Obama’s Sole Victory: Unemployment Benefits

Barack Obama lost most of his arguments with Republicans about extending  the Bush tax cuts. The old tax system will be extended for two years. Payroll taxes will be lowered for 2011, and a number of pro-business investment policies will be continued.

These plans may cost several hundred billion dollars, particularly if they are married to the 13-month extension of unemployment benefits which is a part of the agreement between Obama and the Congress, according to the Congressional Budget Office. The CBO’s estimate is that more than $900 billion will be added to the deficit during the next two years. That figure is based on hundreds of assumptions about the impact of the tax cuts on the tax base and how much unemployment will rise or fall.

Obama did keep many people on unemployment insurance for another year and a month.

Many of those who were about to see their unemployment benefits expire– which includes two million people this month and several hundred thousand more in the first half of 2011–will get a lifeline. These jobless people were faced with the prospect of destitution. Obama not only viewed continuing the program as humane. He also was likely to have realized that adding millions of people to bread lines would severely damage consumer spending. People on unemployment may not spend much, but even modest consumer activity on their part could be the difference between a slight tailwind for the economy instead of a meaningful headwind.

The estimates made by the White House Budget Office, the CBO, members of both parties, and dozens of think tanks are nearly useless. GDP growth is already well below most estimates for the end of this year. Many economists believe a double dip recession is possible. Fed Chairman Ben Bernanke recently said the unemployment could stay at historically high levels for another four years.

The battle over unemployment benefits is not over.  It may last until the middle of the decade if pessimism about the economy turns out to be right. Each time the Democrats push for more extension of these benefits, they will have to give something up for the purposes of compromise. If the Republicans act as history has shown they will, the party will get better tax treatment for the well-to-do and benefits for business.

The business of being humane has become expensive, but the alternative will almost certainly create a level of damage to the economy which will be severe and long-lasting. Two, or three, or four million Americans with no income is among the most likely things that threaten a long-term recovery.

Douglas A. McIntyre