Unemployment Benefits Extension: Effective Counterweight to Slowing Economy?

On June 30, President Bush signed a $162 billion war spending bill that included a 13-week extension of unemployment benefits.

The bill, originally introduced in January, was propelled through the political system this summer, largely because of worsening economic expectations and impending elections in the fall.

Attaching this unemployment extension to entirely unrelated war spending sought by the White House was effective in getting the extension passed despite significant Republican opposition.

This post describes the availability of the extended benefits and the economic and political considerations affecting the decision to undertake this significant additional domestic spending.

Terms of Extended Unemployment Benefits

The San Francisco Chronicle summarizes the terms of the extended unemployment benefit coverage.

• Candidates “must be unemployed, looking for and able to work,” and “must have worked full time for at least 20 weeks during a 12-month period before filing [the] initial claim.”
• “In general, [the extension] will be the same dollar amount as [the] regular benefit but will last half as long, up to 13 weeks.”
• “The program expires at the end of March [2009] unless Congress renews it. If [the person] runs out of regular benefits before then and is eligible for extended benefits, [the person] can keep getting them past March 31.”

Unemployment Benefits as Key Fiscal Policy Tool

After a record 0.5% one-month swelling of the unemployment rate in May, in June more than 60,000 jobs were lost, capping an unfortunate run of six consecutive months in the red. Combined with astronomical oil prices, an imploding real estate industry, and the credit crisis, these facts suggest that the U.S. faces serious economic problems.

There is a substantial risk that “as fewer jobs are created, spending power could dry up [and]… more homeowners could fall behind on mortgages,” resulting in “more losses at banks, and more layoffs.”

The Fed could respond by increasing the money supply, thereby lowering interest rates and encouraging new economic investment. But this type of expansionary monetary policy risks spurring inflation. With an eye on recent dramatic increases in the prices of food and fuel, the Fed is averse to implementing further reductions in the interest rates and risking fanning the flames of inflation (indeed, it may feel the need to raise rates to curb inflation).

This turns policymakers to fiscal policy. The Tax Policy Center of the Urban Institute and Bookings Institution explains the short-run stimulus power of extending unemployment coverage:

• Unemployment insurance protects workers against hardship due to job loss, but arguably weakens the incentive to find a new job. For that reason, unemployment benefits are generally limited to twenty-six weeks.
• But policymakers recognize the need to extend benefits during economic slowdowns. Such action seems more important now, because the long-term unemployment rate (the share of the labor force out of work for more than six months) in 2007 was nearly double that in 2000 — prior to the 2001 recession.
• Since the extended unemployment benefits target those whose income has fallen for a long period of time, nearly all the funds would be spent rather than saved. Federal spending for an unemployment benefit extension is thus a worthy, “bang for the buck” policy in terms of macroeconomic stimulus. This stands in contrast to the general tax refund stimulus, much of which may go to people in less immediate need who will use it to reduce debt and/or increase savings.

Nanci Pelosi, Democratic House Speaker, noted that “every $1 spent on unemployment benefits…generates $1.64 in new economic demand.”

Peter Orszag, director of the Congressional Budget Office, corroborates her claim: “Research has shown that the unemployment insurance system is among the most effective dollar-for-dollar economic stabilizers that we have in terms of counterbalancing periods of economic weakness.”

Political Posturing Prior to Passage

Though President Bush has now signed the bill extending unemployment benefits, The Washington Post earlier reported that “the White House [had] threatened to veto the bill, saying it would waste money by extending benefits in states where unemployment remains low.”

Since Democrats chose to bundle the extension of unemployment benefits alongside a broad war funding act, which the President backed, the emergency spending bill found overwhelming support in both the House and Senate.

Republicans lamented that “It’s an unfortunate spectacle to see the [Democrats] manipulate the extension of unemployment benefits into a partisan weapon.” Administration objections included that:

• “[E]mergency steps such as broadening benefits for the whole country have been used only when the unemployment rate jumps considerably higher than 5.5 percent.
• “Extending benefits to all states regardless of unemployment rates means that states such South Dakota and Wyoming, which have 2.6 percent unemployment rates, would also get extensions.

These objections are well-answered by the Center on Budget and Policy Priorities in a brief position statement entitled: The Unemployment Rate Is Already High Enough To Warrant Extended Benefits; Past Is Poor Guide to When the Time Is Right:

First, past experience is a poor guide to the best time to enact extended unemployment benefits. In past recessions, Congress and the administration typically were late to recognize the need for such an extension or wrangled over the need for such action as labor-market conditions worsened. Prompter action would have provided worthwhile economic stimulus when it was most needed and relief to workers looking for a job in a worsening labor market.

Second, it is misleading to imply that extending unemployment benefits was never considered in the past when the unemployment rate was “only” 5.5 percent. President Bush himself proposed a narrow expansion of unemployment benefits in the fall of 2001 at a time when the national rate was 4.9 percent.

Third, the unemployment rate has not been the best indicator of overall labor-market weakness over the past several months and is certainly not the best measure of the need for extended benefits. Federal extended benefits are designed to assist the long-term unemployed — those who have been looking for work for six months or longer and have therefore run through their regular unemployment benefits. Long-term unemployment is now higher than it was in March 2002, when the President signed the law providing federal extended benefits in the prior recession.

Will the Extension of Unemployment Benefits Help Mend the Struggling American Economy?

Whether this emergency federal spending will increase the spending power of Americans enough to restore future labor markets and encourage new investment remains yet unseen.

While most economists believe in the short-run value of introducing new federal spending, such as through an extension in unemployment benefits, they also point towards the long-run consequences of such fiscal policy, because it can only temporarily support the heavy burden of a slowing economy.

[George's Two Cents]: It is interesting — and unfortunately all too typical — to hear such a major public policy issue debated almost entirely in terms of whether certain action will succeed in stimulating a flagging economy.

Yes, as stated above, extended unemployment benefits are generally regarded as an excellent means of fiscal stimulus, particularly important when monetary policy is hamstrung by inflationary worries.

But shouldn’t we be looking at it mainly in terms of relieving the suffering of the long-term unemployed, who struggle to keep their homes, pay for health care, and feed their families?

Viewed in those terms, it makes no difference whether you are in a low-unemployment state — if you can’t find a job you’re just as bad off as someone in a high-unemployment state.

Just chalk it up as one more bad Bush Administration economic policy decision — handing out across-the-board stimulus checks that were minimally effective and then having to be dragged kicking and screaming into doing the right thing for millions of unemployed in real need, whose spending would have the greatest and most immediate stimulative impact.

photo credit: Daquella manera via flickr