 The Think Tech Hawaii Broadcast Network. I'm Kili Akina, your host, the president of the Grassroot Institute of Hawaii. Hawaii's unemployment insurance system is in crisis right now. You know that there are stalled payments, rampant fraud, massive debt, and all of that is going to lead to higher taxes for businesses starting next year. But is there a better way to help the unemployed? International economist, Vareneet Dhiraji, says, yes, there is, based upon her research into best practices across the country and the world. One of her solutions is unemployment insurance savings accounts. We may talk a little bit about that. Dhiraji is a senior research fellow at the Mercatus Institute, which is at George Mason University. She's also a nationally syndicated columnist. Her primary research interests include the United States economy, the federal budget, taxes, tax compensation, financial privacy, and so forth. And she has a popular weekly release of various charts that are viewed by many people, and they're extremely helpful. They've helped me to understand economics in our country quite a bit. Dhiraji received her MA in economics from the Paris Dauphin University and her PhD from the well-known Pantheon Sorbonne University. Vareneet, welcome back to Hawaii. This time, unfortunately, it's virtual, but I know you love Hawaii. I love Hawaii, thank you for having me. Even if only remotely. Thank you so much. You know, I've admired your work for many years. I've enjoyed talking with you at national conferences and I think you're making a great contribution. Would you tell our viewers a little bit about what you do as an economist and a little bit about the background of where you work at Mercatus? So the Mercatus Center at George Mason is a university-based research center and we specialize where originally when Mercatus was started, it was doing only work on regulations, and which is an area that is often ignored by economists and the policy world, which is kind of strange because actually a lot of things, even tax policy often takes place through regulation. And so, and then now we do many things we do labor issues, we do, it's only on the economic side, we do tax budget, we do financial regulation, we do, we study cronyism and how to try to actually get rid of it. We do all sorts of things. And I, we do trade policy, which was very relevant obviously during President Trump's tenure. And I suspect it's going to continue being relevant with your immigration policy. And I am really very much a generalist and while I have issues that I go back to all the times like taxes and budget, and I look at cronyism a lot and oops, sorry. That's wonderful. Well, very neat today, we should leave. I'm a generalist and I just, if there's a battle and a barricade, I can't resist that I go there. Well, very good. We certainly could talk about many, many things today. I want to narrow it down to unemployment insurance. We were boasting here in Hawaii the lowest unemployment rate in the country not too long ago. And now this year we have the highest unemployment rate in the country. One of the things that has caused is a tremendous amount of money, record amounts that have been paid in unemployment insurance to those who are unemployed. Unfortunately, some people are touting that as a good thing. Is that really a great thing? Well, it's not a good thing. I mean, we can make the case that if you're going to be put out of work by a pandemic and especially if you're going to be put out of work by government locking down the economy, it's preferable that you're not left to starve. I mean, I won't question. I mean, this is for sure it's true. People who are receiving those benefits I mean, are definitely better off than if they were in that said, that's only in the short term. And there's actually a lot of problems that are born out of those benefits, especially the more generous they are and the more disincentive. So there's a huge economic literature on the issue and I won't bore you with it, but the short. Maybe give me some examples. So what was the intent of unemployment insurance in the first place and what's one or two bad side effects that have resulted in growth? Originally was really, I mean, if you lose the job and you're left with a period where you're looking for a job and suddenly you have no income, right? This was supposed to be a safety net measure but it was supposed to be short-lived. It's supposed to be really temporary. During recession traditionally with the federal government is that so the uninsurance, the UI system, unemployment insurance program is actually a state and federal program, right? So most of the benefit is actually put through by the states and each states have different formulas, different number of weeks. They decide how much of the previous wages will be covered. What happens traditionally during the recession is that the federal government chips in by usually giving a bonus or by extending the eligibility of benefits. Well, this time around, they went all out. They was just like the last recession, the bonus was $25 and this time it was $600. If that expired in August but then the president issued an executive order saying that it would be the federal government would pay $200 and the states would pay $100 for a bonus of $300 in addition to the benefits. And so what we know of the traditional consequences