Is Daniels' Jobs Warning A Self-Fulfilling Prophecy?

I’ve been reading through Gov. Mitch Daniels' new book to see if he has anything to say about the current jobs crisis that America is in. The early results are a little disappointing. The first third of the book is focused on long term debt, the middle is focused on his time as governor, and the final section deals with his proposals to reform the tax code.

There are worthwhile thoughts in this book, it's just unclear how immediately relevant those thoughts are. Yet there was a section that did touch on jobs, and that was Daniels’ discussion about Unemployment Insurance (UI).

Daniels seems to have the right instinct (we need fewer people on government welfare) but seems to be unable to make the critical leap to ask: how do we make sure the unemployed can have jobs?

Here is Daniels:

During the 2008-09 recession, and well beyond the point at which it technically ended, unprecedented amounts of unemployment compensation were distributed to those out of work. Presumably everyone can agree that a system of temporary assistant is the right thing in bad economic times ...

But the latest round was different. UI had historically been offered for twenty-six weeks, with an option in the law for extension to fifty-two weeks. Between 2008 and 2010, benefits were eventually lengthened to ninety-nine weeks, essentially two years. The question was begged: Where does it it? Are we in favor of permanent payment to those not working?

The right answer to this question is, “no, we want the job market to no longer be in crisis mode.” The problem is that Daniels' book does not address the job crisis directly and there is no discussion about the Federal Reserve having a role to play.

Daniels begins justifying his concern with anecdotes:

Employers and individual Hoosiers relate to me on countless occasions that UI recipient were rejecting employment offers, telling me that “UI is a better deal.”

I don’t know how accurate a statement that is. It isn’t hard for me to find academic papers arguing that UI has not discouraged employment.

Daniels notes that companies which fire employees “won’t necessarily hire them back once the good times return. Many of them are undergoing a restructuring that may lead to hire new workers in the future for different types of jobs”. Daniels criticizes UI for “creating an entitlement mentality and an incentive for workers not to restructure their lives”.

My concern with Daniels' fatalism is that it is self-fullfilling prophecy. If consumer spending remains low because of the collapse in aggregate demand, then I can see the Daniels prophecy become the norm.

But if instead, an aggressive effort had been made to reduce consumer debt, freeing up opportunities for spending, then this future that Daniels describes might become much less likely.

For a graphical representation of what a society looks like when companies simply don’t have the demand to hire unemployed workers despite their availability, consider this chart from Scott Winship at Brookings:

Note that even when unemployment outpaced wanted ads in the Bush years, it was at least possible to have a lower unemployment rate than we do now.