A brief history lesson on the importance of unemployment insurance

This morning, Raleigh’s News & Observer was kind enough to publish an essay I wrote that details some of the history of unemployment insurance in the United States, its importance in making our economy work more effectively and the recurring, counter-productive efforts by various misguided groups to undermine it. Unfortunately, space limitations forced the elimination of  a couple of passages from my original draft.

Happily, the folks at NC Policy Watch (for whom I hope to be contributing on an occasional basis in the days to come) have been kind enough to allow me to publish the entire piece below. I hope you will enjoy it.

Unemployment compensation: A win-win for business and families

Unemployment Insurance (UI) benefits are good for both the economy and families. That’s a timely lesson of U.S. history since the Civil War. From the recurring crises of the late nineteenth century (now called the “Long Depression” of 1873 to 1896) to the worldwide catastrophe of the 1930s, Americans learned the hard way that failure to support the jobless in bad times makes things worse.

Our forebears discovered that unemployment insurance holds up consumer demand, hence businesses, in a faltering economy. The system is particularly vital to sustaining the small businesses that serve consumers and are pivotal to the larger economy’s health.

It’s worked for almost 80 years. In the current recession, Census Bureau data reveal that unemployment benefits kept 3.3 million Americans out of poverty in 2009—and countless small businesses afloat. With economic recovery underway but still precarious, now is not the time to ignore the hard-earned wisdom of history.

Yet lately some business groups and conservative elected officials have proposed changes in our system of unemployment compensation that would undercut its effectiveness. The N.C. Chamber of Commerce, for example, has called for cutting maximum weekly payments by one-quarter and the duration of benefits by more than one-fifth, while failing to ensure the future solvency of the system with adequate employer tax levels. A few legislators are even seeking an end to the federal-state system we’ve had since the 1930s: they would shift responsibility to those least able to bear it, the unemployed themselves.

To know why these ideas are bad and would produce unnecessary harm, it helps to know where the current system came from. Most directly, it came from the Social Security Act of 1935, which provided for unemployment insurance along with old age pensions and other measures to stabilize the economy and improve the well-being of citizens.  But behind passage of the SSA were three generations of learning.

Wealthy Americans in the late nineteenth-century first tried blaming the victims of the new industrial order. A punitive school of thought called “Scientific Charity” alleged that poverty resulted from laziness or vice. Its practitioners sought ways (hence the “science”) to distinguish those few who were “worthy” of modest alms from the “unworthy.” Yet as Panic followed Panic, and upright, hard-working men and women were reduced to begging or becoming tramps to survive high and chronic unemployment, lived experience discredited the Social Darwinism of Scientific Charity by the 1890’s.

Suffering on this scale fueled rebellion, too:  mass strikes, the Knights of Labor, the People’s (Populist) Party, and socialists and anarchist organizations of all descriptions. In 1894, “Coxey’s Army” marched on Washington to demand, in the name of “the Commonweal in Christ,” that the government help the jobless.  

The unrest roused clergy, scholars, reformers, and some far-sighted business leaders to action.  Over the Progressive Era, they studied systemic unemployment. They discovered that it came, not from any fault of those whose jobs disappeared, but from the boom-and-bust cycle endemic to capitalism. If America wanted the benefits of markets in the flush times, people like the economist John Commons and the settlement house worker Jane Addams concluded, the nation must also deal with the wreckage of the downturns. They learned that the best strategy was unemployment insurance, an idea fine-tuned but not implemented until a new crisis hit.

The Great Depression put one employee in four out of work. The scale of suffering was staggering. Private charity funds were soon exhausted; municipal relief funds went dry. Desertion rates soared as humiliated former breadwinners left their families. Malnutrition spread among children. Millions rallied to Huey Long’s “Share our Wealth” plan; others flocked the Townsend movement for old-age pensions. Thousands joined the Communist Party, on the left, and, on the right, the proto-fascist Silver Shirts. One third of the nation tuned in to the right-wing populist sermons of the anti-Semitic radio priest Father Coughlin.

Franklin Delano Roosevelt and his Secretary of Labor, Frances Perkins, understood that doing nothing was not an option. The market could not fix itself. Thanks to the crisis, Nazis were on the move in Western Europe and Stalin was consolidating power in Eastern Europe. The omens were bleak. It was in this context—of mass suffering and mounting unrest—that the White House and Congress worked out the contours of the Social Security Act, one of the greatest legislative achievements of the century.

How has its unemployment insurance component worked? Very well, on balance.  Since the 1930s, the federal government has never allowed the floor to fall out from under the economy as it did then. Generations of Americans have benefited from the economic stability it helped produce.

We’re in the fix we are now, many leading scholars agree, because of the loss of other smart New Deal era policies that corporate lobbyists persuaded Washington to drop: namely, regulations such as Glass-Steagall that held risky behavior on Wall Street in check.  Do we really want to listen, again, to corporate lobbyists who seek to shift reasonable burdens from themselves onto citizens at large, particularly those already struggling to regain their footing in a slippery economy?

Nancy MacLean
Arts and Sciences Professor of History, Duke University