of unemployment benefit, the main one is that it creates tremendous disincentive to work. And one of the main ways that it does this is by actually delay people who are unemployed and receiving this benefit. Let's say they're eligible for 26 weeks while they won't start looking for a job before their benefits are about to expire. So it means that they're gonna stay longer benefiting from those benefits and it's going to be probably harder to actually get work for some of them after 26 weeks. You know, it's unfortunate that we see a lot of clamoring for the increasing of these benefits and these subsidies by the federal government as the solution that legislators in various states are looking for. We'll talk about Hawaii in a few minutes but tell me what's going on nationally in terms of the way various states are responding to the crisis that they're facing in their unemployment insurance. Well, so there's another big problem that all the states, at least a large chunk of the states are going to be facing and they always do during a recession but they do it even more so when the federal add-ons are so generous is that the states, the way they fund their insurance program at the state level is by actually taxing employer and employees, right? Which creates a lot of distortions in and of themselves. And they put the money in the trust fund. And a lot of the states we've seen this the last time around and I think this time is going to be on steroids, their trust funds become insolvent because in the end there's so many people who aren't employed, so many people who don't wanna go back to work because the benefits are so generous that they actually, the trust fund become insolvent. And what happens is like at the end of this we're gonna see a huge spike in unemployment insurance taxes. And I think Hawaii is actually one of the states that has really drastic plan for increasing that tax. Well, you're absolutely right. In fact, let me interject since we're on that point. Hawaii is a prime example of the tax rates going up because the unemployment fund is depleted. You know, before the coronavirus crisis and the unemployment which ensued, we had a $600 million positive amount in our unemployment tax fund. That wasn't high enough, but still it was positive. It's gone down to $700 million negative right now in the whole almost a billion dollars by the end of the year is predicted. As a result, automatically in 2021, the tax rate for employers is going to triple here in the state of Hawaii. That's an incredible increase. Even if some of that debt is paid off by CARES Act funding, the amount will still go up. Are you seeing this across the nation and what do you see? We don't see it across the nation, but of course we see it in the states that are the most effective. The one that planned the least, but also the one that are affected the most. I think we're gonna see a huge problem with states that are planning on locking down again. And because it's like, again, like if Congress comes up with an extension of benefits, because again, it's a two-prong approach in this particular case. It's not just that they're expending the length of the eligibility, but they're on top of that adding a bonus. And to give you an example of the kind of disincentive to work that it creates, two thirds of the beneficiaries of unemployment benefit the first time around before the $600 bonus expired, we're actually making more money unemployed than when they were working, right? And so you can understand, it's only natural that people are gonna say, well, I'm just gonna actually keep getting this benefits until it expires. And if causes actually, you can actually wonder what kind of cultural shift it actually brings about, but for the states, for the states, they're going to be increasing those taxes. And when they increase on employers, what it does is it actually, it makes the cost of employing people higher. And so it compounds the infect. In other words, we have a double whammy effect. We have a disincentive work on the part of employees, but employers have a disincentive to hire because the cost of unemployment insurance is so high. Is that what you're talking about? Yes. Yeah, I mean, and it's only at the margin, right? It's not like for everyone, but that's what matters. It's like, are you going to be hiring, like re-hiring all four of your employees? Or are you going to be hiring only two of them or three of them? And the next time around, even that's gonna be in 2021, let's say that this is during a time where the economy is doing not so great. What it means is actually, you're probably not gonna expand your business because the cost of employing people is higher. Here in the state of Hawaii, our lawmakers are looking for ways to borrow from the federal government to make up the massive deficits in the unemployment fund. What do you think the solution should be in terms of responding to that deficit? And do we actually, do you think we can actually lower the tax rate on employers? So what I would favor, right, is to actually dismantle the whole system, right? It's not necessarily politically possible just right now, but this is definitely, because this is a recurring problem that we have. The country goes into recession, on average, there's a slowdown every 10 years, on average, right? I mean, I look, 2001, 2008 ML 2020, it happens. And