One way to think about this is to say that unemployment benefits may, perhaps, reduce the economy’s speed limit, if we think of speed as inversely related to unemployment. And this suggests an analogy.Imagine that you’re driving along a stretch of highway where the legal speed limit is 55 miles an hour. Unfortunately, however, you’re caught in a traffic jam, making an average of just 15 miles an hour. And the guy next to you says, “I blame those bureaucrats at the highway authority — if only they would raise the speed limit to 65, we’d be going 10 miles an hour faster.”

Dumb, right? Well, so is the claim that unemployment benefits are causing today’s high unemployment.

Paul Krugman

Unfortunately, the analogy is worthless.

Unemployment benefits cost money. They are a transfer of wealth from one class to another class. The employed, who pay taxes, to the unemployed who are paid from those taxes. This is distributive policy.

You are either a tax producer, or a tax consumer. Ignoring for the moment tax producers, who are only so because of government subsidies, which makes you in actual fact a tax consumer, if you increase the tax consumers above the tax producers, you simply cannot continue. The tax producers must always exceed the tax consumers. Basic arithmetic.

Who provides employment? Those businesses that require labour in providing their goods and services. These same businesses also pay the taxes that provide the unemployed with their paycheck. It makes sense even at this most superficial level of analysis to say that if the money paid to the unemployed rises, there is less money to pay those employed.

It is the production of increased goods that constitute an advance in wealth. Therefore advances in capital and technology that increase the amount of goods produced, lowers their money prices, increasing the standard of living for all.

The important element that Marx omits is the element of time. Capitalists provide the wherewithal, saved goods, to allow the production of goods that take time. The more advanced the goods, the longer the production process. Therefore, the “profit” is the discounted value of present value as against the time taken to produce the goods in question.

Taxes are more important to production. The higher the taxes, the higher the time preference, the lower the saving/investment allocation, thus the lower future production must be. Taxes therefore directly reduce production.

Government without coercive tax revenue, would very quickly cease to exist. The fiat money allows the theft of real property. That is the purpose of taxation, to redistribute real property from the producer, to the non-producer, viz. government, or more accurately ‘The State’.

Shifting occurs when the immediate tax-payer is able to raise his selling price to cover the tax thereby passing the tax onto the buyer of his goods/services, or conversely, if he can purchase capital goods for less from his supplier.

Here we need to first state an axiom of taxation, and this is: no tax can be shifted forward. That is to stae categorically that no tax can be shifted from seller to buyer.

However let us examine how this axiom is proven. It is generally considered, that taxes are taxes on the costs of production. This is false. In point of fact, the reverse is true. The price of a good is determined by its total stock in existence [at any point in time] and the demand schedule for that good.

The selling price is set by any manufacturer at the maximum net revenue point. Any higher price will therefore simply decrease the net revenue. The tax, cannot therefore be passed onto the consumer.

The higher the discount rate, the lower the DMVP of labour. Stated another way, the higher the pure rate of interest, the lower the wages of labour.

3X………..+…………2Y………..+………..10Z = $100
2X……….+………….2Y……….+…………10Z = $80

Then 1X of labour = $20
If the interest rate = 5% then the DMVP = $1

The entrepreneur will pay up to, but not exceeding, $19 for a unit of labour. If he can purchase that unit for less, his profits will be higher. These higher profits will attract competition, unless the profit is somehow protected via barriers to entry, patents etc.

The interest rate is the pure rate of interest which should be equal to the market rate of interest, but in this Central Bank [Federal Reserve] controlled monetary policy environment, it never is, should then distribute capital efficiently to the productive process.

Unions that maintain artificially high wages, legislation that mandates a minimum wage, Welfare payments that subsidise leisure, all directly contribute to maintaining high unemployment, rather than encouraging employment for a market wage.

Taxation raises the discount rate through raising time preferences, which, will increase the shift from paid employment to unemployment. It is the relationship between the Total Product the Average Physical Product and Marginal Physical Product. Essentially the Law of Returns states:

*When APP is rising, MPP is higher than APP
*When APP is falling, MPP is lower than APP
*At the point of maximum APP, MPP = APP

Production will not continue once MPP nears zero. Losses ensue at this point. Therefore, prices to consumers will reach a point where this firm cannot profitably expand production further. Increasing taxation imposes a different cost structure, thus increasing the rate at which diminishing marginal returns become a variable that lowers employment.

Higher unemployment benefits act as a tax, that lowers employment, becoming a positive feedback loop.