CNBC Guest Blog

Extending Unemployment Benefits Is Good for the Economy

Despite the rosy forecasts about the impending end of the Great Recession, the short-term employment outlook for America’s workers appears to be much bleaker because of the breadth and depth of this 18-month downturn. Businesses may be cautiously optimistic about a recovery but they are not yet secure enough to begin hiring workers.  Once jobless benefits run out in the near future for millions of Americans, they will drastically curtail consumption on even the most basic items, further hindering recovery.  That is the main reason why Congress must act quickly to extend unemployment benefits. 

Contrary to what some right wing zealots have spun on the Sunday talk shows, extending unemployment benefits does not create an “incentive problem” for the unemployed to get a job. The sad reality is that there are six applicants for every one job that becomes available, leaving the unemployed with literally no recourse to any type of income without the benefit of an extension. The national unemployment rate, already the highest it has been since the Reagan Administration, looks to be headed north of 10% in the coming months.  Millions of Americans are not sitting home, watching soap operas and eating bon bons because the federal has so generously gifted them with $300 checks once a week on which they rely for sustenance.  They are looking for work in an environment where job openings are scarce. 

Further complicating the economic outlook is the growing number of former workers who will soon lose their employment benefits.  According to recent projections, benefits will run out for up to 1.5 million unemployed Americans by the end of this year. This is a sobering statistic when one considers the impact unemployment has on consumption and the impact consumption has on a real, prolonged recovery.

Despite the July market surge, consumer confidence fell during the same time period. Quite obviously, consumers will not spend money that they do not have, especially when the prospect for many to earn more remains bleak in the short term.  In a stark reminder that rising unemployment has created consumer cutbacks across the board, PepsiCo attributed its falling second-quarter profits to consumer frugality. Providing 1.5 million people with the means to pay for basic staples is not just a boon to them but to an entire economy dependent on consumer spending.

To give credit where it is due, even the Bush Administrationsaw the wisdom in extending unemployment benefits last November, when the economy had not yet bottomed out and the unemployment rate stood at 6.5%.  Since then, the employment picture has gotten markedly worse and is likely to remain so for the next several months.  It makes little sense to deny workers benefits now, when fewer jobs are available, but providing them with benefits nine months ago, when more jobs existed.

The bottom line is that this recession was long in the making and has been long in unwinding.  Most indicators point to the fact that the economy has pulled back from the precipice and that job creation – modest or not – will begin in some months.  We simply cannot afford the body blow to consumer spending that the eradication of jobless benefits for 1.5 million people would entail.  If we are serious about creating growth that will lead to real job creation, we must extend unemployment benefits. 

The Costs of Extending Unemployment Benefits

Congress will extend unemployment insurance benefits to assist those currently falling off the benefit rolls – that’s more or less a no-brainer.  With the unemployment rate currently at 9.5% and heading higher, both Democrats and Republicans will find it in their interest to extend benefits. 

The question is whether proponents of extending benefits will acknowledge the costs.

The need for an emergency extension of benefits is a stinging indictment of the Obama Administration's wildly inaccurate predictions for a hiring recovery earlier this year.  In selling the stumulus, the White House predicted unemployment peaking at 8.5% this summer and then declining.  To predict that the U.S. economy would go from shedding nearly 700,000 net jobs a month to increasing payrolls by 140,000 net jobs a month (the amount needed to reduce the unemployment rate by one tenth of 1%) was fantastical at best, and dishonest at worst.

In fact extending benefits will have the adverse effect of keeping the unemployment rate elevated for longer than would otherwise be the case.  This is straightforward – the availability of benefits gives workers more time to find a suitable job, rather than settling for the best job available.  The longer benefits are available, the longer some workers will take to find that suitable job.

Proponents of extending unemployment insurance benefits tend to overstate the benefits and understate costs.

The obvious benefit is to provide a minimum social safety net in times of severe economic distress.  Because we all sympathize with the fate of the unemployed in severe economic times, most agree on this.

Advocates for an extension also cite the economic stimulus impact.  Here the evidence is far less than advertised.  The best empirical studies of households collecting unemployment insurance benefits show that the economic impact far less a one-for-one bang for the buck.  Facing an uncertain future, people receiving benefits tend to spend only what they must and save or pay down debt with what’s left over.  And because the money comes from somewhere, either through taxes taken from other citizens or borrowed from the future -- and the resulting interest costs today – the stimulus “multiplier” is limited.

Unfortunately, the most significant cost to extending unemployment benefits is to the beneficiaries themselves, and to the long-term productivity in the economy.

No one blames an unemployed worker for accepting unemployment benefits: they sustain a family through incredibly difficult times, and – if a worker is motivated to take advantage of the lifeline -- provide chance to relocate or retrain for other employment opportunities.

But disturbingly few workers emerge from unemployment more productive than in their previous careers.  Skills and work discipline atrophy the longer a workers stays unemployed, becoming less attractive to future employers.  Employers prefer to hire someone with a job, presuming that skills and work discipline are retained by people actually working.  Someone with a job during times of economic distress is particularly valued for having escaped layoffs.

The long-term prospects for the economy are also profound – creating an entire class of citizens who will emerge from unemployment less productive and less employable than they entered creates a permanent talent gap that subtracts from future economic growth.  There are ways to minimize this loss by improving worker training programs and assisting relocation to regions with greater jobs needs, but even the best programs will not fully eliminate the hit to long-term growth.

With the unemployment rate elevated, benefits will be extended, but policy-makers should be clear about the costs.