each time we face the same problems. And so, but the thing, by the way, that these disincentive to work that we observe with the unemployment insurance as it is, we see them all the same during the regular time, right? It's only exacerbated and it makes the recovery take longer during risk time. So what I would favor is to get rid of the system and to move to actually a system of private accounts. Well, let's talk about that when we come back from a break. We'll put a bookmark right here because you've said something quite profound, get rid of the entire system. We're gonna take a break and I'll ask you a little bit more about that. My guest today is very unique to Ruggie, an economist who has looked very carefully at the problems Hawaii is facing when she studies the entire nation and the entire country. She studies the entire nation and the world. I'm gonna be back with her in just a moment. Don't go away. You're watching Think Tech Hawaii, Hawaii Together. Welcome back. I'm Kili Iakina. We're with Veronica Deruji and we're talking about Hawaii's broken unemployment insurance system. Veronica has suggested that we completely overhaul the system and I'm gonna get into that suggestion in just a moment. But first, let me backtrack a little bit. One of the problems that we didn't discuss which has been a glaring issue here in Hawaii has been the amount of fraudulent payments that we've seen in our system. In 2018, we had $400,000 worth of fraudulent payments. But in 2020, this year alone, that figure has shot up to $16 million. Is this something systemic? Why is there so much fraud in the system? So there's always some fraud. And of course, the bigger the incentives to get the money, the biggest incentive to get it even if you don't deserve it or you're not supposed to get it. But in this particular case, the CARE Act which implemented the extension of the unemployment benefit and also it created the bonus, a $600 bonus, had no guardrail against fraud, basically. And also there was so many people at once flooding unemployment insurance offices that they had absolutely no time to do any fraud management. And it was just, it wasn't planned. So of course there's a lot of fraud. It's obvious in economics, we see the relationship between public policy and human behavior. In a general sense, this kind of suggests that there's a lot of psychology in the actual practice and the art of economics. What are your thoughts on that? I'll say incentive matters. People respond to incentives and if you make it very appealing not to work or if you make it very low cost and low risk to fraud, people are gonna do it. So I think it's as simple as that. We can count on human behavior as being something fairly static and we can rely upon human behavior as a determinant of what takes place. You know, you did suggest that we overhaul the whole system, but before we jump into that solution, what are some of the measures that states typically try to take in the short run to deal with this problem? To deal with the fraud or to deal with the... You're like to deal with the problem of the unemployment insurance fund being depleted. Well, usually they raise taxes. That's pretty much what they do. It's unfortunate because again, it compounds the problem by making it more expensive to hire employees. And it really does nothing to actually really fix the system for the next time around. It becomes a real... It becomes a real disincentive not only to employment, but also for employers to invest and to build their businesses. So we create very unfriendly business climate. And we'll see more of that in Hawaii if we raise the taxes. Okay, so let's talk about dismantling the system. It sounds far fetched, especially for a state like Hawaii that is so invested in its systems and its heritage, its history, and so one-sided in terms of political parties. But you've seen this take place elsewhere across the world. We've seen it take place actually in a fair amount of Latin American countries. It started in Chile and there are a certain number of other countries, but also Australia is implementing a system of private savings accounts. And the systems are all a little different, but the principle is the same. And that is basically, it's employer and employee that save that basically put money in an account that really actually belongs to the employee. And the benefits of this is that if you wanna leave your employers because you don't like him, you can use this money to actually look for another job. If- But it's portable. It sounds- It's portable, but it's also, if you wanna keep that money in theory because you know that it's your money and you've actually contributed to it, you actually don't have an incentive to deplete it. Some people of course will, but you don't have an incentive to deplete it. And one of those things that's pretty interesting about looking at the countries that have implemented it, like Chile for instance, Chile has a system of private accounts, right? That works with the tax on the employer and the employees. And basically they have to put all the way to a certain level and then they don't have to contribute anymore into it when the account is fully funded. I mean, I would actually say, why stop? If people wanna continue and save, let's let them do it. But in Chile, the system also has a kind of safety net attached to this from the