Tax and the Unemployment Benefit are not Unemployment Insurance

A few people of vastly different world views have been getting annoyed that the Welfare Reform group is going to be examining the option of unemployment insurance – and some think they should choose a better model to examine. I want to examine the reason why it is frustrating those on the left. No Right Turn claims, endorsing Jackson Wood’s analysis on Twitter, that:

We already have compulsory unemployment insurance. It’s called tax.

What we currently have is not an insurance scheme for at least four reasons:

1) Taxing and promising to pay fixed level of benefits is not an insurance scheme because premiums are not risk-related. If someone was in a particularly stable job (say, they worked for the Government), then their risk of needing to collect the unemployment benefit is lower. If it was an insurance scheme, they would pay lower premiums. Since they do not, they are in fact cross-subsidising those who are riskier.

2) Taxing and promising to pay fixed level of benefits is not an insurance scheme because insurance payouts are not related to contributions. If premiums were legally set as a fixed percentage of income, then payouts would adjust to increase for those who had a higher income. However, that is not the case.

3) Insurance schemes build a capital base from which to meet payouts, while the Government collects money in a year and pays it out in the same year. In other words, the sustainability of the insurance scheme is based on the Government’s ongoing right to tax its people. When schemes rely on future payments to meet obligations, they are typically called Ponzi schemes. Economists from the left and the right agree that benefits like Social Security are Ponzi schemes – they just disagree as to whether it is a good or bad Ponzi scheme.

4) If the unemployment benefit were an insurance scheme, then all Government benefit schemes could be classified as such. However, I’d like to see an insurance scheme with this degree of moral hazard survive in the marketplace. I haven’t seen NZ figures for the unemployment benefit, but there’s certainly evidence of the effect of unemployment insurance from overseas.

Happiness – Part 2

I had intended to do a detailed follow-up to my earlier post about happiness research.  However, I think the reasons for my scepticism of the work by Derek Bok and others have already been expressed far more cogently by Steven Landsberg, Will Wilkinson, and Richard Epstein.

Recall that Bok thinks there is a troubling disconnect between the following facts: (1) society has grown much more prosperous in the past three decades but (2) self-reported levels of happiness have remained largely constant during the same period.  Bok asks, “what is the point of working such long hours and risking environmental disaster in order to keep on doubling and redoubling our Gross Domestic Product?”  In my earlier post, I suggested that subjectively reported happiness seemed to be a thin basis on which to make recommendations about public policy settings, let alone radically reshaping public policy.

Landsburg points out a flaw in Bok’s approach, which I find reasonably compelling:

Wait a minute, now. Self-reported happiness has been flat for fifty years despite rising incomes. Self-reported happiness has also been flat for fifty years despite dramatic increases in leisure and environmental quality. (Since 1965, the average American has gained about six hours a week of leisure—the equivalent of seven vacation weeks a year.)  So why aren’t Bok and Kolbert asking why we bother to come home from the office, take vacations, and clean our air and water?

Will Wilkinson piles on:

Landsburg asks an excellent question. Income inequality has skyrocketed, but that hasn’t made Americans less happy. So why care?

I essentially agree with Wilkinson’s conclusion: 

The fact of stable U.S. levels of self-reported happiness is an ideological Rorschach test; the way it is used tells you more about the person using it than anything else.

Anyway, the answer to Bok’s question is pretty easy. There are many, many other benefits of economic growth.

Finally, there is a very good discussion between Richard Epstein and Russ Roberts, which you can download here.  Epstein discusses some of the false assumptions of the happiness researchers and argues convincingly that envy is a terrible motivation for public policy.