The University of Chicago has produced a series of excellent studies during the COVID-19 crisis documenting the impact of the pandemic, and of the initial legislative response to the pandemic, on the unemployed.
Conservatives responded enthusiastically to a May report that found the typical unemployed worker was receiving, thanks to the $600 weekly add-on to unemployment benefits included in the CARES Act, 134 percent of his or her previous wages. That you could make more money collecting unemployment than by working was, Republican members of Congress generally agreed, a crime against nature, though they weren’t inclined to resolve it by increasing the $7.25 hourly minimum wage. Republican Senator Lindsey Graham, of South Carolina, said the weekly add-on—which ended up going out to one-quarter of all working-age people in America—would be extended past its July 31 expiration date “over our dead bodies … We’ve got to stop this. You cannot turn on the economy, until you get this aberration in the law fixed.”
As I’ve explained before, Congress agreed to $600 as the right amount for the add-on because that was how much it would take to bring an unemployed worker earning at the median up to the amount he or she had earned in wages before the COVID-19 emergency. But since the group put out of work by virus skewed poorer than the median worker—lots of people working in restaurants and hotels, not so many working at law firms—the result was a social experiment in which the typical person collecting unemployment during this period got paid more for not working than for working. The Congressional Budget Office projected that, were this madness to continue another six months, five-sixths of all workers collecting unemployment would wind up getting paid more for not working than they got paid for working. Never mind that for a lot of workers, not working was a pretty good strategy to avoid contracting a disease that’s already killed nearly half a million Americans, especially in the absence of any meaningful enforcement of federal worker-safety regulations.
Graham and Co. intimidated the Democrats into backing away from the $600 weekly benefit. Initially, the cowed Democrats offered to begin phasing out the $600 sweetener as unemployment fell in any given state below 11 percent, as it has by now everywhere. Had the compromise been enacted, Hawaii, which has the nation’s highest unemployment rate (9.3 percent), would be down to $400, and more than half the states would be receiving no add-on unemployment benefit at all. The Republicans who then controlled the White House, the Senate, and the House, refused the offer, and so the weekly add-on expired (though President Trump extended, haphazardly and through administrative action, a $300 weekly add-on, in deference to the coming election).
Now Democrats control the Senate, albeit by the slenderest possible margin, and the White House, and they’re offering a $400 weekly add-on in their latest coronavirus bill. Rather than campaign last fall mainly on giving unemployed people a bigger cushion, they campaigned mainly on sending a single $2,000 check to all sorts of people who didn’t need it. Consequently, the new coronavirus bill also includes a $1,400 supplement to the $600 check that Congress sent households in December. There is a means test, but it isn’t very strict. The $1,400 benefit starts phasing out when an individual tax filer’s income reaches $75,000 and a joint filer’s income reaches $150,000; a couple can earn $200,000 and still receive some stimulus cash. Whether the recipient is unemployed is taken into account not at all.
The Biden administration has been looking for a way to compromise on the bill, mostly to keep Sen. Joe Manchin from defecting. But the Republican counter-offer is pretty stingy, and I presume there are no conservatives willing to trade at least some of that $1,400 to bring the weekly unemployment add-on back up to $600. That is a shame, because (as I noted last month in the New Republic) that would be a much better policy. How much better is documented by the latest study from the same University of Chicago group that gave you May’s research about the $600 benefit’s 134 percent median replacement rate.
That May study was followed by a number of studies that showed that, even when being unemployed paid better than going back to work, the rate at which people went back to work was largely unaffected. Now the University of Chicago team has weighed in on that question in a new study, the gist of which is, “Timothy Noah is entirely right that the Democrats’ COVID-19 bill is poorly designed, and it’s real a shame nobody’s willing to listen.”
The new study says that, pace Lindsey Graham, the economic effect of the $600 weekly unemployment sweetener during its brief life from April through July was to increase rather than decrease employment, because the $263 billion stimulus it provided the economy greatly outweighed the quite minimal effect it had on whether unemployed people went back to work. The $600 benefit boosted total U.S. spending between 2 and 2.6 percent, which is quite a lot of bang for the buck, and decreased employment by only 0.2 to 0.4 percent. “The job search disincentive effect,” the authors concluded,
is an order of magnitude smaller than would have been expected based on models calibrated to pre-pandemic behavior… Our most conservative partial equilibrium estimates imply that total employment was actually increased as a result of the supplement as long as $453,000 in additional spending translates into at least one additional job.
The $1,400 that Democrats want to send out to U.S. households more or less indiscriminately is the way the federal government typically responds to recessions. The federal government also, of course, typically expands unemployment benefits during recessions, though not previously on anything like the scale during the pandemic. These more “targeted transfers,” the new study notes, have always generated more spending, which is what’s needed during a recession. The expanded unemployment benefits under COVID-19, including the $600 benefit, increased spending to an extraordinary degree. Unemployed households increased their spending not only in absolute terms, but also relative to employed households.
What this adds up to is that if the economy requires stimulus, the best way to provide it is through very generous unemployment benefits. A $1400 check is nice, but to a family that’s in trouble it won’t help much and to a family that’s not in trouble it’s a windfall likely to be tucked away in some retirement or college savings account. COVID-19 is hurting the economy mainly by putting people out of work. I can’t understand why helping those people is not the first priority.