On March 28th Michigan's new Republican governor signed into law the rollback of unemployment benefits from 26 weeks (the national standard) to 20 weeks.
In a state with chronic high unemployment that precedes this latest recession, why would its government cut unemployment benefits for its residents? Michigan currently has an unemployment rate of over 10%. Once considered the "deserving poor," unemployed workers are now under attack in a way not seen since the advent of the program during the Great Depression. Business interests have complained for years about the cost of the system, but most usually were glad it was there. When it came to unemployment, many business folks want to eat their cake and have it too. They want the stability of maintaining the workforce so it could pay their bills (and fuel their consumer businesses) and be ready for call-back when demand picks up. But, they seem to believe that they could have it without it costing them anything. That was always nonsense. The only way to significantly cut employer costs is to reduce benefits. Benefits are the largest cost for the system. Administrative costs are not even close. But, there is a good reason why business leaders think they can have the best of both worlds.
When times are good, businesses insist on tax cuts. "We can afford it!" is typically the cry. Or this favorite: "Now is not a good time to raise taxes." (This is the rationale in good times and in bad times.) And, taxes often get the cut - particularly in high cost states like Massachusetts. (In fact, unemployment taxes have been cut by the legislature in Massachusetts every year in the past 20 except for 1997 and 2008 - and in 1997 it was because they couldn't agree on how much to cut and nothing was passed) The system is designed to self-correct; that is, taxes will rise or fall depending on whether there is enough money in a state's trust fund to pay out benefits for a certain number of months. When the trust fund gets low, taxes go up and when it's flush they go down. But, if left to work as designed, the increases and decreases will not be severe as reserves are accumulated during the good years and used to mitigate the costs in the bad years. Still, business lobbyists urge states to cut their rates in good times when they can best afford to pay them - and Legislatures tend to give them what they want. Why? Because states can just borrow from the federal trust fund that employers also pay into.
When recessions are short, or at least normal, the economy tends to get the state trust funds back into the black fairly quickly. Loans (called advances) are paid off in short order - not infrequently, short enough that the feds don't even charge interest. So, there is no real incentive built into the system to keep state trust funds solvent, and cutting taxes in good times and bad seems like a win-win scenario. Any surcharges related to advances tend to be lessened by economic recovery. And, besides, one can argue that that's exactly what employers pay federal UI taxes for - to create a reserve account for a rainy day. (However, not everybody would agree with that characterization of the federal trust fund.) Borrowing in this context seems to make sense But, not so much in Michigan.
Michigan owes almost $4 billion in advances from the federal trust fund. It's not just the result of this last recession; the state has been borrowing from the feds for most of the last 20 years. (California has four times as many workers as Michigan and a higher unemployment rate. Yet, it has only borrowed a little more than twice what Michigan currently owes. California's problems are largely related to the last recession; Michigan's are long term.) While borrowing money from the feds can be a rational strategy in the short-term where the state's economy can reasonably be expected to bounce back, continual borrowing will not only incur interest charges which cannot be paid out of trust fund money (meaning there must be a surcharge on employers), but will reduce the credit employers get towards their federal unemployment taxes. Quickly, these charges become expensive. And business will pay for it. For Michigan there are two reasons the state has been borrowing for the greater portion of 20 years: (1) through government intervention at the insistence of business lobbyists, it has prevented the system from self-correcting and (2) the state's infamous and ever-deteriorating economy. The debt is a consequence of the state - again, at the insistence of the business community - failing in its fiduciary duty to the trust fund, into which employers pay their state UI taxes. But, the deterioration of a once-strong industrial economy has also plagued the state in the post-industrial era. Efforts to diversify the economy and add high-value-added industries have been largely unsuccessful - at least not successful enough to stem the outflow of residents, students, and workers from the state. The tax cuts that employers have received over the years are perhaps the most important reason why state trust funds like Michigan's are insolvent. The response that Michigan is taking is to put the burden on people who by definition do not have jobs but want to work. It will backfire, unless of course the economy improves more dramatically than expected. That has happened before....just not so much in Michigan.
By giving laid off workers less time to find work before loss of benefits, more will exhaust and be left without support. The experience of workforce development professionals is that people who find work before exhausting their benefits usually begin seriously seeking work immediately, so cutting benefits is unlikely to encourage anyone who is not doing so to start looking for work sooner. The result will likely be that more people collecting UI will go some period without support because for a lot of people these days it takes months to get hired (even the hiring process can take months). What might happen is that people who would have otherwise gone back to work within the standard 26 week period will not because the shock of losing support after week 20 will compromise their job search abilities. In any case, it will result in more unpaid bills and less consumer spending (not to mention, the consequent social problems). One thing Michigan overlooks is that almost 100% of UI benefits end up back into the state's economy.
The Michigan Chamber of Commerce lobbied for the benefit reductions, despite the impact it will have on the economy. This may be because the Chamber usually views its members as individuals and responds to their immediate and parochial concerns rather than seeing the big picture, even if that means a tax cut today and no customers tomorrow. Michigan now leads the nation in a race to the bottom on labor standards - and considering what is happening in Wisconsin that is a pretty serious charge. It will be interesting to see if Massachusetts business interests that argued that the state's unique 30 week UI program should be rolled back to 26 weeks to "get in line with the nation" will oppose Michigan's departure from the national standard in the other direction. Or will they demand that the most progressive state in the nation follow Michigan's descent? We'll see; some business leaders in Massachusetts do understand the importance of unemployment insurance for a maintaining a strong and stable workforce. The argument against public sector union rights sprung up everywhere - and in Massachusetts, too - after Wisconsin's new Republican governor decided it was the most important issue facing his state - despite never mentioning it during his campaign only a few short months before. But, make no mistake - Michigan's actions will not create a more favorable business environment that results in new and better jobs. The shredding of the safety net in this state will further discourage workers from staying and relocating to Michigan. Businesses there will not be able to rely on a skilled workforce as the vestiges of the industrial economy disappear. High-value-added industries will find Michigan an undesirable place to find workers. Don't let the recent job growth in Michigan fool you; its job growth is a factor of the number of additional jobs that disappeared when the auto industry crashed in 2008. The new job growth is more likely related to a different kind of government program - loans to the auto industry. And the state is nowhere near the level of job growth it needs to sustain a real employment recovery there. That may help explain why Michigan was the only state to lose population in the 2010 census. Cutting the safety net will not bring those folks back.
Michigan is the latest state to wage a war on workers. While the state and business borrowed their way to insolvency rather than maintain a properly functioning system, the unemployed are expected to be the ones who must pay the price - folks who are by definition not working. At one time, the Republicans would court the working Americans and rely on their electoral support while focusing their attacks on the poor. But, as the middle class erodes the political dynamic has begun to shift. The war on workers is contained to the Mid-West at the moment, but the rest of the country needs to prepare for the domino effect. It's coming. And its ramifications for an equitable public policy are severe.
Originally published by this author at The Big Idea.