Does Killing Unemployment Benefits Kill The Economy?

The House of Representatives failed to pass a bill to extend unemployment benefits until November. The number of people who would be covered is more than a 1.5 million and increases by at least 100,00o a month. About 5.2 million people get federal unemployment benefits now.

The problem is particularly severe, beyond the human suffering, because 4.34% of the civilian workforce has been out of work for 26 week. That is almost 6.72 million citizens. Many state benefits run out after 26 weeks, so the federal program is all this is left.

Passage of the pending bill required a two-thirds majority and the final tally was 261 for and 155 against. Not enough. The cost of the legislation is estimated at $33 billion. That money is available inexpensively now, in theory, as investors rush to buy US paper as a safe haven and the Treasury’s borrowing costs fall.

A year and a half ago when the $787 billion stimulus bill was passed, a $33 billion addition would have seemed nearly unimportant. The rising deficit and calls for austerity in nations around the globe have put the Administration and Congress back on their heels. Voters are becoming more anti-spending by the day, and members of Congress are worried about the mid-term election.

All of that is old news. What is not is the growing question about what happens when several million Americans are without any means of financial support at all?Tax increases are often viewed as regressive. The basic argument is that higher taxes gives people less incentive to make money and increase their incomes. Total receipts to the IRS fall. The government has undermined the incentives that cause improvement in GDP. This argument is being made across Europe as countries raise taxes and cut government spending. There is no right side to the regressive taxation issue.

Cuts in government spending have the potential of being regressive as well. A decision to stop paying unemployment benefits could save $33 billion and help shrink the deficit very modestly over the next several years. Any slowing of the growth of the deficit may also slow increases in the national debt. On paper, these  cost cuts made by the federal government look attractive.

When more than a million people go from having a very modest income to none at all and another three or four million people are facing a similar fate, the consequences to the economy can be serious. The unemployed do not spend much to keep up GDP advancement, but the figure is meaningful when spread across millions of citizens.

The ripple effect from the decision not to pass the unemployment bill is also powerful. For the one in ten Americans who are unemployed, there are probably another one or two worried about keeping their jobs. As the economy appears to slow, that anxiety increases. People who may lose their jobs and any public safety net that helps support those out of work will cut spending to create a financial cushion. That process is an enemy of GDP growth.

There in no compelling set of numbers that show the failure to extend unemployment benefits will cost the federal government $33 billion in receipts.  There are none that prove that some businesses need the patronage of people who rely on their unemployment checks to maintain profits and number of employees that they keep.

Congress is setting aside an issue that is expedient to set aside now. It will not sit on shelf for very long, however.

Douglas A. McIntyre