In a normal country, we wouldn’t need a second round of expanded unemployment insurance benefits. The back-of-the-envelope math lawmakers did in late March would have been sufficient to see us through a temporary lockdown — the time it took to scale up testing, contact tracing, and the emergency production of masks, gowns, and ventilators. By now, we’d be savoring the few summer evenings left before students return to campuses and the rest of us resume our anxious tiptoe toward November.
Instead, four month of relentless carnage later, we have four million coronavirus cases and counting, states around the country are going back into lockdown and the president has just released a new campaign ad decrying “the left’s assault on Goya.” (The bean company.)
The pandemic is nowhere close to under control in America, but despite levels of unemployment not observed since the Great Depression, the economy hasn’t totally collapsed yet. And there is a good reason for that but, thanks to Republicans in Congress, it’s about to disappear.
Technically, the additional $600 unemployment benefit Congress hurriedly approved as part of the CARES Act back in March doesn’t expire until next Friday, July 31, but because of the way most states distribute unemployment benefits — for full weeks starting on Saturday and Sundays — jobless workers in most states will receive their final installment this weekend.
Experts believe that letting the expiration of the benefit, which has kept money pumping through the economy even as jobs are gone or on hold, will be disastrous — both for people who depend on it and for the economy as a whole. “I think, frankly, it would be a catastrophe,” former Fed chair Janet Yellen told members of Congress last week. “We need the spending that those unemployed workers can do.”
Data indicates this recession has hit low-wage workers disproportionately hard, but the point Yellen is making is not just about them, but about everyone else too. The benefits have allowed those jobless workers to continue to spend money at businesses, keeping those businesses open, allowing them to retain rather than lay off workers, and keeping the entire ship afloat.
But Republicans, lobbied by organizations like the right wing Heritage Foundation, are nevertheless seeking to end the benefit or at least dramatically reduce it as they work to craft a new coronavirus response package. The problem with the benefit, as Larry Kudlow, director of the National Economic Council, explained on CNN back in June is this: “We’re paying people not to work, it’s better than their salaries would get.”
And he’s right: at the start of the outbreak, Congress came up with the idea to pay unemployed workers a $600 flat fee per week on top of the standard unemployment. That figure is roughly equivalent to the average lost wage for the average American worker, but because it is a flat fee, most workers — about two-thirds, according to Joseph Vavra, professor of Economics at the University of Chicago — are eligible to bring home more money than they would at their old jobs. For the typical worker, the combined benefits end up being worth roughly 30 percent more than they would normally make, Vavra says.
Congress designed the benefit as a flat fee for a practical reason: it got money into bank accounts faster than they would if each individual worker’s lost wages were calculated one by one. (Some state unemployment systems are, reportedly, too outdated to perform that function anyway.)
It turns out that was the right move. Using data from individual bank accounts, Vavra and his co-authors found evidence that suggests that unemployed households receiving the benefit are spending 73 cents of every dollar, or about $440 of the $600 benefit the week they get it. That money that is going to businesses, helping keep them afloat, and bolstering the economy at large.
If the benefit goes away, as it is poised to, Vavra expects that the tens of millions of people who are receiving benefits will, in turn, cut their spending by as much $440 a week. And that could have a profound effect on the economy — causing personal spending to drop by as much as $13 billion dollars a week, or 5 percent, a drop greater than the total drop in personal spending economists observed during the 2008 recession. (Vavra caveats that there is some uncertainty about both how many households are receiving benefits, and how much they would cut spending by: “It could easily be off by a factor of two or three. But even if it is, that’s still a big number,” he says.)
As to the question of whether the $600 benefit is deterring jobless workers from seeking employment, Vavra says, “There’s no good empirical evidence on what the benefits are potentially doing to potential labor supply incentives… The times when we should be most concerned about disincentive effects are going to be times when the labor market is relatively strong — when there are, you know, jobs out there. We are by no means in a healthy, well-functioning job market right now.”
What that means is that millions of Americans are about to lose their ability to participate in the economy. In Mississippi, the state with the stingiest unemployment benefit, the typical worker’s benefits are expected to drop from about $812 per week to $212.
We’ve known this deadline was looming since the first bill was passed in March. But, so far, Congress has failed to act. Or, rather, the Republican-controlled Senate has — in May, the Democratically-controlled House of Representatives passed the Heroes Act, which would extend the $600 benefit through the end of the year. Senate Majority Leader Mitch McConnell has yet to take a vote on any similar bill.