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Self-Employed Eligible for Unemployment Benefits: Ethics and Moral Hazard Considerations

Should the Self-Employed be Eligible for Unemployment Benefits?

From time to time I write an opinion editorial for the Pacific Coast Business Times. The following Blog was posted on March 9.

On Feb. 22, President Obama signed into law H.R. 3630, the Middle Class Tax Relief and Job Creation Act of 2012, a bill that is estimated to cost $150 billion.

Most people are familiar with the payroll tax cut extension provision through December 31, 2012 that lowers the workers’ payroll tax obligation from 6.2 percent to 4.2 percent. Many know about the change in requirements in the unemployment benefits program, including weaning some of the 3.5 million current recipients off federal jobless benefits. It would eventually cap the maximum duration of benefits at 73 weeks, instead of 99, depending on a state's jobless rate. Americans out of work the longest and in the hardest-hit states would be shielded from most of the cuts. What few Americans know, however, is the bill provides unemployment benefits for self-employed workers.

The Startup Technical Assistance for Reemployment Training and Unemployment Prevention (STARTUP) Act alters the rules governing the unemployment insurance program to allow recipients starting their own small businesses to collect their unemployment without the added burden of searching for other full time work.

Current unemployment insurance rules require recipients to be actively searching for and willing to accept suitable work. Self-employment assistance (SEA) allows a small number of those same recipients who want to start their own businesses to maintain their benefits while they build their companies. Allowing entrepreneurs the ability to focus on building their businesses instead of looking for other work just to keep their unemployment benefits increases their likelihood of success. Would-be entrepreneurs must have a valid business plan to receive SEA but will also be eligible for job training opportunities to further increase that likelihood of success.

H.R. 3630 allows for a one-year program totaling $35 million which is both authorized and appropriated, guaranteeing that the funding will be used to foster small business growth. Several states like Oregon and Delaware already offer similar programs to qualified unemployed. The provision in the payroll tax and unemployment insurance or UI extension agreement would expand that opportunity to promising entrepreneurs nationwide.

The bill would allow the long-term unemployed to take advantage of the program. Currently, SEA participants are not eligible to use the program during extended or emergency unemployment periods, which have been extended to 99 weeks in many states. Instead, SEA is only available for the first 26 weeks of unemployment. The STARTUP Act allows an unemployment beneficiary to use 26 weeks of funds for self-employment assistance at any point during their eligibility. The bill would also incentivize every state to offer the program, providing technical assistance from the Labor Department and authorizing $35 million in state grants over the next three years to establish, implement, improve, and administer the programs.

One of the bill’s sponsors, Representative Ronald Wyden (D-OR) is quoted as saying: “Starting a small business is a full time job.” It takes time and sweat equity to make a business successful which the current unemployment rules don’t provide. With the unemployment rate remaining high, there is a great deal of talent sitting on the sidelines vying for too few jobs. Self-employment assistance allows the most industrious of those people to maintain their unemployment insurance benefits while building businesses that could take even more people off of the UI rolls.” Please answer this question, Representative Wyden: How will we identify “the most industrious of those people”?

The economic rationale for the self-employed assistance program includes: (1) it will get some unemployed off the public doll; (2) it helps to foster a spirit of entrepreneurship; and (2) it will assist small businesses to hire Americans thereby reducing the number of unemployed. This rationale relies on the long believed notion that small businesses are the creators of new jobs and engines of future economic growth.

I agree with the rationale but question what happens in the real world and whether the cost of yet another level of bureaucracy creates more costs than benefits to society. How will it be determined that an unemployed, would-be self-employed individual, is eligible for the expanded benefits program? The notion that “Would-be entrepreneurs must have a valid business plan to receive SEA… and be eligible for job training opportunities to further increase that likelihood of success” is problematic. What is a valid business plan? It seems that states would need to hire additional, better-trained workers to assess the skills of SEA beneficiaries.

These are just a few questions that should have been fully addressed before the SEA provision was adopted. But, like many flawed pieces of legislation such as Obamacare, the Congress tends to act first, answering questions later, and let the chips fall where they may. Do we really want an additional state bureaucracy on top of the federal layer at a time when state and federal deficits are spiraling out of control?

There are many ethical issues to consider. First and foremost is: Do the added costs of administering and monitoring the new program exceed the benefits to society of providing unemployment assistance to the unemployed --- self-employed wannabes? This is similar to many issues we face with respect to trying to be a compassionate society while recognizing our moral obligation to future generations not to provide them with a bankrupt country.

To carve out a new group of UI recipients, no matter how well intended, opens the door for other exceptions that can create an ethical slippery slope. Moreover, moral hazard risks exist because the tendency may be to look to become unemployed in order to use the 26 weeks to create one’s own business. In this way the provision may unknowingly lead to questionable behavior that raises doubts about a person’s work commitment and increases the emphasis on the pursuit of one’s self-interest without regard to the possible costs to society. In other words, the behavior of the would-be unemployed person may change as a result of the availability of the SEA provision in that the risk of being unemployed during the 26 week period shifts to the government. – and taxpayers like you and may will be picking up the tab.

Blog posted by Steven Mintz, aka Ethics Sage, on March 15, 2012