A Gang of Thieves: Not a Metaphor

In my former career as a freelance policy analyst, I did a good deal of research on our nation’s Unemployment Insurance system, which convinced me entirely that the major flaws in our UI system that make it incapable of serving as a true automatic stabilizer stems from the role of state government in the program. Thus, it does not surprise me in the least that:

“A Michigan government agency wrongly accused individuals in at least 20,000 cases of fraudulently seeking unemployment payments, according to a review by the state.

The review released this week found that an automated system had erroneously accused claimants in 93% of cases – a rate that stunned even lawyers suing the state over the computer system and faulty fraud claims.

“It’s literally balancing the books on the backs of Michigan’s poorest and jobless,” attorney David Blanchard, who is pursuing a class action in federal court on behalf of several claimants, told the Guardian on Friday… (Guardian US)

I would go further than David Blanchard: this is a crime. The state of Michigan has committed an act of grand larceny against tens of thousands of workers, and the Justice Department should be prosecuting right now. (Incidentally, the phone number for the Detroit office of the U.S Attorney is (313) 226-9100. Give them a call, why don’t you?)

Here’s how they pulled off the con…

Actual, Factual Welfare Fraud:

The story is depressingly simple and straightforward. When he got in office, Governor Rick Snyder pushed through massive tax cuts for corporations and the rich; these tax cuts blew a giant hole in the budget; rather than raise taxes to pay for vital services – like public water that doesn’t poison people – the state decided to steal from Michigan workers and use at least $10 million of that to help balance the budget.

It did it through a cunningly hands-off move: back in 2013, Rick Snyder put in place the Michigan Integrated Data Automated System (I kid you not, the damn thing is called MiDAS) to run the state’s Unemployment Insurance system, paying some $47 million to Fast Enterprises LLC for the privilege, so much more efficient than paying public sector workers, dontchaknow? Once in charge of monitoring UI fraud claims, MiDAS’ automated processes “erroneously accused claimants in 93% of cases.” That high an error rate smacks less of a programming error and more of a deliberate design to fighr every claim for Unemployment Insurance, a public sector importation of the rising practice in the private sector of hiring claim-challenging firms to keep UI costs down.

Once confronted with evidence that MiDAS was broken, the state went to court to fight “tens of thousands of appeals, and battled a PR war over those wrongly denied benefit” before finally discontinuing use of the system (multiple class-action lawsuits are still pending). After all, MiDAS may have been a godawful failure when it came to telling the difference between a legitimate claim and fraud, but it was really good at generating revenue from fines for the state’s UI Contingent Fund, which grew from $3 million in 2011 to $155 million today.  And while the regular UI Trust Fund can’t be used for anything other than paying UI benefits, the Contingent Fund has no such restrictions and can be plundered at will by the legislature.

Since then,  2,571 workers have managed to recover $5.4 million that was stolen from them, but that’s a small fraction of the 22,000 erronous fraud claims we know about (there’s another 30,000 cases that haven’t been audited for false claims yet).

The Bigger Picture:

While the Michigan case is the most egregious case I’ve encountered to date, it’s actually more common than not for state government to abuse their UI systems in any number of ways: restricting eligibility such that a minority of workers can actually get access to benefits, keeping benefit levels as low as possible, but especially deliberately underfunding their Reserve Funds. To quote myself:

“Because states must fund their UI system with payroll taxes on local employers, reducing payroll taxes is often the first bargaining chip that states offer when trying to compete with one another to attract new firms from out of state. The lower the payroll tax rate, the cheaper it is to hire workers. Corporations respond to the leverage they have over furiously bidding states to extract concessions so that they do not have to pay in at all, with the state covering their contributions.”

“The result is a dangerous depletion of UI reserves. 35 states and the U.S. Virgin Islands had to borrow to cover UI payments during the period from 2008 through 2011, with total outstanding loans that “peaked at more than $47 billion in mid-2010,” because they let their UI funds run dry. Three years after the peak, twenty-three states still owe a combined $28 billion.”

In other words, the UI system has become part of the same beggar-thy-neighbor struggle to attract employers by offering to slash taxes, deregulate any and all markets, and in general to subordinate their interests to that of globally mobile capital. But even those remaining blue states face a fundamental problem: Unemployment Insurance is an automatic stabilizer that by design sees its revenues decline and expenses increase during recessions, and by law, states cannot deficit spend to compensate.

Interestingly, when I wrote this paper back in grad school, I actually got a phone call from Larry Temple, the Executive Director of the Texas Workforce Commission, which handles their UI program. In the middle of his work day, he spent a half hour explaining to me that I was wrong about states under-funding UI systems (Texas has a net balance of negative $1.3 billion, btw.), that taxes on employers and inflation are always bad, and how (if I really wanted to understand Unemployment Insurance) I needed to become an employer so that I would “sign the front of the check for once.” (For what it’s worth, he did offer to buy me a beer if I ever visited Austin…) Pity the poor workers of the state of Texas who have to go through Larry Temple to get their own money.

What’s To Be Done?

As I discuss in my report, if we want Unemployment Insurance to work as intended, and we do because it’s one of the main ways we can fight recessions, we have to make some big changes:

1. Nationalize. While it seems counter-intuitive to say this at a time when Republicans have unified control over the Federal government, the reality is that even progressive state governments don’t have the capacity to run UI systems effectively. This could be done relatively simply by simply eliminating the offset of Federal Unemployment Tax by state UI taxes, by eliminating the wage cap on unemployment taxes (currently, we pay UI taxes only on the first $7,000 in wages), and turning that tax into a progressive one rather than the current flat tax. Finally, John R. Commons’ Wisconsin system where individual companies would be assessed different UI taxes and keep company-level reserves in a bid to incentivize companies to avoid laying off workers has failed – instead, it incentivizes employers to systematically challenge claims in order to keep their taxes down – and needs to be replaced with a system of a uniform payroll tax and a single national reserve fund.
2. Universalize. A system in which only 48% of workers are protected is not a system that can actually accomplish its mission of preventing destitution or dramatic declines of consumer spending during recessions. All workers, whether permanent or temporary, full-time or part-time, self-employed and “independent contractors” need to be covered by the system, pay into the system and receive benefits on a proportionate basis to their earnings.
3. Minimum Benefit. The average weekly UI benefit in the U.S is only $342.64, which is just barely above the national poverty line for a family of two (let alone for the poverty line for the average household of 2.5 people). This average hides the fact that benefits vary enormously by state, with Alabama, Arizona, Florida, Louisiana, Mississippi, and Tennessee providing a maximum benefit of less than $300 a week. In order for UI to actually do its job in preventing unemployed workers from sinking into poverty, a minimum benefit should be established at the rate of $400 a week. (Indexed to inflation, thanks Murc!)