Our unemployment insurance system sends the wrong signals.

I have heard liberals argue recently in favor of growing and extending our unemployment insurance programs. But I have real problems with how unemployment insurance as it is currently structured and financed today.

Let’s consider an example of Bill, an employer who is considering hiring Joe. If there were no employee taxes, no unemployment insurance, no benefits and no other employer costs, it would be simple to calculate the cost at say $10 an hour. And as long as Joe can generate at least $11 in increased revenue for Bill then Bill is ahead as an employer by $1 an hour. But it is not that simple. Bill must also pay perhaps $.50 an hour for unemployment insurance, $.75 an hour for social security and Medicare employer contributions, $1 an hour for workers compensation insurance and $2 an hour in health care benefits. All of a sudden Joe’s cost to Bill is $14.25 an hour (not to mention increased liability insurance, capital costs, management time and other overhead costs). So if Joe can still only produce $11 in marginal income, Bill lays Joe off. And then you know what happens? Bill’s cost for unemployment insurance goes up even higher (say to $.75 an hour) because Bill has a history of laying employees off so he is deemed to have increased the cost of providing this insurance.

This last characteristic about employer’s cost of unemployment insurance is another disincentive to hire anyone in the first place. Why hire anyone on the margin? If Bill guesses wrong, he not only loses on his underlying bet but his future cost of business will increase along with his higher unemployment insurance premiums. Our incentives should encourage, long-term employment, mid-term employment and short-term employment. At least when Joe is working in what might be a short-term job, he is learning, producing and positioning himself far better to land his next gig than sitting at home collecting unemployment insurance.

I am fine with charging an employer for workers compensation insurance. Because that is a real cost attributable to more work and is roughly priced according to how dangerous the work is. It reflects approximately the marginal cost of each additional hour of work. All things being equal, we would rather encourage safer work than less safe work. This charge to Bill reflects real costs associated with the industry in which Bill operates, and does not subsidize dangerous jobs by making safer jobs less competitive.

But it is counterproductive to charge employers for the cost of unemployment insurance. It makes marginally profitable employees and prospective employees less profitable and sometimes not profitable at all. When the later happens people lose their jobs and go onto unemployment insurance, raising unemployment insurance premiums and increasing the subsidies from government.

I am all for a limited safety net provided by government. But government ends up subsidizing unemployment insurance benefits and recently has extended them to up to three years.

We should be simplifying our safety net. If you don’t have enough money for food, basic housing and medical care I support helping these folks. But the system would be far more productive if we streamlined it and separated it from the issue of whether the individual just lost his job.

I have liberal friends that argue that unemployment benefits are a great way to pour money into the economy. And it might do some of that. But this trick might have had more positive benefits when most of what these unemployed people consume goods that were manufactured in the US. That is rarely the case today. The government is subsidizing unemployment benefits today and creating jobs, but most of them are in China.

So what are the factors that have led some socially liberal democracies to economic success while others, like Greece are in the tank?

My liberal friends point to how well some social democracies have fared in the last few decades – namely Germany, Norway, Canada, and Australia. But they rarely bring up Greece.

Sometimes they attribute the economic success to a big comfortable safety net for their citizens. Sometimes they point to the success of a high tax, big entitlement society. Just recently a friend tried to attribute the financial success to the 35 hour work week in Germany and France.

But let’s face it, the success of an economy has hundreds if not thousands of different factors. Many are pure luck, some aspects are systematic and some are cultural. To begin with if a country starts out relatively wealthy it has a better chance of doing well several decades later. If a country is landlocked in the middle of Africa, with poverty-stricken countries around it, the odds of the country breaking out economically are slim. How wealthy would Saudi Arabia be today without its oil?

But Greece may be example number one of a country with many substantial advantages that have been squandered. They borrowed to the hilt to support a huge entitlement system and now will be paying the price for decades to come.

Here are a few of the advantages that Greece has had since World War II: It was a beneficiary of the Marshall Plan. It has plenty of (Western World) coastline, has been a member of the EU since 1981, and is a top tourist destination (15% of the GDP) with a terrific climate. It is close to a huge and prosperous region and has a thriving maritime industry.

But Greece has obviously had its difficultiesl. In 2009, Greece had the EU’s second-lowest Index of Economic Freedom (after Poland). In other words it prefers unions to free markets. It also turns out that its government had been lying about the amount of its debt for years. The cost of living in Athens is about 90% of that of New York City. It has a recent history (and possibly longer than just recently) of political corruption and maybe one of the worst records in the Western world of citizens cheating on taxes. It is left-wing and still has an active Communist Party and another political party called "The Party of the Radical Left."   Trade unions are strong and pervasive. Along with Spain and Italy, Greece faces a flood of illegal immigrants.

So what are the factors that have led some socially liberal democracies to economic success while others, like Greece are in the tank (granted Greece has done better than poor countries in the heart of Africa)? To start with, Canada, Australia and Norway are incredibly rich in energy and other natural resources. And we all know where those prices have gone in the last decade. And these three plus Germany are near huge and prosperous markets. All of them have an advantage of many English speakers (my hypothesis is that a higher percentage of Norwegians speak English than those residing in California). It is hard to find German executives that don’t speak excellent English. And English is at least today a competitive advantage if one does not speak your customers’ native language. And all four countries have all spent relatively little on National Defense and policing the world compared to the US.

So my point is that is silly to attribute any country’s success to one factor. It is not even several factors that make the difference. It is hundreds of different forces combined with where a country starts that together lead a country to economic success or failure. Many times a country benefits from pure good fortune, for example being occupied by America rather than Russia after WWII. The US ended up with over half of the world’s manufacturing capacity immediately after WWII. Sometimes a country is simply unlucky because it has no natural resources, no wealthy neighbors and is in the middle of Africa. And if a country can borrow enough to support its life style and entitlement programs (like Greece did), sometimes economic troubles can be masked for years.

The left continues its uncivil assault on the Tea Party !

The left continues its uncivil assault on the Tea Party calling them “terrorists”. Why? Because the Tea Party, has the audacity to advocate reduced federal government spending and is willing to use its small position in Congress to hold out.

Democrat Representative Mike Doyle said: “We have negotiated with terrorists. This small group of terrorists have made it impossible to spend any money.” Joe Biden agreed saying: “They have acted like terrorists.”

And in a NY times opinion piece yesterday entitled: "The Tea Party's War On America:" said: “You know what they say: Never negotiate with terrorists. It only encourages them. These last few months, much of the country has watched in horror as the Tea Party Republicans have waged jihad on the American people. Their intransigent demands for deep spending cuts, coupled with their almost gleeful willingness to destroy one of America’s most invaluable assets, its full faith and credit, were incredibly irresponsible. But they didn’t care. Their goal, they believed, was worth blowing up the country for, if that’s what it took. For now, the Tea Party Republicans can put aside their suicide vests. But rest assured: They’ll have them on again soon enough. After all, they’ve gotten so much encouragement.”

The Socialist left does not care about a fair and open debate. They “know” what is best for this country and if you and I will simply accept their math, their accounting, their projections and their promises, they will surely tone down their language to a more civil level.