Washington seems determined to make this holiday season a celebration of austerity. On Monday, President Obama proposed a two-year pay freeze for nonuniformed federal employees. On Friday, the blue-ribbon deficit commission will vote on its final proposal, slashing trillions from the federal budget. And as of today, the federal extension of unemployment insurance benefits has expired. About 800,000 jobless workers will get dropped from the rolls by Dec. 4, and about 2 million by Christmas.
So they must be, Republicans say. Why? They have their reasons. But they're more rooted in politics than economics, because the economics of the unemployment benefits are pretty straightforward: They cost something, but they help the recovery along.
Republicans' first line of argument against extending the benefits is that they're not paid for. Sen. Mark Kirk of Illinois, a Republican newly sworn into Obama's former seat, explained the party line on Fox News this week. Asked an interviewer: "The first thing you're talking about is deficit reduction and spending. Does that mean that right now … you'd be against extending the unemployment insurance?"
"That's right," Kirk answered. "You could extend it if you found a way to pay for it. And I voted for that in the past. But these proposals to extend unemployment insurance by just adding it to the deficit are misguided."
Rep. John Shadegg of Arizona went further, speaking with Mike Barnicle on MSNBC. Shadegg at first repeated Kirk's line: He's fine with unemployment benefits as long as they do not add to the deficit. Then Barnicle questioned the validity of the position, given that Shadegg supports giving a $700 billion tax break to the wealthiest Americans without paying for it. Barnicle also argued that unemployment insurance provides an "immediate benefit" to the economy, unlike tax cuts for the rich.
"No!" Shadegg said. "Unemployed people hire people? Really? I didn't know that." He continued: "The truth is the unemployed will spend as little of that money as they possibly can."
Actually, most economists—make that all economists—disagree with Shadegg. Give an unemployed person a dollar, and she tends to spend it, because she needs to. (By definition, she has no other source of income.) Give a rich person a dollar via a tax break, she tends to save it. (By definition, she has a lot of other assets.) Mark Zandi, chief economist at Moody's, has found that $1 in unemployment benefits generates $1.61 in economic activity. (That's the second most-stimulative form of government spending, behind food stamps.) A dollar in tax cuts—not just to the rich, but to everyone—generates about 32 cents.
Thus, in economic terms, the loss of benefits is not good. There is a cost to having generous or long unemployment benefits: They do not come cheap to the government and do tend to lengthen the time it takes for a worker to find a new job. But given the way the jobs crisis is weighing on the recovery, most economists, save for the most conservative, say the benefits outweigh the costs.
On a human scale, too, the lapse is a catastrophe. Recipients expecting as many as 99 weeks of insurance payments will receive as few as 26—often too short a time to find work, given that 15 million Americans remain jobless, employers have only just started picking up hiring again, and there are more than four workers competing for every job. The benefits themselves are not particularly generous anyway, providing an average of about $300 a week, from about $120 in Puerto Rico to $420 in Hawaii. It's enough to keep a family's head above water (but not above the poverty line, in most cases).
Fed Chairman Ben Bernanke and other members of the Federal Reserve have therefore expressed concern about the jobs situation and pushed for short-term stimulus to support the recovery until it is self-sustaining. "There are obviously very severe economic and social consequences from this level of unemployment," Bernanke told an audience at Ohio State this morning. The White House economic team strongly supports the extension as well.
But their pleas have fallen on deaf ears in the Capitol, where austerity—or at least austerity involving anything other than tax cuts for the rich—has made itself at home.
On Tuesday and Wednesday, Senate Republicans blocked Democratic unanimous consent requests to reinstate federal benefits for a year. Now, Senate Democrats need to break a Republican filibuster, winning two Republican votes for the extension proposal or a package containing it.
Democrats hope that they can squeeze an unemployment extension through by tying the benefits to the Bush tax cuts: Republicans either vote for the unemployment insurance extension along with the tax-cut extension, or every American gets a tax hike. But the possibility that the extra weeks of benefits will not come to a vote, and no American will receive more than 26 weeks from now on, remains present.
What would happen then, in the year after Austerity Christmas? Last summer, unemployment insurance lapsed for 2.5 million recipients during a similar congressional fight over deficit spending. Larry Summers, head of the National Economic Council, says that lapse shaved 100,000 jobs off the economy. In 2011, according to the congressional Joint Economic Committee, the loss could be 10 times greater.
"Prematurely ending the federal unemployment insurance benefits program would drain the economy of $80 billion in purchasing power and result in the loss of over one million jobs over the next year," a Joint Economic Committee report on the matter notes. "Economic growth will be reduced by as much as 0.4 percentage points between December 2010 and February 2011. In short, a failure to extend the unemployment insurance program could hamper the fragile recovery."