Wednesday, March 20, 2013

States Are Broke ... Unemployment Funds Are Gone

Unemployment benefits provide a safety net for the TEMPORARILY unemployed.

This recession has been an especially deep and long one, however, and states' funds to keep paying unemployment benefits have by now pretty much been exhausted.

As a result, many states necessarily are cutting back theese extended benefits, and the long term unemployed are starting to suffer even more.

But perhaps worse than that is the fact that no end is in sight. And because the states get a substantial part of the money to pay these benefits from the federal government, which also has no money, that makes our nation's financial problems even greater. And to replenish the various unemployment funds properly, the states impose taxes on the very same employers who are not hiring enough new workers today. It's a vicious circle, and creating more jobs is the only realistic long term solution.

And to top it all off, when the current recession began, the states had too little in their reserve funds to get through a 'normal' recession, let alone the deep one we've experienced. Thus, chalk up another adder to the national debt and deficits.

Why Are States Cutting Unemployment Benefits? says this about the sobering and intractable situation:

"As today’s Wall Street Journal reports, unemployment benefits across the country are growing less generous. Among the reasons: A growing number of states are cutting back their regular, non-emergency benefits below the long-standard level of 26 weeks.

What’s behind the trend? Backers of the cutbacks generally cite big debts accrued by state unemployment systems during the recession. Paying off those debts usually requires states to increase taxes on employers, which business groups and others fear could deter hiring. Cutting back benefits is one way to reduce costs and pay down those debts more quickly.
But it’s worth understanding how states accrued those debts in the first place.

State unemployment systems are funded through taxes on employers, who pay based on the number of workers they have and their history of laying them off (companies that lay off workers more often pay higher taxes). The systems are set up as trust funds, building up reserves during good times and drawing them down during recessions.

In the latest recession, however, states’ reserves proved too small to handle the tidal wave of unemployment claims. At one point 35 states drained their trust funds and were forced to borrow from the federal government to make payments to jobless workers. Even today, three years after the labor market began to rebound, 22 states (plus the Virgin Islands) owe a combined $29 billion to the federal government. . . .

But the recession is only part of the story. Many states were ill-prepared even for a milder downturn. . . . Heading into the recession of 1990-1991, states had a year’s worth of benefits in reserve, the minimum amount recommended by the federal government. In 2000, on the eve of another recession, states had about 10 months’ worth of cash on hand. This time around, states went into the recession with barely six months’ worth of reserves. . . .

Those decisions are in the past, of course. Now that states face big deficits, they have to figure out how to deal with them. . . . states may still face deficits when the next recession hits."

Summing Up

Rather than worrying about how we'll fund unemployment benefits during the next economic recession, why don't we instead focus on the current jobs recession? That's the problem, and creating more jobs is the solution.

Governments, federal and state alike, are not financial problem solvers. They're financial problem makers. The states already owe the feds $29 billion for unemployment loans, and the number keeps getting bigger each day.

Our nation's financial problems are serious, and they're only going to be solved by creating jobs and dealing with ther issue of unaffordable entitlements such as Social Security and Medicare over time. While there's plenty of time to get the entitlements situation under control, we have to get started now.

But unemployment is a totally different story. We have no time to waste.

And sustained economic growth led by the private sector is the only lasting way out of our current employment mess.

The solutions are there to be had. All we have to do is focus on the problem instead of just talking about it.

North American energy development, including Keystone XL pipeline approval and allowing drilling on federal lands, is a must. So are corporate and individual tax reforms.

But by far the most important thing to be done is for the politicians to start supporting all efforts and initiatives to generate private sector jobs growth.

That's the only answer, and the only way to accomplish that is to unleash the 'animal spirits' of individual consumers, investors and entrepreneurs. Confidence, spending, investment, growth and jobs will follow. And we'll finally start climbing out of the ditch.

Because in the end, a dollar is only a dollar, whether it's spent by the government for unemployment benefits or invested by the private sector in economic growth.

The government's growth inevitably results in the private sector's shrinkage. The opposite is equally true.

That's my take.

Thanks. Bob.

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