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We’re All in Big Trouble Without Renewed Jobless Benefits

Noah Smith
·5 min read

(Bloomberg Opinion) -- The U.S. has made many big mistakes in handling the coronavirus pandemic. But it got one big thing right. When the economy was collapsing amid fear of the virus, the federal government passed an unprecedented relief package. The centerpiece was what has come to be called pandemic unemployment insurance -- a $600 weekly payment to anyone who was out of work because of the coronavirus, on top of normal unemployment benefits. This became a lifeline for millions of Americans.

Pandemic UI was so generous that poverty in the U.S. has actually gone down during the outbreak, despite a stunning spike in unemployment. This represents a monumental accomplishment, and it shows that a government renowned for partisan gridlock and dysfunction is still capable of flashes of effectiveness.

Unfortunately, that bright spot seems like it might be short-lived. Pandemic UI is set to expire at the end of July, after which Congress will go on recess:

If pandemic UI expires, millions of Americans will find themselves unable to pay rent or even buy groceries. Human suffering and social unrest will increase dramatically, while the drop in demand will further wound the already-struggling economy.

Leaders are discussing an emergency short-term extension of the benefits. But this won’t be enough to avert an interruption in payments because the state agencies that administer the program will need time to update their systems. Even if there’s a patch, a great many Americans will have to re-apply for benefits. That’s going to be a source of extreme hassle, anxiety and fear for millions. State unemployment systems weren’t set up to handle this many claimants, and getting the money often involves standing in long lines and waiting weeks to know if your benefits have been denied. Many people fall through the cracks in the system and never get the benefits they deserve; those who won that grim lottery back in March and April will now be forced to roll the dice again.

And even if pandemic UI is renewed for the time being, cuts to the program may be on the horizon. Many conservatives are troubled because the benefits sometimes pay unemployed people more than their old jobs did. That seems like an obvious incentive for workers not to go back to work. The cost of the program, which has helped raise the U.S. federal debt to all-time highs, is also causing sticker shock. To address both of these issues, Republicans have proposed lowering benefits from $600 a week to $400.

But conservatives’ concerns are probably unfounded. For one thing, the national debt is hardly an issue at this point. With yields on 30-year Treasuries at less than 1.5%, the federal government can easily shoulder the additional debt. And because coronavirus is a one-time occurrence, pandemic UI doesn’t create long-term structural deficits. This is the worst possible time for austerity.

As for whether pandemic UI is discouraging people from going back to work, although this is reasonable in theory, evidence shows that it’s also not much of a concern at this point. If pandemic UI were causing a shortage of workers, we’d expect to see wages rising, as companies tried to lure workers back. But median wages are little changed. And data from human-resources management company Automatic Data Processing Inc. shows that workers were much more likely to face wage cuts or freezes this May than they were in May 2019.

Job vacancies are also down relative to the number of unemployed workers, suggesting that companies aren’t being forced to work very hard to find employees. Most top economists now agree that a lack of labor demand, rather than unwillingness to work, is the reason unemployment is high:

Why would paying people not to work have so little effect on unemployment? One possible reason is that the headache and risk of applying for unemployment benefits is less attractive than the stability of a job. The possibility that Congress will cut off benefits, or make people re-apply, is another reason to want a steady job instead of a government check that might end on short notice. Finally, pandemic UI is probably acting as a fiscal stimulus, sustaining aggregate demand and thus boosting general demand for labor.

So although paying people not to work is a bad idea in normal times, in the current crisis situation it looks like it’s safe to do. If Congress is so concerned about the disincentive effects of pandemic UI, it could let people keep some of the benefits if they later return to work, thus removing the incentive to stay at home. But given the evidence that pandemic UI isn’t raising unemployment, the easiest course of action would just be to renew the full $600 benefit for a few more months. The program has its flaws, but it has been the most effective thing the U.S. government has done in response to this crisis.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Noah Smith is a Bloomberg Opinion columnist. He was an assistant professor of finance at Stony Brook University, and he blogs at Noahpinion.

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