government. And what's fascinating, when economists have actually looked at the Chilean model, they've actually showed that because of the reform, people really do have an incentive to go back. But what's interesting is they first wait to have really emptied the government part of the benefit. So they don't wanna deplete their share of the account, but basically the disincentive that we've seen with the old was the current, like the unemployment model that we have, it actually all the same incentives are at play with the government share. So what I would wanna do is to have none of that. Just you have a private system and the thing that's great about this too is not only does it give employees, they can split if they don't like their employers, they don't have to wait to be fired with the, or to be fined an agreement to leave with their employee. Like, remember in our current system, you're only eligible if you're fired and you're not, there's no cause or you're not, there's all sorts of restriction. Well, for this, there isn't. You get fired, you can still use it and take the time to look for a job, but you still have the incentive to work, to actually not deplete all of this. And then you can accumulate the money and then use it whatever you want. When you're older and you're retired, that money is yours. Now this model works when there's an employer and employee working together, but what if there's no employee, excuse me, what if there's no employer? What if we're dealing with people who are private contractors working from gig to gig on their own? Can we structure a similar situation? Yeah, so you could, this works because obviously having the two, funding it together is more money, but you can imagine the system where the, where the sole proprietor or whatever was a contractor actually puts money aside for his retirement, but there's something that I think is really worth mentioning. It's something that the economy's called the crowding out effect. Before the federal government and the states stepped in to create these unemployment insurance program, they used to be actually a pretty vibrant private sector provision of such insurance. And I really believe that if the government were to step out, these options would emerge also. So for instance, while private there would be, they could be an insurance company that actually specializes in ensuring or actually providing an insurance or transitional income for contractors who are out of work for let's say six months or three months. I don't know what the term would be, right? And rather than actually save and put money in the account what they would do is they would pay for that service to this company. And I could guarantee you that they will be a private solution and actually we probably will see several private solutions to these type of problems. We see it like already with Uber and the platform economy, the Uber drivers which actually don't have health benefits and things like this. Well, they are actually private companies that are starting to emerge to say to those drivers, we offer, this is a service we offer Australia for instance as a system that is really, really well developed. There's no reason why this system, they couldn't be a private system of different insurance company offering different product to different employees who don't have such an account. Well, this certainly sounds like a promising solution. Before I let you go, what are some of the challenges that such a solution would face that have to be resolved? I'm talking about- Well, this is a risk averse and people are risk averse. And the notion of this is a system that again, is a rest on personal responsibility and people who have been used of having, of believing that somehow someone else need to be paying for their hardship, it's a hard sell but other countries have done it. And there's no reason why, and this is a beauty of the American system that actually Hawaii could be entrepreneurial and you could have a governor who decides that enough is enough and Hawaii is going to become the leader in employment. And they're going to put it in place. He's going to dismantle, he or she is going to dismantle all the barriers to work starting with unemployment insurance but there are so many others. No occupational licensing, there's all sorts of things that actually create disincentive to work. And I wish that for you. Well, that's a great vision for Hawaii indeed. And it begins with a shift in mindset. And I want to thank you for what you put forth because it gives us much to think about. Very neat. Thank you very much for joining us. If people would like to reach out to you and connect with you or ask you any questions, do you have an email address or website that you would- So, I think at mercadis.org, they can find me among the staff scholars and they can find my email address and everything and contact me there. What is that address again? It's mercadis.org. All right, mercadis.org. Well, very neat. Thank you so much for being with us today. It was extremely informative and valuable information. We're going to circulate it as broadly as we can. And until you come back and visit Hawaii, we'll say aloha for now. Aloha. And everyone else, thank you for joining us. You've been watching Hawaii Together on the Think Tech Hawaii Broadcast Network. Until next time, take care and much aloha. Bye-bye.