The coronavirus created a bipartisan consensus in favor of a relief package — not just a stimulus but a lifeline for individuals and businesses. After some debate and compromise, this came to include direct cash payments and a temporary $600 per month increase in unemployment benefits.
Under the CARES Act signed into law by President Trump, the expanded unemployment provision terminates at the end of July. Democrats now want to extend it for another six months, into January. Republicans rebuked the proposal. They argued that the expanded benefit had been temporary on purpose, intended to cover the period when we really didn’t want people to work. To expand it until the next calendar year would create a perverse incentive whereby many workers find it financially more advantageous not to go back to work.
Senate Finance Committee Chairman Chuck Grassley asked the nonpartisan Congressional Budget Office to study the ramifications of the proposed extension. CBO’s conclusions confirm that an extended bonus unemployment benefit would indeed make it more profitable not to work for 5 out of 6 recipients. Further, the result would be lower levels of employment and a higher unemployment rate right up until the election. This would obviously place Trump and incumbent senators at an electoral disadvantage.
As CBO puts it explicitly, “roughly five of every six recipients would receive benefits that exceeded the weekly amounts they could expect to earn from work during those six months.” That’s not the way things are supposed to work. Normally, unemployment insurance replaces 30% to 50% of normal earnings. It is only meant to ease the pain of a layoff temporarily, and it is set low enough that recipients are better off finding and taking a job.
Although an extension of the $600 benefit would increase GDP in the second half of the year, it would slow it down throughout 2021 when GDP and employment levels would be lower than if the $600 bonus were allowed to expire in July.
As a matter of pure utility, lawmakers ought to oppose the unemployment insurance expansion proposal. It’s a bad idea to depress employment and economic output through 2021, to say nothing of the young taxpayers who will someday have to pay for additional spending that actually makes the economy worse for them now.
But Republicans fighting to maintain control of the White House and the Senate have an additional political incentive to oppose any such measure. Everyone wants the economy to do well, but Republicans need it to do well as we head into the fall.
