But back to the compromise deal. Is it a good thing? The economy is extremely tenuous so we probably needed to extend the majority of the Bush tax rates. However, they could have done the deal without all the egregious pork barrel spending; perhaps created higher rates on ultra high incomes, and paid for a good chunk of the deal through other spending cuts. These things didn't happen. Even so, it's a deal that probably had to happen. But it's another almost trillion dollars in debt; and that's irresponsible.

So who won with this deal? President Obama looks least bad in the sense that he acted like the President of the whole Country instead of just the 20% far left from which he has governed for much of the first two years of his administration. So he made a deal when a deal had to be made. Pragmatically, he had no choice. Negotiating next year with the Republicans, with their significant majority in the House and closer to parity in the Senate, would produce a package much less to his liking and would have jeopardized the economy in the process. And while Obama angered the far left, he picked up the middle. A win for 2012 positioning.

The Republicans come in next; looking worse than the President but not as bad as the Democrats. They didn't provide for any spending off-sets despite their repeated entreaties to want to have an "adult" conversation about controlling spending. They also come off a bit greedy. Some of the high end tax rates could be let to expire without serious repercussions to the economy. Or, at the very least, add a new rate for people making over $1 million per year. Or better yet, get rid of some of the egregious loop-holes that allow people who make over a $billion per year (not million but billion) to pay only about 15% in taxes (the second wealthiest man in the U.S., Warren Buffet says he pays 14% in taxes without any tax shelters). You may want to check out the "carried interest" controversy just below this article to see how outrageously the tax code coddles the supper wealthy.

Back to the winners and losers regarding extending the Bush tax rates.

The Democrats (excluding Obama) look the worst of all. They couldn't stop this deal anyway. They could only hope to stall it since the Republicans would take control, and the credit, of the situation in January. And Obama would have no choice but to accept their terms.

But by all their antics and efforts to derail the deal, the Democrats looked like whinning children; politically stupid and callous to boot — all to make a point. Ridiculous! And by the way, they could have had a much better deal if they would have chosen to have a vote on the tax extension before the election since John Boehner (the Speaker elect) had already indicated prior to the elections that he would accept a deal far more favorable to the Democrats. Obviously, the Democrats only grew spines after the elections; so, griping now makes them less than pathetic.

But this deal is just a stop gap. The next two years will really tell the story. We'll see if our elected officials are up to the task. Judging by their reckless spending in this bill and the subsequently proposed and absolutely outrageous $1.1 Billion omnibus spending package (which thankfully was tuned way back), it appears that these politicians distain the voters who have the audacity to ask them to be fiscally responsible.

↑ Click Here to Hide Full Article ↑

No subject will get people's hackles up like a discussion on whether to extend or not extend unemployment benefits. That's because the subject is so strongly demagogued by extension supporters. For example, rather than using rational argument, people are called cold-hearted; oblivious to the pain of others; uncaring; mean-spirited; etc. The same thing happens when talking about minimum wage. It's the caring people who want to offer a helping hand against Darth Vader and the dark side. Because of this, politicians are loathe to come out against either higher minimum wages or unemployment benefit extensions. So for the most part, the subject is left to acedemicians to study the issue. But truth be told, there is some limit on both the amount of benefits and the duration of benefits, beyond which the costs far outweight the benefits. A limit which when exceeded causes the unemployment rate to actually rise, or at least not fall as fast.

This kind of makes sense doesn't it? If the amount of compensation is 100% of your last salary and the duration is unlimited, it just seems obvious a significant part of the population would be happy to get paid to golf and vacation. You say 100% and indefinate duration is unrealistic. But in Denmark, unemployment compensation is 85% of your salary and extends to four years. If you got 85% of your salary for the next four years, wouldn't you take your time and set your standards for the next job pretty high? Wouldn't you also, perhaps, consider taking a vacation first?

People are pretty good at responding to incentives. And in fact emperical evidence backs this up. A study in a particularly generous Scandanavian country showed that when their unemployement compensation ran out at five years, the unemployment rate dipped precisely after 5 years. When they changed it to four years, the unemployment rate dipped in year four. And so on with three years and then two.

Other studies bear this out as well. A recent study by the Federal Reserve Bank of San Francisco found the unemployment rate at the end of 2009 would have been nearly half a percentage point lower–9.6%, instead of 10%–if jobless benefits hadn't been extended beyond their usual 26 weeks to as much as 99 weeks. And no less a figure that Larwence Summers, President Obama's former Director of the White House National Economic Council, authored a study while at Harvard showing just such a proposition. Although he's recanted it somewhat since he's been on the Obama team.

Even the 99ers will corroberate these findings. On recent TV interviews, they have admitted that when first laid off, they took their time and set high goals for the next job opportunity. Only as it came close to the end of the benefit period did they begin to get real serious about their search and lower their expectations, perhaps even taking a job that is not as good as the one they left.

One argument for extensions is that it actually helps the economy. For example, some economists say that for every dollar of unemployment benefits, between one and two dollars are added back into the economy. This is called the multiplier effect. The idea is that unemployed people spend the benefits which then adds profits which go into banks which loan money to other people and businesses which in turn gets spent or invested and so on and so forth.

But there are two things wrong with this. The first is that the benefit is extremely short term and the cost is just kicked down the road. It's like a person on the brink of bankruptsy who is offered a credit card with a $20,000 limit and a 30% interest rate, and he goes on a trip to Las Vegas. He feels good in the short term and the economy will be modestly helped, but within a few months, after he's bankrupt, the house gets foreclosed on and debts can't be repaid; money is sucked out of the economy and he and his entire family are now in serious trouble. Multiply this by millions and so too will the economy be in serious trouble.

The other problem with the multiplier effect is that it's an equation. Economists love equations. Change one variable and see what the effect is on the other variables. The problem is, sometimes when you change one variable, the others change as well. People are behavioral creatures. They react to situations. If confronted with a situation where benefits are reduced, they change their behavior. They adapt to the new circumstances — i.e. look much harder for a job or even accept a lower paying job. And in the process, they change their own circumstances. This is called a self-correcting equalibrium process. When interfered with through external actions, like government assistence, the correcting mechanism is altered.

The bottom line — most would agree that some unemployment insurance is needed. But, is 99 weeks too long? I think it is and that it prolongs and intensifies the unemployment problem. Others may disagree. But, one thing is clear, a rational discussion needs to take place. It's just too easy to always say "you gotta feel sorry for the guy; let's offer an additional hand-out". But there is a point where just endlessly extending benefits begin to work against everybody. It's not cold hearted to try to find that sweet spot where you're providing a helping hand, but not throwing money away and actually making matters worse. What do you think?

↑ Click Here to Hide Full Article ↑