New jobs report and unemployment benefits: Some Republican-run states are cutting jobless benefits at the wrong time.

Commentary about business and finance.
May 6 2011 2:59 PM

Putting the Squeeze on Jobless Benefits

It's the wrong time to cut unemployment benefits, so why are Republican-run states doing it anyway?

Unemployment. Click image to expand.
What should states do about unemployment insurance?

This morning's jobs report confirms for what feels like the thousandth month in a row that the U.S. economy is getting better, but from a very low trough and somewhat slowly. The economy added 244,000 jobs in April, the Bureau of Labor Statistics reported this morning. But the unemployment rate jumped up two-tenths of a percentage point, to 9.0 percent. The month saw the strongest job growth since 2006. But there were fewer people employed overall.

The report, then, will do little to change Americans' firm, and correct, conviction that the economy is still totally in the can. According to a CNN survey released today, about 80 percent of Americans say the economy is in poor shape. Only 1 percent—hedge fund managers and the serially confused, perhaps—say the economy is "very good." Unemployment remains the top concern. So why are governments across the country starting to kick the support out from under the chairs of the jobless?

It happened with barely anyone noticing. But, in the past few weeks, the unemployment-insurance system started shrinking back to its prerecessionary size. When the economy is growing, states provide a set number of weeks of insurance benefits to jobless workers. During recessions, the federal government tacks additional weeks on, given that finding work in a down-market is always especially hard. Right now, states provide up to 26 weeks of benefits, followed by 53 weeks of federal "emergency unemployment compensation" and 20 weeks of federal "extended benefits" in some high-unemployment states. It all adds up to a maximum of 99 weeks.

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As recently as a few months ago, Democrats had fought to keep those generous, stimulative benefits in place when Republicans wanted to cut them. Why? The system is a safety net that keeps families' heads above water as the labor market recovers. (According to the Congressional Budget Office, federal unemployment insurance kept about 3.3 million people above the poverty line in 2009, for instance.) In December, President Obama cut a painful deal, stomaching an extension of the Bush tax cuts for the richest Americans in exchange for keeping federally extended benefits in place for the remainder of the year.

Despite that deal, in the past month or so, a number of lawmakers have started to whittle benefits back. In March, Michigan became the first state to take an axe to its standard unemployment benefits, even though the state boasts one of the worst labor markets in the nation. The Republican government cut the number of state-sponsored, initial weeks from 26 to 20, effective in January. It said the state simply could not afford them: It owes the federal government $3.9 billion, borrowed to pay past unemployment benefits, and just cannot go further into the red. (Michigan and 48 other states have mandatory balanced-budget rules.)

For all the other states cutting back, the issue is inaction, rather than fiscal pressure. Some states needed to make a certain simple legislative fix to ensure that the federal government kept on kicking in its share of weeks of benefits—weeks of benefits already budgeted and paid for in Washington. A number of states failed to do so. So, on April 16, North Carolina, Tennessee, and Wisconsin all lost 20 weeks of federal benefits, effective immediately. Missouri did on April 2 as well.

On top of that, this week, House Republicans introduced a bill that effectively encourages states to whittle back their unemployment insurance systems. The legislation—written by Rep. Dave Camp (Mich.), the head of the Ways and Means Committee—gives states the option of using federal unemployment-benefit dollars for other job creation programs. ("Job creation" is defined broadly, so that repaying federal loans or providing tax breaks to businesses counts.) If some states, perhaps following Michigan's example, cut benefits and use federal dollars to repay loans rather than provide weeks of aid, it could take billions from jobless Americans' pockets.

But wait! you might say. We're officially in a recovery, and it is picking up steam. The private sector has added more than 200,000 jobs per month for the last three months. Fewer people are unemployed than a year ago. At some point, we needed to start ratcheting this enormous, expensive system back—particularly given that unemployment benefits do tend to lengthen the period of time a jobless worker spends off the market. Is this really such a bad thing?

It is an inevitable thing, for sure. But there also remain worrying signs that it is too soon to pull the plug on this specific economic support. Gross domestic product is growing at a snail's pace. New claims for unemployment insurance—an early sign of where the labor market is headed—have bounced back up. A whopping 13.7 million Americans are looking for work. One month of jobs numbers and a boatload of hoarded corporate profits do not a restored economy make. As happened last year, the economy could exhaust its strength, and unemployment could track back up.

If the recovery does start to flag, those unemployment insurance payments become very, very important. For one, they help families make it through a tough period, with about four jobseekers for every available position. But they also provide what economist-types call an "automatic stabilizer": Federal money automatically kicks in to juice the economy, helping keep overall demand up. For those reasons, the government has never before cut unemployment benefits when the jobless rate is higher than 7.5 percent. But this time, legislators are starting to dismantle the system early. Count it as one more reason to hope that the jobs picture keeps getting sunnier.

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