Wednesday, August 03, 2005

Nice unemployment if you can get it

Our friend Don Luskin has been engaging in a lot of France-bashing (keep scrolling down, the latest round is two days' worth). It was inspired by our bon ami Chris Masse (be sure to visit his blog, which deals with prediction markets). Chris recently sent Don some comments about French unemployment -- it's Really, Really Bad.

One of Chris' points is that France's unemployment rate is twice that of the U.S., and the average duration of unemployment in France is twice that in the U.S., so France's unemployment compared to the U.S. is really four times worse. Strictly speaking, well, not exactly. Unemployment is simply the ratio of unemployed to the labor force. It doesn't matter whether we all take equal, short turns being unemployed, or if it's perenially the same people who are unemployed. Only the ratio is important.

However, Chris is right because he's talking about more than just the unemployment rate: the overall unemployment situation has problems if people go very long periods between jobs. I also suggested factoring in the percent of GDP spent on unemployment benefits, creating something like a Masse Employment Prospects Index. Let's hypothesize countries A and B that have identical unemployment rates and average unemployment durations. If A spends more than B on unemployment insurance, A is worse off: its labor force must work that much harder to support those who aren't working (for whatever reason). This is like any other redistributive tax: workers are deprived of their income, which can breed resentment and discourage them from working more, and high unemployment benefits tend to discourage the unemployed from finding jobs as quickly as possible (because they have that safety net). And let's not kid ourselves by thinking that companies pay unemployment insurance premiums. Like the Social Security "employer contribution," it's the workers who actually pay it, in the form of lower wages.

This would be similar to the Misery Index once used in the U.S., adding the unemployment rate and inflation to get a rough sense of American malaise. The Kerry-Edwards campaign tried their own distortion last year, which Don Luskin so well debunked as selective statistics. Kerry's bad (or dishonest?) economists had to skew things, because as National Review Online's Jerry Bowyer showed, the Misery Index a year ago walloped the average of Clinton's two terms, and it's still about the same today. The only reason Bush's two terms haven't (yet) equaled Clinton's two is because the so-called "Bush recession" precipitated from the economic slowdown during Clinton's last year as president. Krugman can tout Clinton's second term as an "economic miracle" all he wants, but that doesn't change the fact that it was unsustainable growth spurred by a lot of "irrational exuberance," and that the economy was already sputtering before Bush was even nominated, let alone elected! For a thorough description of what was already keeling over, read what Larry Kudlow wrote back in 2001 about "Bush's inheritance."

Last December, Econopundit Steve Antler provided data on long-term U.S. unemployment versus that of selected European countries, specifically the percentage of unemployed who have been so for 12 months or longer. This February, he referenced that entry in this one, when Germany reported record high unemployment. While the U.S. figure of 9% seems bad, remember that it means 0.45% of the U.S. labor force has been unemployed for one year or longer. That's about 675,000 people, out of a labor force of 149 million people.

Then compare France, which has 10% unemployment, 34% of whom have been out of work for one year. I don't have figures at the moment on the size of France's labor force, but that doesn't matter: it's bad for any economy that 3.4% of its labor force has been out of work for one year or longer. And Germany, heavens, oh Germany: over 11% unemployment, 48% of whom have been unemployed for one year or longer, so roughly one out of every 20 people in the German labor force hasn't worked in over a year. The U.S. has cyclical unemployment, but much of Europe has structural unemployment. The latter is far worse because solving it requires a major overhaul of society.

Then in May, Econopundit had some very telling data about the duration of U.S. unemployment. He also fought off Brad DeLong's meaningless criticism. When he mentioned Paul Krugman, I had to drop him a line. He printed most of it:
Krugman has a bad habit of confusing cause and effect, not just correlation with causation ("President Clinton's 1993 tax increase ushered in an economic boom"). In the case you cited, I think unemployment periods lengthened because social safety nets had already been strengthened, not that social safety nets were expanded because unemployment periods were growing. If people know there's a wider net, they don't have to be as desperate in finding a job, any job...[More-generous] social insurance benefits promote "taking it easy" when unemployed. As more realize they can take it easy, agenda-driven economics [sic] like Krugman point to them as evidence of a bad economy, failed government "progressivism," etc. So the benefits are increased, and [on and on it goes]...
France, Germany and the other European nations with high unemployment and generous social spending must endure the pain of cutting unemployment benefits to force people to find work, slashing government expenditures (particularly social safety nets), and cutting taxes to encourage work and investment.

Chris had some insightful observations on France's tax situation:
The difference between France and the U.S.A. (as I see it):

- In the U.S., the taxpayers are vocal --especially around mid-April--thru the think tanks or associations or else that advocate lower taxes.
- In France, there are very few of these associations defending the taxpayers, they are under-funded, not very vocal, and French journalists don't give them a voice anyway.

When the red light is on, the French elite is always prompt to look at the camera straight in the face and say that they are happy to pay taxes. "Our taxes fund the hospitals and help the destitute", they say.

