Justin Wolfers shows more of a commitment to coming down in the middle than to being true to the data in his pox on both your houses piece on the impact of North Carolina's cut in unemployment benefits. The basic story is that in July of last year North Carolina both cut the duration of unemployment benefits and vastly ramped up the job search requirements. The result was that the number of people getting benefits fell by 48,500, a decline of 53.4 percent between May of 2013 and May of 2014.

The conservative position on this cut was that ending benefits would give people the incentive they needed to get a job. The idea was that the government was needlessly coddling these people, when what they really needed was a little push to get them going. This story gives a very clear prediction.

The loss of benefits should lead to notably faster job growth in North Carolina than in the rest of the country. After all, the number of people losing benefits was more than 1.0 percent of the state's labor force. If the necessary kick story is right then we should have seen a notably faster increase in jobs in North Carolina than in neighboring states with similar economies.

By contrast, the liberal position is that the spending from benefits helps to boost the economy. However, this impact is likely to be relatively limited. First of all, we are not talking about that much money relative to the economy as a whole, and second all the spending will not boost employment in North Carolina. This is in part because North Carolians don't necessarily spend their money in North Carolina (some will spend it in neighboring states) and also because the spending itself will go to producers around the country and around the world.

Most of what someone pays for a car in North Carolina will go to a car company located in another state or country. The workers at the factories that assembled the car and produced the parts will almost all live outside of North Carolina. Similarly, the rent or mortgage payments made by a worker may go to a landlord or mortgage holder anywhere in the country. Therefore only a fraction of the impact of the spending will be seen in North Carolina.

If we back out the predicted impact of North Carolina's benefit cut on the state's economy, it is easy to see that it would be relatively modest. If we assume an average benefit level of $15,000 ($300 a week), the reduction in beneficiaries would lower payments by $720 million over the course of the year. Assuming a multiplier of 1.5 this would cut GDP for the country as a whole by roughly $1,080 million. If half of this loss accrues to North Carolina, it would lower demand in its economy by $540 million. This is roughly 0.12 percent of the state's $470 billion economy.

Okay, now lets get back to Wolfers' pox on both your houses story. If the people thrown off unemployment insurance are getting the kick they need to get a job then we should see some visible impact on job growth in the state. As Wolfers notes, we don't. North Carolina's job growth is no better than in neighboring states.

On the other hand, if we assume the liberal story is true, it would be very hard to detect a decline in growth of 0.12 percentage point, even if it did in fact occur. There are enough random factors and errors in the data that we could never expect to find such a modest impact even if the economy really did suffer from the cut in benefits.

Certainly some liberals did exaggerate the negative impact from the benefit cuts on the economy. But the evidence that Wolfers presents hardly disproves that the cuts did not have the negative impact that any reasonable analysis would have predicted.

 

Corrected Note: "billion" corrected to "million." Thanks to Michael Epton and Robert Salzberg.

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