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How $600 unemployment benefits to jobless people helped rescue the American economy

Business Insider logo Business Insider 8/8/2020 jzeballos@businessinsider.com (Joseph Zeballos-Roig,Carmen Reinicke)
a close up of a sign: Yuqing Liu/Business Insider © Yuqing Liu/Business Insider Yuqing Liu/Business Insider
  • At the end of July, the extra $600 weekly unemployment insurance benefit established by the CARES Act in March expired, immediately slashing pay for millions of out-of-work Americans. 
  • The benefit not only supported those out of work due to the coronavirus crisis, but powered the early months of the economic recovery from the pandemic recession, economists say. 
  • Now, Congress is fighting over the next round of stimulus. In the meantime, millions of Americans are wondering how they'll make ends meet.
  • Visit Business Insider's homepage for more stories.

When the additional $600 weekly unemployment benefit expired at the end of July, Charissa Ward, a furloughed Disney server in Florida, knew she wouldn't be able to cover all of her expenses. 

Now, she will receive only the Florida state benefit, a maximum of $275 per week before taxes and among the lowest in America. Ward has been out of work since mid-March, officially on furlough since April, and doesn't know when she'll be able to go back. 

The $275 per week "doesn't pay anything really. I can't even cover my mortgage payment, let alone food, my car payment, my insurance, basic electric, you know, nothing," the mother of three told Business Insider. "We're not talking about going on vacation here, we're talking about survival." 

Ward is among the 31 million Americans relying on unemployment benefits, a safety net that is getting thinner now that the federal government doesn't provide any additional money. The typical jobless person is set to receive around $330 each week, an amount varying greatly across the country.

In March, Congress scrambled to design and pass a relief package as sweeping shelter-in-place orders shuttered businesses across the US, kept people at home, and led to millions of Americans losing their jobs. Among its provisions: a $600 weekly federal supplement to state unemployment checks, meant to fully replace the lost earnings of laid-off workers.

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That government payout played an enormous role in rescuing a pandemic-stricken economy from collapse. Experts credit the benefit with backstopping income loss and boosting consumer spending in a recession, along with providing people enough money to buy groceries and pay rent and other monthly bills. Some said it helped keep poverty from rising.

"It is so clear from the data we have in hand and from the research that's being done, that $600 [helped] prop up the entire economy," Claudia Sahm, the director of macroeconomic policy at the Washington Center for Equitable Growth, recently told Business Insider.

The signs of a recovery

Proof that the extra $600 propped up the economy appeared in a number of economic indicators. In April, US consumer spending slumped, but incomes increased by a record 10.5% due to payments under the CARES Act. A month later, US consumer spending spiked a record 8.2% as people rushed to spend their stimulus and unemployment checks.  

In addition, retail spending was strong in May, when it jumped a record 17.7%. That strength continued in June, when retail sales increased 7.5%. 

That continued strength is "a good sign that emergency unemployment insurance bore a lot of the responsibility for those numbers," Ernie Tedeschi, an economist at Evercore ISI, told Business Insider. 

There's also evidence in high-frequency data that suggests the additional UI benefit lifted consumer spending and the US economy. Data from the Harvard-based research group Opportunity Insights shows that spending for low-income households has nearly recovered to pre-pandemic levels, down only 2% from February.

On the flip side, high-income spending is still down 10% from before the pandemic. 

"Consumption among low-income households has been so strong despite the fact that low-income households have been disproportionately hit by the pandemic," Tedeschi said, adding that "there's circumstantial evidence that our emergency unemployment insurance benefits have done their job to solidify the ground under unemployed workers."

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That spending is important to the overall economic recovery as consumption is roughly 70% of US gross domestic product. Consumer spending also gives strength to the labor market — when people shop, businesses profit more, and in turn, can expand and hire additional workers. 

"So much of our economy not falling 60% and falling 33% in the last quarter was this additional infusion into household incomes from the government," Daniel Alpert, Cornell Law School senior fellow and adjunct professor, told Business Insider. A lack of continued support will "deepen the severity and extend the duration of this crisis," he said. 

The fierce political clash over $600

Republicans and Democrats hold dueling views of the federal benefit's economic effects. Shortly after it was implemented, many GOP lawmakers opposed its renewal past the summer. In late May, Senate Majority Leader Mitch McConnell reportedly pledged to scrap it.

The GOP is instead pushing to cut the benefit to a lower weekly amount. Many conservatives argued that since the bulked-up payment allowed many workers to earn more from the government than their past jobs, it incentivized them to stay out of the workforce. 

"There were definitely businesses that faced hurdles getting their workers to come back. In the longer-term, you never want to be incentivizing people to not work," Rachel Greszler, an economics expert at the conservative Heritage Foundation, told Business Insider.

She said extending the $600 benefit would have "damaging effects in the longer-term" on employment levels.

Democrats are pushing to revive the payments through January, saying the economy remains weak due to the ongoing pandemic and jobs are scarce. There are currently five unemployed people for every job opening.

"We're seeing spikes all over the country, unemployment in many places," Democratic Sen. Ron Wyden of Oregon, a supporter of the $600 extension, told Business Insider in late July. "It's so bad, companies are laying workers off again."

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Five studies were recently published examining the impact of the $600 supplement on the economy. None found evidence that the benefit is broadly discouraging work among the jobless.

The lapsed federal benefit has been a significant source of friction in stimulus negotiations between congressional Democrats and top White House officials. Talks have stretched on for over two weeks with few signs of progress.

President Donald Trump threatened on Friday to circumvent Congress and take executive action on enhanced unemployment benefits among other priorities if negotiations with Democrats collapse. But it remains unclear what unilateral authority he can draw from as Congress controls spending. It raises the risk of legal challenges that could delay federal aid.

"You're trying to make a dollar last way longer as if it was $100 dollars"

The timing of the next stimulus bill is important, as millions of Americans are going without the needed extra $600 each week while Congress debates the package. 

The uncertainty of the timeline makes it even more difficult for out-of-work Americans to plan for the future.

Tia Ferguson, also a mother of three in Columbus, Ohio, now receives $171 in unemployment insurance each week. Without the extra $600, she's not sure how long that, her savings, and her husband's income from a new business will last. 

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"I'm actually afraid to answer that question because realistically I don't know," she told Business Insider. "It's not enough to even remotely sustain the life we had for 13 years." 

The substitute teacher was furloughed in March when schools shut down, and went 11 weeks before getting her first unemployment check due to delays in the state system, she said. When she finally did start receiving UI, she paid many of her bills including her mortgage, utilities, electric, and gas ahead of time to sustain her family as she doesn't know when she will be able to return to work.

She's also cut her budget as much as possible — switching lunch meat for peanut butter at the grocery store, and monitoring her kids' screentime to keep the electricity bill down.  

"You're trying to make a dollar last way longer as if it was $100 dollars," she said. Still, she's doing everything she can to maintain a sense of normalcy for her kids, she said. In addition to the coronavirus pandemic, her family dealt with another tragedy this year — in January, she had a stillborn baby.

"I don't want it to be the case that during a year that they lost their baby brother, they lost the house that they grew up in either," said Ferguson. 

Read more: Wells Fargo lays out a plausible scenario where the Fed becomes insolvent — and breaks down the catastrophic effect that would have on the bank's ability to handle future crises

Read the original article on Business Insider

Video: Trump Signs Executive Orders For $400 A Week Unemployment Benefits, Extends Payroll Tax Cuts Through 2020 (Newsweek)

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