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Saturday, September 10, 2011

Unemployment vs. Private Savings

So some people make the argument that people wouldn't save if it weren't for unemployment insurance.  While this may be true, it is sort of irrelevant for the reasons discussed below.  Further problems with unemployment insurance become apparent when we look at the difference between money in the marketplace and money in the unemployment fund.  Money in savings or investment portfolios has the opportunity to earn interest.  The reason it earns interest is that banks use the money in those funds to trade, effectively borrowing money from their customers to make what are hopefully profitable investments.  So they pay their customers interest on the money they are borrowing.  Theoretically one can live off the interest of a large enough bank account.  Consider next unemployment.  A worker at a bank loses their job, then starts collecting unemployment.  The unemployment they collect comes out of a fund theyve been paying into for however long they've been working.  During that time that money was not earning interest or being actively used in the market place.  In fact, that money COSTS money to keep track of.  Some of these costs include the statements that we receive once in a while letting us know how much we've accumulated, alot of those costs include paying people to watch over that money.  So instead of participating in the market place where it can grow wealth, it gets taken out of the market place, where it costs additional money to maintain.  Then, once the individual goes to take that money out, even MORE money is taken from their company to match some of those unemployment dollars.  So not only is the initial income taken out of the market at an overall loss to the marketplace (because the money spent maintaining it is being used for a loss-bearing service) but the money when 'paid back' to the individual takes even MORE money out of the marketplace as the company has to pay that unemployment, causing more job loss, because the company has to pay money to an individual that is not laboring for them.    So unemployment, even if only the original money the individual has put into it is paid out, along with the obligation of the company, is a huge negative against the marketplace as a whole.  Those dollars would have either been saved in a private interest-earning fund by the individual, in which case the banks would have traded the income around, or the money would be spent by the individual in the marketplace, driving down the cost of goods and increasing the rate of pay as companies earn more money. 

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