Cutting the $600 unemployment benefit could hurt the recovery, economists say

Economists differ somewhat in their estimates of the extent to which the generous federal supplement buoyed the country financially during the pandemic. But they agree that it helped keep companies in business, restaurants and retailers open and more Americans employed.

That aid, however, runs out this week, and lawmakers are wrestling with how much to assist the unemployed in coming months. Democrats want to continue the $600 enhancement -- which, when combined with state benefits, meant that two-thirds of recipients made more on unemployment than they did on the job -- into early next year,

But Republicans are concerned that the boost would deter people from returning to work, so they want to cut it to $200 a week for the next two months and then set it at 70% of former wages.

Among lawmakers' key concerns: What will best help the economy recover?

The answer depends on when the nation's fiscal health starts to stabilize. The past quarter was likely the worst on record for economic activity, and the recovery remains fragile, economists say. It would not be surprising if more jobs were lost in July, after two months of climbing out of the deep hole dug by state lockdowns in March and April.

Some experts say it's too soon to ramp down the federal assistance.

Nearly 1 million jobs could be lost through the end of the year, and unemployment could be 0.6 percentage points higher if lawmakers reduce the benefit to $200 a week, according to a recent estimate from Moody's Analytics.

Slicing the federal supplement to $300 would lead to a 1% contraction in the economy by the end of 2020 and cost 800,000 jobs, said Ernie Tedeschi, an economist at Evercore ISI.

"Emergency unemployment insurance is supporting the economy through this extraordinary pandemic and recession and putting a floor under what would otherwise have been an even worse situation," said Tedeschi, who also served as a senior adviser at the Treasury Department during the Obama administration.

Total spending among unemployed households increased 10% during the initial months of the pandemic, instead of falling about 7% as it typically does, according to a recent JPMorgan Chase Institute analysis. This is likely because of the $600 boost.

By contrast, spending among those who kept their jobs dropped by 10%.

"It's been a life preserver. Not only is it keeping afloat households, but it's also keeping afloat lots of businesses," said Peter Ganong, an assistant public policy professor at the University of Chicago who co-authored the JPMorgan report. "If people are spending more, then it's creating jobs."

Also, other parts of the economy have not collapsed during the pandemic-fueled downturn, Ganong said. For instance, there hasn't been a wave of foreclosures.

As for whether the generous supplement kept the unemployed from accepting job offers, Tedeschi says no. Some 70% of the jobless who returned to work in June were making more on unemployment than they were in their previous positions, he said.

But when the economy does start to improve, the extra payments may entice some people to stay home, slowing the recovery, said Michael Strain, director of economic policy studies at the American Enterprise Institute, a right-leaning think tank.

"The labor supply effect -- the effect unemployment benefits will have in keeping people out of the workforce -- will be much more serious," he said. "These benefits will be doing more harm than good."