But what the French do not know is that the most successful members of this French elite are Swiss resident --Alain Delon (actor), Isabelle Adjani (actress), Charles Aznavour (singer), Alain Prost (former Formula One champion with Ferrari), Jean Alesi (former Formula One driver for Ferrari), Jean-Claude Killy (Olympic medalist), Jacques Martin (comic books), Bernard Clavel (novelist), Yannick Noal (former tennisman; singer), Henri Leconte (former tennisman), Guy Forget (former tennisman), Corine Bouygues (heiress of the Bouygues empire --builder and media owner), and Daniel Hetcher (retired designer and businessman) come to mind. There are many more. The list includes many thousands of retired French business persons who, once they sold their French assets, chose to spend their retirement in Switzerland. Since France and Switzerland are on the same latitude, it can't be for the balmy climate.
That would be like Tom Hanks, Julia Roberts, Michael Jordan, Stan Lee, Tom Clancy, John McEnroe and Donald Trump leaving the U.S. for a friendlier tax climate. Driving people away from your economy, whether on a national, state or local level, drives away their wealth. Forget the taxes they pay (as I've said before, that's a wholly immoral reason to want someone in your area): you lose the jobs that their spending supported, and the business expansion they might have invested in.

Similarly, the Wall Street Journal reported Tuesday about Connecticut's new 16% estate tax:
Florida Governor Jeb Bush ought to send his counterpart in Connecticut, Republican Jodi Rell, a thank-you note with a box of chocolates and a ribbon tied around it. Last month Ms. Rell marked her first anniversary as Governor by signing into law a tax bill that might as well be called the "Palm Beach Economic Development Act."
While it applies only to estates worth $2 million or more, that functions under the same principle as the previous paragraph. Are Connecticut's governor and state legislature that stupid? This is bound to backfire like the failed 1990 luxury tax. The latter threw people out of work as the "rich" cut back on their luxury purchases; unemployment benefits meant that the bill cost money instead of bringing in tax money. Similarly, wealthy Connecticut residents will likely start selling their homes and take up permanent residence in Florida. Connecticut will not get all the estate tax revenue it hopes for, and the residents moving out of state means a loss of income, property and sales taxes. Then, the sell-off of property will plunge prices, meaning less property taxes will be collected from everyone else. And, of course, Connecticut will lose all that wealth, both spending and saving.

Many think that a trade deficit "exports jobs," which is not true. High tax rates export jobs. Trade deficits are implicitly balanced by foreigners investing their capital in the domestic economy. High tax rates drive both labor and capital out of the domestic economy.



Anonymous Elisin said...

You write: Let's hypothesize countries A and B that have identical unemployment rates and average unemployment durations. If A spends more than B on unemployment insurance, A is worse off: its labor force must work that much harder to support those who aren't working (for whatever reason).

I think I disagree. If you believe that higher unemployment insurance will result in more people being unemployed, all other thigs being equal; then country B is worse off. If country A were to lower its benefits to match those of B, then its unemployment level should drop below that of country B.

What you are pointing out is that the employed in country A are worse off then those in country B, because they presumably pay more in unemployment insurance taxes. That is balanced by the unemployed in country A being better off then those in country B, becuase their unemployment benefits are higher.

Friday, August 05, 2005 12:28:00 PM  
Blogger Perry Eidelbus said...

The problem is that not all else stays equal. As I said, unemployment insurance premiums are just another form of redistributive taxation. Their collection is a disincentive for the employed to work as much as they could, and more significantly, their payout is an incentive for the unemployed to remain so.

The relevant governments across Europe won't admit that their welfare states are collapsing. Unemployment benefits are a particularly severe problem in Germany, which is rife with people registering in two or more districts to get multiple benefit checks. Look at the figures again, over 11% unemployment, 48% of whom have been unemployed for one year or longer. It's just impossible for an economy to prosper when 5% of its labor force (not just unemployed, but everyone counted as wanting to work) has been out of work for at least one year. That's a sign of deep structural problems, not just a cycle. The 89% who are working just can't keep supporting the unemployed.

Friday, August 05, 2005 6:42:00 PM  
Blogger David said...

one can observe, that France's
unemployment is 10 times higher today than it was several decades
back. "Why?"- one asks.

Several factors come into play when one is trying to analyze why a
certain portion of the population is out of work, but the main reason
why one tenth of the population is out of work lies in the following:

France has faced an increasingly illegal immigration crisis over the
past two decades, that in turn, creates a cheaper, although illegal,
labor force to meet the French employer's demands. When this occurs,
the value of an employee's work decreases dramatically, and
therefore, the old employees no longer receive the same salaries.
When the new labor wages are compared to the unemployment
insurance/compensation offered by the French government to its
citizens, its reasonable to assume that people would be willing to
quit work to receive the unemployment compensation, which is almost
equal to an average salary, and live a life of leisure.

In my opinion, France must lower the incentives it gives its
unemployed citizens so they don't consider the labor/compensation a
rational trade-off.

-David Akinin

Thursday, July 26, 2007 3:04:00 PM  

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