Economists warn scaled-back unemployment benefits would knee-cap recovery

Economists are warning Congress that scrapping or substantially reducing unemployment benefits will pull the rug out from the economic recovery.

Expanded unemployment is front and center as the Democratic-controlled House and Republican-controlled Senate embark on negotiations for the next COVID-19 relief package.

Republicans argue the $600 in additional weekly unemployment benefits has created warped incentives by paying many people more than they previously earned at work. Democrats counter that the benefits, set to expire on July 31, are crucial at a time of historic unemployment.

“Already we’re worried that the economy is starting to weaken, and that’s before thinking about the government pulling back stimulus,” said Beth Ann Bovino, U.S. chief economist at S&P Global. “If the government starts to pull back some of the measures that were in place, those positive numbers that we saw, say goodbye to them.”

Republicans say the additional $600 from the March 27 CARES Act means many workers would be taking a pay cut if they went back on the job. They’re now looking to make changes.

“We’ve said the No. 1 issue is we have to finish the technical fix on enhanced unemployment,” Treasury Secretary Steve Mnuchin, who is representing the administration alongside White House chief of staff Mark Meadows in the negotiations, said Monday.

“We’re going to make sure that we don’t pay people more money to stay home than go to work,” he said.

Democrats note that it would likely take months for overstretched state unemployment offices using decades-old software to put in place more targeted programs.

“If we don’t put money in the pockets of the American people with their direct payments and unemployment insurance, it will be much worse,” Speaker Nancy Pelosi (D-Calif.) said last week.

“People really do need this money,” Pelosi said, adding that families need cash for food and clothing. “These are necessities. And when people use that money for necessities, they inject demand into the economy and create jobs.”

The unemployment situation in the country remains dire. For 17 weeks in a row, more than 1.3 million new people have applied for jobless benefits, about twice the pre-pandemic high.

The 11.1 percent unemployment rate exceeds the 10 percent peak of the Great Recession, and in April it hit 14.7 percent, the highest level since the Great Depression.

Between regular unemployment and a special category of pandemic unemployment Congress created in the CARES Act, more than 30 million people are relying on government benefits because they are out of work.

Joseph Vavra, a professor of economics at the University of Chicago, says the $600 benefit has been an important factor in the economic recovery, helping millions of people pay their rent, buy food and spend money at businesses desperate for consumers.

“There’s lots of evidence that unemployed workers spend those benefits when they get them, and that flows out to the general economy,” he said.

“If you’re looking for how to stimulate the economy and you’ve got a fixed amount to spend, I think the evidence is pretty overwhelming that you’ll get bigger spending effects by sending it to unemployed households than you would by sending it out in an untargeted way,” Vavra added.

The disincentive to work, he said, should be a lower consideration as long as unemployment remains at these levels.

Former Labor Department chief economist Heidi Shierholz, who now works at the left-leaning Economic Policy Institute, said unemployed workers are struggling to find a scarcity of jobs in the coronavirus recession.

“Cutting off the $600 cannot incentivize people to get jobs that aren’t there,” she said, noting that there are 14 million more unemployed workers than job openings.

“The millions who will remain jobless after the extra $600 is cut off will have no choice but to drastically cut their spending, causing a sharp decline in their living standards, an increase in poverty and completely unnecessary suffering,” she said.

But Republicans point to analysis from the nonpartisan Congressional Budget Office that suggests otherwise.

The $600 benefit, it found, would mean that 5 of 6 recipients earn more on unemployment than they would expect from work. As a result, employment would be lower if the benefits were extended through the end of January and remain lower in the five months after they expire. Growth, however, would be higher while the benefits are in place, but lower later, as people who remained outside the workforce struggled to find jobs.

Two former Federal Reserve chairs, Janet Yellen and Ben Bernanke, have urged Congress to extend benefits in some capacity.

“You can lower the $600 so that the replacement ratio is not above 100 percent,” said Bernanke, who oversaw the Fed’s response to the Great Recession, in congressional testimony Friday.

There was room, he added, for an “appropriate incentive to go back to work without taking away support for the unemployed,” such as a tax credit for rehired workers.

With benefits already set to start expiring at the end of this week, Republicans on Capitol Hill have floated an idea of reducing the benefit to $400, a figure the U.S. Chamber of Commerce suggested Congress not exceed in its COVID-19 package.

But Bovino said that even dropping the benefit to $400 a week would undermine the recovery. S&P Global estimates the economy would bounce back from its sharp second quarter drop with an annualized 22.2 percent spike to gross domestic product if the current policies are kept in place.

But reducing the benefit by even $200 would reduce that number by a whopping 4 percentage points, to just 18 percent.

Those estimates could be optimistic, Bovino noted, given the resurgence of the virus.

California, Texas and Florida — three states with major outbreaks that have had to reimpose tougher social distancing measures — account for 28 percent of the U.S. economy.

Tighter measures will only mean lower growth and higher unemployment, making unemployment insurance all the more crucial.

“Now’s not the time to quibble over pennies,” Bovino said. “If the negotiations stop on something like this, then we all go down.”