07/18/2010 06:16 pm ET | Updated May 25, 2011

Republicans Like High Unemployment and Short Unemployment Benefits

Republicans may in part oppose extending unemployment benefits for short-run political gain -- the worse the economy is doing in November, the better Republicans believe they'll fare in the elections.

High unemployment rates and short unemployment benefits suppress wages and increase the profits of the GOP's corporate donors in the short-term. But the truth is that they undermine the health of the economy in the long-term.

According to Mark Zandi, chief economist for Moody's and a former campaign advisor to John McCain, unemployment benefits are one of the most effective ways of stimulating the economy, with each dollar the government spends on unemployment benefits generating $1.61 in economic growth. And the impact is rapid. Someone getting an unemployment check goes right out and spends it on groceries, gas and other necessities, which increases economic demand and leads to potential job growth in the sectors that manufacture and sell life's necessities. Right now Republicans don't want to see the economy and employment grow, since the more the country suffers, the more they believe voters will blame it on Obama and elect Republicans. Cynical!!!

But high unemployment and short unemployment benefits (along with a low minimum wage) also fits perfectly into the GOP's long-term political goals. They suppress the wage rate and increase the short-term profitability of corporate donors who have to pay less to hire and retain workers. Recent studies show that as many as 35 million Americans will be unemployed for at least part of this year. The more people fear losing their jobs, the less bargaining power they have and the more bargaining power corporations have.

Republican charges that unemployment insurance encourages people to sit on their asses and not look for work is a gross distortion, particularly in a recession when there are five applicants for every job. An average unemployment check of $300 a week or about 40% of a worker's average wage, is hardly going to make most people want to stay out of work for long. But unemployment might buy unemployed workers time to look for a job in their former vocation at a wage similar to what they made in the past, rather than to take a less skilled job for less money right away. A factory worker who used to make $20 an hour might try to hold out a little longer for a similar-paying job. And a white collar worker who used to make $50,000 a year maintaining computers might wait a little longer to find a job that uses his/her training and skills at a comparable salary. But if you cut someone off from unemployment after 26 weeks and they're facing possible homelessness, they might take a job at Mickey D's or Walmart for close to minimum wage. Or the $50,000 per year computer technician might accept a similar job for $40,000 year.

The net effect is to drive down the median wages across the US economy, which in the short-term may increases corporate profitability and make Republican Party donors happy.

The irony is that stagnating wages is not even good for the long-term growth of a capitalist economy nor for the profitability of its businesses. Enlightened businessmen used to understand this.

Henry Ford was known for known for several things: his right-wing political views and his opposition to unions; his perfection of the modern assembly line to turn out relatively inexpensive cars; and his belief that unless employers paid their workers relatively decent wages, there wouldn't be enough who could afford to buy his cars. In 1914 he shocked the world by increasing the minimum wage of Ford workers from $2.35 a day to $5.00 a day. Not only did it increase worker morale and productivity, it helped create a middle class that could afford to buy Ford's cars. As Ford put it, raising wages "has the same effect as throwing a stone in a still pond," and creates an "ever-widening circle of buying" which raises the overall prosperity of society, including business. It helped America become the first mostly middle class society in history and created the American dream that children would lead a better life than their parents. With stagnating wages and high long-term unemployment rates, that dream may be receding.

Between 1997 and 2008, median U.S. household income fell by 4% after adjustment for inflation. According to an analysis of wage trends by the Economic Policy Institute, between 2000-2009 inflation adjusted wages for workers with a high school degree declined from $629 to $625 a week. For those with a college degree, they declined from $1030 a week in 2000 to $1025 in 2009. Meanwhile the income of the top 1% skyrocketed. This occurred almost entirely during the years of Republican governance under George W. Bush, which were widely seen as boom years for the economy, until the great Crash of 2008.

Since 70% of economic demand comes from consumers, stagnating wages ultimately leads to decreased demand and economic contraction. More startling, according to conservative economist Rahuran Rajan of the University of Chicago Business School and former Chief Economist of the International Monetary Fund, wage stagnation may have been a major contributor to the bubble economy under President Bush, leading to the financial crash of 2008, the Great Recession from which we are still suffering, and the slow growth from which we will likely continue to suffer for many years. According to Rajan:

The initial causes of the breakdown were stagnant wages and rising inequality. With the purchasing power of many middle-class households lagging behind the cost of living, there was an urgent demand for credit. The financial industry, with encouragement from the government, responded by supplying home-equity loans, subprime mortgages, and auto loans... The side effects of unrestrained credit growth turned out to be devastating -- a possibility that most economists had failed to consider.

In other words, during the Bush years, in order to sustain their standard of living and continue consuming, the middle class borrowed more and more money, financing and refinancing their mortgages, and ran up credit card debt. Every level of the financial industry made billions by facilitating this unsustainable explosion of middle class borrowing to make up for stagnant wages.

The credit card industry borrowed money cheaply from the Fed and then charged cardholders 20%-30%, often securitizing credit card debt by selling it off to investors. Banks and mortgage brokers made fees by convincing consumers to take out "liars loans," which they couldn't afford at artificially low rates, which escalated to unaffordably high rates in a couple of years, leading at first to a housing boom and then to a housing bust and a massive round of foreclosures, which we're still experiencing. This was enabled because the banks didn't keep these risky loans on their books but instead used investment banks (sometimes their own affiliates) to make massive fees packaging the junk loans into bonds and selling them to investors. They were aided and abetted by ratings agencies that were hired by the investment banks selling the bonds for fat fees to rate junks bonds as AAA. And finally Wall Street created derivatives based on these risky bonds in order to create even riskier bets, including betting against the very securities that they were packaging.

It all worked out really well, until it inevitably didn't and it all came crashing down in the final months of the Bush administration in 2008.

So Republicans who promote policies of low wages, high unemployment, and short unemployment benefits may be helping the short-term profitability of many corporations, but they are undermining the long-term foundations of a prosperous capitalist economy. (Democrats who collaborated in the deregulation that enabled the runaway securitization of unsustainable private debt share part of the blame, too.) As Kevin Drum wrote recently:

Growth in a modern mixed economy is fundamentally based on consumer spending, and middle class consumers can increase their spending in only three ways: (1) real wage growth, (2) borrowing, or (3) drawing down savings. Only the first is sustainable. So if we want the American economy to grow consistently over long periods, we have to focus our economic machinery on median wage growth. We've done it before, we can do it again if we're smart, and the result would be good for everyone: the rich would get richer, the middle class would get richer, and the poor would get less poor. The alternative is booms, busts, and continued social erosion.

It's not clear if Obama and the Democrats have the vision and the political will to restore America to a high wage, high growth economy that benefits both workers and business. But it's clear that if we follow the Republican strategy of encouraging unemployment, cutting unemployment benefits, and suppressing wages, the American Dream that your children will lead a better life than you will is dead.