Fiscal Policy

A Benefit Worth (Largely) Preserving

People line up outside the Kentucky Career Center to find assistance with their unemployment claims in Frankfort, Ky., June 18, 2020. (Bryan Woolston/Reuters)
Don’t cut the unemployment-insurance supplement too far or too fast.

From CNBC:

Republicans are considering extending the enhanced unemployment insurance benefit at a dramatically reduced level of $400 per month, or $100 a week, through the rest of the year, sources told CNBC.

Congress passed a $600 per week, or $2,400 a month, boost to jobless benefits in March to deal with a wave of unemployment unseen in decades as states shut down their economies to combat the coronavirus pandemic. The policy expires at the end of July as the U.S. unemployment rate stands above 11%, despite two strong months of job growth.

The GOP, which has not made a final decision on how it will craft unemployment insurance in a bill set to be released this week, previously discussed extending the benefit at an additional $200 per week instead of $600. Democrats want to make the $600 per week sum available at least until next year.

There are good arguments to be made for reducing the enhanced benefit from its current level, but a reduction to $100 (or even $200) seems to me like too great a cut too soon.

It is a statement of the obvious, but it is worth remembering that the surge in unemployment is directly linked to governmental decisions to close down vast swaths of the economy. Those were justifiable when the scale of the problem posed by COVID-19 came into view. But in many instances the lockdowns have been prolonged far beyond what was initially contemplated. The reasons for that include the inadequacy, at many levels of government, of the response to the coronavirus, as well as clear signs of mission creep (the original argument for the lockdowns was to manage the pandemic, not a doomed-to-fail effort to eliminate it). The result has been that the always remote prospect of a V-shaped recovery has vanished, whatever the stock market may say. And the consequence of that is that the country is effectively in the middle of a lengthy and dangerous social, political, and economic experiment, which is by no means played out and could well end very unhappily indeed.

At this point, therefore, the name of the game needs to be damage limitation. Some of the damage, both to the economy generally and to the nation’s finances specifically, will endure for a long time, but the long-term problems will be exacerbated if the short-term crisis is made even worse than it already is.

The early indications are that much of the financial- and economic-policy response to this emergency has worked reasonably well so far. For example, an analysis by Karlye Dilts Stedman of the Federal Reserve Bank of Kansas City would appear to show that “timely Federal Reserve interventions restored calm to the Treasury market.” That view is by no means an outlier.

In a somewhat similar vein, in a report issued earlier this month, The Economist noted how the combination of the various measures taken by the federal government (ranging from the payment of the $1,200 stimulus checks to the unemployment-insurance supplement), together with the fact that unemployment has not reached the 25 percent feared by some when the lockdowns began, has helped many of the most vulnerable weather the storm.

With the result that:

The current downturn looks different from previous ones. Household income usually falls during a recession — as it did the last time, pushing up poverty. But a paper in mid-June from Goldman Sachs . . . suggests that this year nominal household disposable income will actually increase by about 4%, pretty much in line with its growth rate before the pandemic. The extra $600 in unemployment insurance ensures, in theory, that three-quarters of job losers will earn more on benefits than they did in work.

The fact that many of the newly unemployed are, at least theoretically (I imagine that the loss of health benefits complicates the picture considerably), better off for now is a case for some scaling down of the unemployment-insurance supplement, lest the current level acts as a disincentive to return to work at those jobs that are available. That said, the number of job vacancies is ticking up, but not to the extent that would suggest that that disincentive is kicking in, at least to any material extent

To give some context of what a cut could mean, last month CNBC cited data showing that, in the absence of the supplement, the average (there are large variations from state to state) unemployed American would see his or her weekly income fall from about $980 a week to $380, a decrease of 61 percent. Increase that weekly number by the rumored Republican $100 to $480, and the new combined number would still be less than half of the old.

There is no precise way of determining what the “right” figure should be, but last month a group of economists, including Glenn Hubbard, no man of the Left, came up with a proposal under which the supplement would replace up to 40 percent of prior wages and would be capped at $400 per week. Under this proposal, CNBC reported, workers who earn up to the median wage would, after state benefits are added, receive about 80 percent to 90 percent of their previous earnings. Federal Reserve chairman Jerome Powell has also added his support to extending the supplement “in some form”: “I wouldn’t say what form, but you wouldn’t want to go all the way to zero on that.” Former Fed chairman Ben Bernanke is also on record as supporting an extension, but “you can lower the $600 so that the replacement ratio is not above 100 percent.” He has also, The Hill reports, proposed a special tax credit for returning workers.

The supplementary benefit has also boosted demand in the economy, at a time when that is badly needed.

From research by JPMorgan Chase:

In normal times, spending among unemployment benefit recipients falls by about seven percent in response to unemployment because typical benefits replace only a fraction of lost earnings. However, in March 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act added a $600 weekly supplement to state unemployment benefits, replacing lost earnings by more than 100 percent for two-thirds of unemployed workers eligible, by some estimates. As a result, for benefit spells which begin after workers receive this supplement, we find dramatically different spending patterns for the unemployed compared to normal times.

Although average spending fell for all households as the economy shut down at the start of the pandemic, we find that unemployed households actually increased their spending beyond pre-unemployment levels once they began receiving benefits. The fact that spending by benefit recipients rose during the pandemic instead of falling, like in normal times, suggests that the $600 supplement has helped households to smooth consumption and stabilized aggregate demand.

And then there is the little matter of paying the rent. The moratorium on evictions of tenants from properties with federally backed mortgages is expiring, and state and local eviction bans are also coming to an end. Even if many landlords may, under current uncertain circumstances, prefer to stick with the tenants they have, even if they fall into arrears, a wave of evictions could, especially if the unemployment-insurance supplement is shredded, be on the way, something that will do further damage to a social peace that shows evident signs of falling apart.

There are, of course, compelling humanitarian arguments to be made for a reasonably generous extension to the unemployment-insurance supplement as these extraordinary times drag on, but even if the only relevant considerations are economic, political, and social, there are good reasons to ensure that the unemployment-insurance supplement does not — for now — fall too far. Much of the mess in which the country now finds itself is the product of missteps by government. It would be good to avoid yet another.

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