This week, Congress will fight it out over whether to reauthorize the supercharged unemployment benefits established in the COVID-19 relief bill. Extending the benefits would be a grave mistake. It would turn legislators’ initial error into a long-term flaw in our economy.
In March, Congress passed the $2 trillion behemoth CARES Act. Among other things, the legislation boosted state-level unemployment benefits by adding $600 per week on top of whatever each state normally pays. The result of this well-intentioned but poorly-thought-out expansion of the welfare state was that for the average worker, staying home on government benefits paid far more than going to work.
A whopping 70% of the unemployed now face a financial disincentive to return to work. In New York, for instance, an individual who normally earns $36,000 annually can collect unemployment benefits roughly equivalent to a $49,000 salary.
Basic math tells you what comes next.
“When we asked our employees to come back, almost all said, ‘No thanks,’” restaurateur Kurt Huffman wrote in the Wall Street Journal. “If they return to work, they’ll have to take a pay cut.”
This skewed incentive structure was, arguably, justifiable for a few weeks or even months as we wanted workers to stay home to “flatten the curve” of the coronavirus pandemic’s spread. However, the CARES Act made these lush benefits available for four months, and House Democrats want to extend them through 2021.
Congressional Republicans face widespread pressure to extend the benefits beyond the July 31 deadline and not be “heartless” or “rip away support” for unemployed people during a crisis. (Workers would, of course, still have the usual state-level unemployment benefits available).
Yet reality does not care about these emotional appeals. The facts to date have overwhelmingly confirmed the elementary intuition that paying people more not to work is no recipe for economic recovery.
Heritage Foundation economists project that the federal expansion of unemployment benefits caused roughly 14 million additional workers to flock to the unemployment rolls and led to a roughly $1 trillion-$1.5 trillion drop in the size of the economy. As far as extending the benefits beyond July 31, the nonpartisan Congressional Budget Office has found that this would lead to juiced-up spending in the short term, but, much more importantly, it would increase unemployment in 2020 and 2021 as well as shrink the economy in 2021 and beyond.
Plus, these massive welfare programs are expensive, and with the federal government already set to run a nearly $4 trillion deficit this year, we simply can’t afford it. The CBO concluded that the government debt incurred by expanding this program would “drive interest rates up — lowering investment and the economy’s maximum sustainable output.”
Proponents of the supercharged unemployment system such as the liberal-leaning Brookings Institution argue that the expanded benefits can’t truly be dragging down the economy because the rules say workers aren’t allowed to quit their job for no reason and take the benefits. Also, if beneficiaries are offered their job back but decline, employers can report them and have them removed from the rolls.
This is true on paper but false in practice.
In reality, the CARES Act made it so anyone who has “to quit his or her job as a direct result of COVID-19” can claim benefits, and there is no meaningful determination of what this must entail or verification system in place. So, essentially anyone can claim this, cite some COVID-19 economic harm, and start cashing government checks that exceed their typical income.
Yes, it is technically true that employers can report employees who won’t come back to work. However, most won’t do so. Imagine the potential PR nightmare for a business owner who gets called out for having employees removed from unemployment relief amid a pandemic. And regardless, the unemployment bureaucracy is far too overloaded and backlogged to do anything about most reports anytime soon.
Moreover, this misdirection fails to address the much bigger issue. Unemployed individuals who lose their job permanently currently have no incentive to take a new job when more jobs become available.
Secondly, proponents argue that the ultralush unemployment benefits are necessary to prop up consumer spending. Yet it’s far more important to correct structural flaws sabotaging our economy than it is to prop up consumer spending temporarily, at taxpayer expense, through welfare largesse.
Just reducing the federal bonus to $200 weekly or capping overall benefits at 80% of previous income would go a long way toward restoring a functional incentive structure. Yet even this might prove a heavy lift politically and will undoubtedly draw criticism.
Still, it’s obvious that you can’t foster economic recovery while paying people more not to work. The only question is whether congressional Republicans will have the courage to correct this systemic flaw amid Democratic attacks and media pressure or whether they will simply cave to the inertia of big government yet again.
Brad Polumbo (@Brad_Polumbo) is a fellow at the Foundation for Economic Education.
