White House press secretary Jay Carney took the American public on the economic fallacy superhighway yesterday. A Wall Street Journal reporter correctly asked Carney, “I understand why extending unemployment insurance provides relief to people who need it, but how does that create jobs?” Legitimate question. If Jay Carney or anyone else has the stones to say that extending unemployment insurance creates jobs, they ought to be called on it and asked to explain how exactly that happens. Carney, like the self-deluded Keynesian he is, replied arrogantly, “I would expect a reporter from the Wall Street Journal would know this as part of the entrance exam.” Watch the video of this exchange to see for yourself. Carney goes on to explain the typical Keynesian fantasy land narrative: (said in a pompous voice) “You see, when someone is unemployed they aren’t spending any money. Unemployment insurance gives them money to spend. That spurs economic growth. Duh.” He then goes on to say that economists across the spectrum agree with this analysis. Really?

I’m willing to bet that not all economists agree that extending unemployment insurance, a euphemism for paying people not to work, creates jobs on net. And that is the key here. A government policy can very easily create some jobs. But the real question is, has it created more jobs than it destroyed. And my guess is that most economists would agree that paying people not to work does indeed spur some economic production, while at the same time destroying much greater amounts of economic production. So on net it is a job and production destroyer. Taken further, if this story were true, we could all quit our jobs and collect unemployment checks while we sit back and enjoy higher and higher levels of economic prosperity!

I just so happen to be in a profession where I can talk to economists and see what they think. I first called economics professor and Independence Institute Fiscal Policy Center Director Penn Pfiffner. I explained what Jay Carney had to say and asked how he would reply. This is what Penn said,

Recent developments in the understanding of economics now point to an overall loss to the economy from extending unemployment insurance. While it does help the individual receiving the redistributed funds to continue spending, that spending is not based on increased productivity (output), therefore we’re continuing to borrow from the future in circumstances where the debt mood is already oppressing the economy.

Okay, that’s at least one economist who disagrees. Let’s talk to Linda Gorman, an economics PhD, former academic economist, and Independence Institute Health Care Policy Center Director. This is what Linda had to say,

Mr. Carney must believe that the money used to pay unemployment benefits comes from elves. In fact, it comes from businesses who have to pay the taxes that are used to support the unemployed instead of using the money to hire productive workers.

Okay, we’re two for two. Let’s talk to someone outside our organization. I thought about it and decided that I could give Professor of economics at George Mason University Bryan Caplan a call. Luckily for me, he was in his office and agreed to give me his reply to Carney’s assertion. This is what Professor Caplan had to say,

Even if that story were true, its not the whole story. What extending unemployment insurance does is help people not look for jobs. Even Larry Summers believed that unemployment insurance extensions delay people getting back into the workforce. The incentive effect against finding employment is larger than any positive effect of the unemployed spending money.

Ah-ha! Even former director of the Obama White House National Economic Council Larry Summers agrees that extending unemployment insurance only encourages unemployed people to remain without a job. What else should we expect when we’re subsidizing an activity (not working). When you subsidize something, you get more of it (people not working). I worked some Google magic and came upon this Larry Summers quote,

The second way government assistance programs contribute to long-term unemployment is by providing an incentive, and the means, not to work. Each unemployed person has a ‘reservation wage’—the minimum wage he or she insists on getting before accepting a job. Unemployment insurance and other social assistance programs increase [the] reservation wage, causing an unemployed person to remain unemployed longer.

This was taken from his chapter on “Unemployment” in the Concise Encyclopedia of Economics, first published in 1999. Of course Larry Summers changed his tune on unemployment insurance after he became an economist for the Obama Whitehouse, but he can’t hide from his past life when he was a relatively independent economist.

I wonder if Jay Carney has ever heard Larry Summers speak on the effects of unemployment insurance. Maybe Larry could change Jay’s mind some day. Or maybe this Independence Institute video on unemployment benefits could do the trick.