What is wrong in this picture?

State governments are borrowing heavily from the federal government to keep paying unemployment-insurance benefits and, even with the weak job market, most states are raising payroll taxes to pay off the loans.

The story is here.

Comments

Sounds like you are advocating for a second Obama stimulus program.

In the last stimulus program, the federal government waived interest on its loans to the states for unemployment insurance until December 30, 2010.

States should be cutting their own expenses in a smarter way.
Like, the top 10% earning non-elected state gov't workers should be moved into 50% half time work, (~25hrs week for half cash but full benefits), and their responsibilities split off/ delegated as well. Then the state can hire new, least cost people.

In state gov't hiring, the priority should first be a competence requirement threshold, then preference for the longest unemployed.

Raising payroll taxes is crazy if more job creation is desired. But, it fits with the idea of raising taxes on the rich (punish them! for creating so many jobs in the past...), and increasing punishment/taxes to any who might want hire new workers. You know, those rich folk who try to get richer, peacefully.

Following up on the regressivity point, which is due to not increasing the base, here is the GAO comment:

The FUTA taxable wage base has remained fixed at $7,000 per worker per year since 1983.47 Six state trust funds have also kept their taxable wage base at that level since then, while an additional 20 set theirs between $7,000 and $10,000. From 1983 to 2008, the average weekly wage in UI-covered employment rose from $336 to $869 per worker, a rise of 159 percent. By keeping the wage base fixed instead of rising with wages, the percentage of wages subject to UI taxation has fallen from 43.1 percent in 1983 to 26.8 percent in 2008. This means that a steadily shrinking portion of the wage distribution is responsible for raising UI revenues. This also suggests that any impact UI taxes have on reducing wages has been borne increasingly by lower-income workers.

What's wrong with this picture is that the WSJ article did not report accurately.

For example, when you talk of "rates" you have to talk about the "base" on which rates are taxed. Many states "cap" the base at very low annual wages, so that high wage earners are not taxed over that base. So, the "rates" go up, but as a percentage of income (except for the unfortunate low wage earner below the base), there is no increase on the marginal income above the base. What happens is that the lower paid worker has more income withheld to support UI. What also happens, in the real world and not in your plush world, is the harsh reality that low wage workers get low UI benefits--and they really do not have the luxury of waiting to find the right job, whereas high wage workers usually have some reserved savings and can use UI and their savings to take the amount of time they need to find the right job.

I find the WSJ article disappointing and the GAO report quite illuminating.

"Automatic Stabilizer"? I thought the idea was to keep people employed.

GAO: "Long-standing UI tax policies and practices in many states over 3 decades have eroded trust fund reserves, leaving states in a weak position prior to the recent recession."

3 decades? I guess they thought The Fed had solved the economy.

BPO, if you read the GAO report, I take it as a compliment from you when you say "We would expect no different of you."

It's good to do your own research and check what the sources say, and, just as importantly, don't say.

Well, Bill, since high income earners are going to get less than 25% of their former wages in benefits, there better be a cap.

The fact of the matter is that states spent every dollar of "surplus" unemployment funds during the boom and now they're whining they're broke.

Pay-as-you-go is a Ponzi Scheme whenever the funds are not invested. It's a worthless IOU. Madoff went to jail for swindling fewer people out of less money.

No, mulp, Reagan raised taxes only as part of a COMPROMISE with the Democrat controlled House which was complaining about deficits which were only 4% of GDP, but they REFUSED to cut non-defense spending. There were a mixture of tax cuts and tax increases under Reagan. On net, revenues increased steadily.

4% deficits - the good old days!

Six Ounces, I agree with you that government trust funds have to be watched so that the foxes that oppose the Programs in the first place do not replenish them during good times.

Six ounces, You assume that UI funds are not segregated from the general state budget. do you know that to be true?

Doc Marlin, When you say borrowing money to reduce long term fiscal problems depends on the rate and duration of the borrowing. If you currently pay high interest and during a recession pay off the bond and borrow at a lower rate you can actually come out ahead.

Ever refinance a house?

Bill, no funds in government are segregated. They can be "earmarked" by law, but law only prescribes how future revenues are SPENT, not how current revenues are STORED. In any pay-as-you-go system, there IS NO STORAGE. Any apparent storage is purely an accounting gimmick.

The unemployment funds are not put into a lock box of investments that gain interest. Unemployment insurance is 100% funded and guaranteed from current revenues. When UI revenues are exhausted, GO funds are used. When those aren't available, the state begs for federal aid.

Even if there were a lock box, if the savings are insufficient to pay for the benefits, the fund is insolvent. You can't just save for EXPECTED losses. You have to have enough funds for a stressed scenario. This is the same sort of stress tests we make banks and insurance companies perform. We cut states a break from capital requirements and GAAP.

The Social Security "trust fund", for example, consists of non-negotiable government securities. These securities are IOUs from future tax revenues. This is no different from paying for SS from future revenues themselves. The interest on the securities is also an IOU from future revenues.

Suppose you drive to a bar and set aside $20 for cab fare in case you drink too much. The "savings" doesn't do you any good if you borrow from that $20 to buy more beer, promising to pay yourself back IF you need a cab. And buying more beer pretty much ensures you will NEED that cab fare.

Even if you do pay it back to yourself tomorrow, you're either going to be walking home or driving drunk tonight.

Are you walking or driving drunk, Bill?

Six ounces, For all the tirade of your comment, it was amazing that you did not answer the factual question I asked but were able to recall a party line.

Next time, if you aren't going to or are unable to provide information to support your opinion, let's just do this as they do in fantasy football--you give a number to your fictional play--call it 23--and just say 23 if you have no information but wish to make this statement. I'll understand. Or you could just cut and paste.

Six Ounces, From the policyalmanac.org, state and federal UI accounts are segregated, and the history is such that when they have been drawn down in the past, they were replenished.

Here is a history of UI and a history of their balances:

http://www.policyalmanac.org/social_welfare/archi...

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