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Originally published November 30, 2010 at 9:40 PM | Page modified December 1, 2010 at 9:57 AM

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Cutting back unemployment benefits would hurt the economy, too

If Congress lets unemployment benefits expire this week for the long-term unemployed, they won't be the only ones to feel the pain. The overall economy would...

The Associated Press

Return on benefits

The Congressional Budget Office says every $1 spent on unemployment benefits generates up to $1.90 in economic growth. The program is the most effective government policy for generating growth among 11 options the CBO has analyzed. Mark Zandi, chief economist at Moody's Analytics, puts the bang-for-a-buck figure at $1.61, and a recent Labor Department study estimates it at $2.

The Associated Press

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WASHINGTON —

If Congress lets unemployment benefits expire this week for the long-term unemployed, they won't be the only ones to feel the pain. The overall economy would suffer, too.

Unemployment benefits help drive the economy because the jobless tend to spend every dollar they get, pumping cash into businesses. A cutoff of aid for millions of people unemployed for more than six months could squeeze a fragile economy, analysts say. Among the consequences they envision over the next year:

• Annual economic growth could fall by one half to nearly 1 percentage point.

• Up to 1 million more people could lose their jobs.

• Hundreds of thousands would fall into poverty.

"Look for homelessness to rise and food lines to get longer as we approach Christmas if the situation can't be resolved," says Diane Swonk, chief economist at Mesirow Financial.

The issue is expected to be taken up in the lame-duck session of Congress that resumed Monday. Among other unfinished business, lawmakers are likely to vote on whether to extend 2001 and 2003 tax cuts that are set to expire at year's end.

Sheryl Hutchison, a spokeswoman for the Washington state Employment Security Department, said the end of federal benefits would not pose an immediate problem for the state. "In terms of how many people in our state are going to run out of benefits right away because of the end of EUC (emergency unemployment compensation), virtually no one," she said.

For the most part, they'll move into a different program that provides benefits up to 20 weeks, she said.

The average weekly payment for the roughly 8.5 million people receiving unemployment benefits is $302.90. But it ranges widely: from an average of $118.82 in Puerto Rico to an average of $419.53 in Hawaii. Each state sets the amount through a formula meant to replace a portion of an unemployed person's old income.

That money ripples through the economy, into supermarkets, gasoline stations, utilities, convenience stores. That allows those businesses to hire more people, who, in turn, spend more money.

The Congressional Budget Office says every $1 spent on unemployment benefits generates up to $1.90 in economic growth. The program is the most effective government policy for generating growth among 11 options the CBO has analyzed.

Mark Zandi, chief economist at Moody's Analytics, puts the bang-for-a-buck figure at $1.61, and a recent Labor Department study estimates it at $2.

Some economists worry that renewing jobless aid would discourage some unemployed people from seeking work. But a study this year by the Federal Reserve Bank of San Francisco downplayed the impact as "quite small."

For most recipients, the average $300 weekly unemployment check doesn't go very far: It covers just half of basic household expenses, according to the National Employment Law Project.

Set to spend

Analyst Mark Miller of William Blair & Co. figures that, in particular, such discount retailers as Dollar General and Family Dollar will see their revenue pinched by a couple of percentage points next year if extended unemployment benefits expire.

"If you've been unemployed for six months, you've gone through your savings," says Heidi Shierholz, economist at the Economic Policy Institute. "You have no choice but to spend [benefits] immediately."

By contrast, money given to higher-income families — say, through tax cuts — tends to deliver less economic benefit because those taxpayers typically save a big chunk of their windfall.

In July 2008, Congress began extending unemployment benefits, which can now last for up to a record 99 weeks: 26 weeks of regular benefits from the states, plus up to 73 weeks in federal aid in states with high unemployment rates. As of last week, about half the states offered the maximum 99 weeks of benefits. The extended federal benefits will start phasing out on Wednesday if Congress doesn't act.

When lawmakers extended the benefits, they were responding to a jobs crisis: Unemployment was on its way to double digits for the first time since the 1981-82 recession. The long-term unemployed — those out of work for more than six months — hit a record-high 6.8 million in May this year. Those people represented 46 percent of all unemployed Americans. That's the highest such proportion on record dating to 1948.

Unemployment peaked at 10.1 percent in October 2009. It's been stuck at 9.6 percent since August.

At its peak in the first week of this year, slightly more than 12 million people were receiving unemployment benefits — the most on records dating to 1986. The Labor Department estimates that if Congress lets the aid run out, nearly 2 million people will lose their benefits by Christmas.

Impact on poverty

Without an extension of aid, the number of impoverished Americans would rise, economists say. The income from unemployment checks kept 3.3 million people from falling into poverty in 2009, according to government estimates. The Census Bureau defines poverty as annual income of less than about $22,000 for a family of four.

Republican lawmakers oppose an extension of the unemployment aid if it would enlarge the government's $1.3 trillion budget deficit. They insist that the cost — around $5 billion a month — be offset with budget cuts elsewhere. Those cuts would reduce the economic impact of extending the benefits. Some in Congress want to pair an extension of unemployment aid with a deal to also extend the Bush-era tax cuts.


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