Incomes are about to fall through the floor
There have been plenty of fumbles when it comes to the US government’s response to the Covid-19 pandemic. But the most important thing it did was protect workers by expanding unemployment insurance as part of the CARES Act.
This move, while it has not received the same level of attention as the direct payments made to employers or the trillions of dollars the US Fed has pumped into the financial system, has arguably done the most to alleviate the economic shock for average Americans. By widening the eligibility criteria and boosting payments by a flat $600 per week, these temporary measures have provided at least a modicum of certainty for millions of American workers.
The problem is that these measures were implemented as two separate packages: Pandemic Unemployment Assistance (PUA), which made unemployment insurance available to workers who would not previously have been eligible, and Pandemic Unemployment Compensation (PUC), which boosted the weekly benefit by $600. The PUA is set to expire after 31 December 2020, but the PUC is scheduled to end after 31 July 2020, meaning workers will no longer receive an additional $600 in weekly income should they be made jobless as a result of the pandemic. These additional payments are about to evaporate in a matter of days.
Both PUA and PUC were implemented as part of the CARES Act passed by Congress in March at the height of the pandemic. They were designed to cushion the blow of lockdowns on employees, especially those working in the most exposed sectors like travel, retail, and food services. So far they have been essential and effective. Together, these measures mean that unemployment insurance is available to millions more workers than would typically be permitted to access it, and the amount received is also higher. These drastic measures were warranted given the sheer scale of economic disruption, which has hit workers and businesses incredibly hard.
The need for drastic intervention is made clear when you consider the sheer number of unemployment insurance recipients, which has skyrocketed during the pandemic. As the chart below shows, the scale of disruption to the labor market dwarfs that of 2009 during the financial crisis.
By allowing PUC to expire, Congress will not only be inviting unnecessary hardship on those who find themselves out of work through no fault of their own, it could also spark further economic damage by limiting incomes and spending power when it is most needed. During a recent House Budget Committee hearing on the economic impacts of Covid-19, former Congressional Budget Office (CBO) Director Doug Elmendorf said, “I think the worst thing you could do is let these benefits expire at the end of the month.”
While the US economy has certainly rebounded since the market bottom in March, there are still some serious risks to contend with. A second wave of Covid-19 infections has arisen in some states, prompting businesses to return to a state of lockdown and turn customers away. While liquidity measures have helped large companies remain operational and keep employees on the books, smaller businesses have suffered and are not in a position to leverage their balance sheet in the same way companies like Amazon or Nike can. Small- to medium-sized businesses represent the engine room of growth for the United States, employing locally, and sourcing inputs from other American-run businesses, and paying taxes in full. Supporting them is just as critical as supporting multi-national companies.
If Congress does finally come to the table, it will be a very close-run thing. As previous negotiations have shown, these decisions are often made at the eleventh hour, when exhausted lawmakers and White House representatives finally relent and reach a compromise. We are used to witnessing this political dance play out over budget issues, but this time around the livelihoods of millions are at stake. The complicating factor is whether the US can bare the fiscal cost of additional payments. At the current rate, jobless benefits are pumping out around $100 billion per month. However, there is also a risk in making benefits too generous, which could result in a perverse incentive to avoid work or, perhaps more importantly, start aiming for redundancy.
Whether these complications are real or not depends a lot on how we interpret the behavioural aspects of economics. All else equal, most would prefer to hold down a job than be out of one, even if the benefits are generous. Given the circumstances, it is clear that dramatic action is needed to ensure that workers and families have sufficient protection to guard against loss of income and becoming overwhelmed by expenses and debt. If companies can be supported by the Federal Reserve’s money printers, then there is no reason why average workers should not have access to some basic level of support.
In the long run, the health of the economy will not be served by harming the ability of households to make ends meet. The immediate goal of Covid economic policy should be giving people an appropriate fallback so they can plan their lives with at least some degree of confidence in the future. When uncertainty becomes too great, anxiety and paralysis set in, which makes it impossible for people to function effectively. Even for those lucky enough to still have a job, watching co-workers being laid off does nothing for morale. If we want our labor force to stay productive during this period, then creating the right safety net is essential.
What Congress and the Trump administration will do from here is still up for grabs. This a race against the clock and there is not much time left. For the sake of the economy and the livelihoods of millions, let us hope an extension gets across the line.