Carney: Mend, Don’t End, Enhanced Unemployment Benefits

Congress is currently in a quandary about what to do about enhanced unemployment benefits.

Some in Congress, especially Democrats, want to extend the extra $600 a week the federal government has been kicking-in on top of state unemployment benefits. Others, especially Republicans, worry that the extra money is keeping unemployment higher than it otherwise would be because a significant number of people have been able to collect more in benefit than they earned on the job.

The current enhancement program is set to expire at the end of the month. If nothing is done in Capitol Hill the program will end and millions of Americans who lost their jobs to the pandemic and shutdowns will find themselves cut off from extra income. That may send some Americans back on to payrolls but it will mean many Americans will just have to spend less because the only income available, unemployment benefits, will suddenly and dramatically decline.

Of course, we do not really have to choose between ending the enhancement and keeping it in full. Instead, we could choose to phase it out. The extra payments could be reduced to $500 in August and $400 in September. After that, it could fall as unemployment rates around the country decline. Even a $200 reduction would greatly cut back on the number of Americans for whom returning to work would be penalized.

This could also be structured as aid to the states. The federal enhancement could remain at $600 while the maximum state contribution declined. That still eliminates or greatly reduces the problem of paying people more not to work while also granting relief to state budgets that have come under strain because of the pandemic and necessary expenses.

Some Republicans want to take a “rip the bandaid off” approach and end the enhancement altogether. This is not an act of cruelty. State unemployment benefits, which on average pay around 50 percent of a worker’s lost wages, would still be paid. The theory behind this is that if workers lost the extra income they would flood back into the workforce and the unemployment rate would drop dramatically. Some even talk of getting unemployment down to “normal” levels by election day.

The problem is that there is not a lot of evidence to support the idea that the economy can support enough suitable jobs for Americans who would lose all that income. The most recent report on jobless claims showed that 17,338,000 Americans are currently collecting unemployment. The latest government report on job openings showed that employers only have 5.4 million unfilled positions. Many of the unemployed—probably around half—will not be good fits for many of those jobs. So it’s very likely that the economy will not have jobs for at least 14 million Americans regardless of how low we push unemployment benefits.

I recently ate at one of the most popular restaurants in Hot Springs, Arkansas. The place was not even half full, something that a server told me was rare on a summer night pre-pandemic. Yet there was still a 20-minute wait because the place employs just the fraction of cooks, servers, bartenders, and barbacks that it needs to serve a socially distant, reduced demand customer-base. Multiply that out across the economy—and add in all the stadiums, theaters, and other places that cannot reopen at all—and you can see that returning toward anything like a “normal” level of unemployment is unlikely.

Other types of support are also being wound down, which will make the return toward full employment even more difficult. Businesses that took Paycheck Protection Program loans have mostly run through the funds used to keep up payrolls. They are not allowed, under current rules, to apply for new loans. So they are likely to start cutting back on unneeded staff soon. Very few will expand employment.

The big hit to incomes will also make a snapback in employment unlikely. The additional unemployment benefits have kept incomes very high despite massive job losses. Allowing them to expire altogether would reduce overall income by around $50 billion per month, according to Michael Strain, director of economic policy studies and Arthur F. Burns Scholar in Political Economy at the American Enterprise Institute.

“This would depress overall consumer spending by several hundred billion dollars in the second half of 2020, which by itself could cause a recession-level contraction in economic output,” Strain wrote in a Bloomberg Opinion piece.

It is very likely that one of the reasons retail sales have recovered so well is that incomes were stabilized even though unemployment rose. This gave families suffering job losses the ability to keep paying bills and keeping spending for their families needs. It likely even boosted spending by families that did not suffer job losses because it provided reassurance that incomes would not drop even if a family member was laid off. That appears to have cut off the usual recessionary pattern where job losses lead families to cut back on spending, which leads to more job losses, which lead to less spending, and so on in a vicious cycle.

The effect on retail sales has been dramatic, causing non-restaurant sales to rise above pre-pandemic levels. That is sustaining jobs and even creating new ones. (I excluded ‘food service’ sales from this chart because socially distancing restrictions continue to weigh on supply of tables at restaurants.)

It’s very likely that if the enhanced unemployment benefits come to a sudden end, resulting in a dramatic loss of income, that V-shaped recovery will become something like two-thirds of a W, with another significant leg downward. The loss of sales will lead to job losses, which will further depress income, which will depress spending, which will depress employment.

In other words, the attempt to restore employment by cutting unemployment benefits will do exactly the opposite of what was intended. Millions of more Americans will become unemployed and become dependent on government programs for food, healthcare, and housing. And that will almost certainly guarantee Joe Biden a win in November and possibly hand the Senate over to the Democrats. To put it mildly, that is not very likely what GOP lawmakers hope to achieve by ending the unemployment benefit enhancement.

Lawmakers may also want to couple the reduction in enhanced benefits with another round of coronavirus impact payments. These payments do not penalize work because they are paid to workers and those out of work. The last round, however, did ‘penalize success’ because the payments of $1,200 for an adult and $500 for each child under age 17 phased out with income. Single filers making $75,000 or more got a reduced payment and for those earning $99,000 or more got nothing. This penalty could be ended by simply making the $1,2000 payments available to all. Wealthier households who do not need the money could be encouraged to donate the excess to charity.

When the original CARES Act put a July sunset on the jobless benefits enhancement, few policymakers anticipated just how deep the job losses would be or how long the pandemic would weigh on the economy. It should now be clear that the economy is not as strong as many had hoped it would be. The labor market is not ready to end the program and there is no pressing need for it to come to a sudden stop.

The American economy is on the mend. What we need now is not an end to enhanced unemployment benefits but a plan to mend the program that has helped the American economy stay on its feet despite the pandemic.