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Study reveals impact of cutting bonus jobless benefits

Julia Lane, NYU Professor and Coleridge Initiative Co-Founder, joins Yahoo Finance's Zack Guzman to discuss a new report she co-authored that reveals slashing bonus unemployment benefits would lead to a 44% decline in local spending.

Video Transcript

ZACK GUZMAN: Welcome back to live market coverage here on "The Ticker." As we see talks between Republicans and Democrats continue to make no progress on that next round of stimulus tied to the pandemic, it's worth taking another look at the impact of losing that additional $600 in unemployment benefits from the federal level. Of course, that expired at the end of July. And a new paper out of the National Bureau of Economic Research is digging into the way that losing that benefit might impact Americans and local spending here. And for more on that, we're joined by one of the authors of that report, Julia Lane, Coleridge Initiative co-founder and NYU professor joins us now.

And Professor Lane, I mean, you guys put a number on it. And it's rather shocking. Obviously, we know that spending as these talks have dragged on, has basically flat-lined when we look at a lot of the data points coming from credit card data firms out there. But how big of an impact is it now that this aid has completely shut off post July 31st?

JULIA LANE: Yes, so what we did was we took data from unemployment insurance claims. And we looked at it for the state of Illinois. And the bottom line number is that, um, the impact of not renewing the $600 benefit is to reduce spending on average by about 44%. And that varies a lot by county.

So if you were to take a look at, for example, Champaign county which has only 5 and 1/2% unemployment, it reduces spending by about 15%. But Macon county, which has 9.9%, it reduces spending by about 68%. So there's a lot of variation, depending on the earnings replacement rate, and the unemployment rate. So--

ZACK GUZMAN: Yeah, and I mean what we're specifically talking about here, the federal pandemic unemployment compensation, FDUC, that-- that additional level of aid here. And we've heard plans from the President and trying to-- trying to address differently that $600 with $400, some of it coming from the state here, as we move forward with those executive orders. Obviously, it's unclear if that's going to be the way forward, or Republicans and Democrats might agree to extending FDUC. But when we talk about that, as you're noting the-- the variation here from one county to the other, what else is there to look into? Because your paper highlighted where that aid is going, why it's so important that it's hitting the Americans that need it most, rather than some other blunt policy tools, maybe a payroll tax reduction that the President has also floated, something like that, in getting aid to the areas that need it most.

JULIA LANE: That's-- that's exactly the point of the paper. And, um, the point is, is that I think the, um, real value of actually using the data that's flooding into the state agencies on a daily basis about unemployment insurance claims, you can figure out how much is-- what's happening to their benefits, what was-- what were their previous earnings. So you can calculate the replacement rate, and how much is going to the unemployed individual relative to what they were making before. So you could calculate with a great deal of accuracy every week what the impact is on every county, and it varies tremendously in terms of that impact.

So we did it for the state of Illinois. But obviously, those data are available for every state in the country, and the methodology is completely replicable. So you have real-- you wouldn't have to speculate, like one of your previous guests, about what might be happening. You can actually combine it with actual spending data that Raj Chetty has built on TrackingTheRecovery.org. And-- and actually get pretty good estimates of what's going on in every county.

ZACK GUZMAN: Yeah, so that's what the data is saying. So let's speculate about what we can speculate about here, which would be what comes next in that, if we do drag on here with no aid coming through, obviously a 44% decline on average here would be rather impactful considering this economy in this recovery is very shaky right now.

JULIA LANE: Yes, that's correct. That would be very big--

ZACK GUZMAN: We've heard from Mark Zandi of Moody's Analytics talking about, you know, if there is no aid here until the end of September, if we have to wait for that, then a lot could go wrong here. So what's your take on what happens to this recovery, if we don't get aid, and we have to wait until the end of September?

JULIA LANE: Well, consumer spending is a large portion of economic activity and that's the main, uh, stimulus that's happening. Because there's not going to be increased government spending. Now there might be some investment spending. But really the big dollar activity is consumer spending. So at 44%, it's a very big hit to worry about, even though it's different across counties and industries, of course.

ZACK GUZMAN: And obviously a lot of this is being parsed out. You talk about the data, the one that a lot of investors watch the most have been those jobs reports, the unemployment figures that we've been getting moving in the right direction. But a lot of people worry that even just holding up aid here for a month and having Americans who were on the fringe maybe seeing that shift, in an improving job picture here could completely flip and accelerate in the worst direction. What's your take on how true that is based on the recovery and replacement rates that we've seen so far with this last round of stimulus, and now with it no longer around?

JULIA LANE: So that-- that's a great point. So first of all, remember that the national unemployment rate is only for a survey of 60,000 households. And so it asked people, are you actively looking for work. So of course, the response on that when there aren't a lot of jobs is people say, no, I'm not actively looking for work in the survey week. So the-- the numbers that go across the screen the first Friday of every month, are, uh, quite misleading in terms of the pain that is being felt by individuals who are not actively looking for work, and-- and who are feeling a very real impact on their-- on their paychecks.

So what we're able to do with these data is not use survey. We have actual information on all the individuals who have filed for unemployment insurance benefits and their previous earnings. So you-- it's not, you know, peanut butter spread across a few households responding somewhat erratically to surveys, because they change the way in which they ask the questions. It's not knocking on people's door anymore. It's answering the phone.

ZACK GUZMAN: Sure.

JULIA LANE: And how often do you answer your phone when an unknown number calls? So there's many, many more biases in the, um, survey data that come across from the Bureau of Labor statistics every Friday-- I'm sorry, the first Friday of every month. So I would very much take those with a pinch of salt. What we're able to do is directly calculate the number of people who are filing for unemployment benefits and who are certified. And you can watch them over time. So the other shoe that's going to drop is-- is the exhaustion of those benefits.