Mary Altaffer/AP Photo
A help wanted sign in the window of a Greenwich Village restaurant, May 4, 2021, in New York
Last Friday’s jobs report, showing employment rising by 559,000 in May, continued a steady march back from the depths of the pandemic, far better than the last recession recovery, albeit not as sizzling as anticipated. The main problem appears to be a large number of unfilled job openings, about which everyone in America seems to have an opinion.
Conservatives believe that comfortable lifestyles on the dole are to blame for workers declining to take low-wage positions that were recently COVID death traps. Liberals blame a lack of child care holding back mothers and fathers from re-entering the workforce, or lingering fears about contracting the virus making workers hesitant to return. Or you can just see this as a period of adjustment: People found other things to do during COVID-19 besides subsist as a reserve army of the unemployed; they needed to be with kids who were in school remote from home; and it’ll take time to bring things back to speed.
The good news is that, in some sectors, the supply crunch is leading to real wage gains, which we should welcome in tight labor markets, rather than see them as a scourge to be eradicated. In this case, the sector where those wage gains are centralized—the pandemic-battered leisure and hospitality industry—has not stopped a surge in hiring. (Most of these wage gains appear to be coming from tips as customers shift from takeout to in-person dining.)
The bad news is that conservative-leaning states have decided on a premature solution to what doesn’t look like a long-term problem. Twenty-five states will cut off extended unemployment benefits starting as soon as next week, rather than letting them run through Labor Day as scheduled. Not only will the federal $300-a-week enhancement go away, but benefits for workers not normally eligible for unemployment, like gig workers and freelancers, will expire, leaving them with no assistance.
Showing a remarkable nonchalance about this forced austerity, White House Press Secretary Jen Psaki said last Friday that Republican governors “have every right” to cut enhanced unemployment benefits early. The administration could have challenged the cuts under federal law—indeed, the statutory text says that the increased eligibility in particular must be offered, regardless of what the states decide—but has chosen not to. With the Biden administration giving up on the matter, it’s no surprise that the public supports the early pullback. But what will be the effects?
Conservative-leaning states have decided on a premature solution to what doesn’t look like a long-term problem.
According to the Century Foundation’s Andrew Stettner, about four million Americans will lose benefits in these states, and a total of $22 billion in federal dollars will not be issued. That’s a key number to keep in your head. Because while we’re all talking about labor shortages, the consequence of this and other looming expirations of federal support will be a drop in near-term aggregate demand. Not only is it immoral to leave millions of people with no help amid economic stress, but it’s counterproductive and will needlessly damage the economy.
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To give the conservative argument its due, the theory is that all these formerly high-on-the-hog unemployed will slink back to fill open jobs, and nobody will have to suffer. But there’s no evidence that this will happen. William Spriggs, chief economist for the AFL-CIO, points out that the share of unemployed workers flowing into employment has gone unchanged really since last summer, including during the period when a federal boost of $600 per week expired. In other words, regardless of unemployment benefits, we really should not expect more than about one-quarter of unemployed workers to get jobs.
That leaves at least three million still unemployed, without benefits. Maybe a stockpile of money from pandemic relief programs will allow them to scrape by, but that won’t last forever, and certainly not as long as conservatives expect. And if austere living built up that stockpile, it’s important to recognize that if that continues, it would lead to a depressed economy.
Many of these 25 states are also at or near pre-pandemic levels of unemployment already; much of the shortfall in employment comes from blue states reopening more slowly. So there’s even less chance that these cut-off unemployed workers will find a job. All that cutting off benefits will do is pull roughly $1.2 billion out of the economy every week in these states. Millions of people simply won’t have money in their pockets to make purchases.
That really hurts the economy. Unemployment insurance returns $1.61 in economic activity for every $1 in benefits, according to Moody’s Mark Zandi. We already have recent real-world evidence of the efficacy of cash assistance: The stimulus checks significantly reduced economic stress by giving people spending money. This also supported the overall recovery, which has continued to beat expectations. Cutting off cash assistance prematurely is an economic hardship for these state economies.
I asked economist Dean Baker about the economic impact. “This will be a lot less money going to some states, so there may be some hit to their economies,” he said, estimating a loss of economic growth of between 0.5 and 1 percent. Now, in an economy where second-quarter gross domestic product is coming in around 10 percent, that’s not a recession-level event. But it’s also not the only fiscal pullback we’re likely to see.
Millions of people simply won’t have money in their pockets to make purchases.
The same day as Psaki’s remarks, President Biden added that it “makes sense” for benefits to expire in the other 25 states within 90 days. That will pull billions more out of the economy. Moreover, at the end of September, student loan payments will resume for roughly 42 million borrowers, after 18 months of forbearance. With an average monthly payment of approximately $393, that’s another $16 billion per month owed (though we know, given high default rates, that not all of that will be paid). The moratorium on evictions also ends at the end of June, along with mortgage forbearance, extensions to which for about two million homeowners likely expire around July 1.
Any one of these expirations wouldn’t make much of a dent in a hot economy, but put them all together and suddenly you’re talking about real money. The economy was burning in the first half of the year, buoyed by large federal fiscal support. It’s not entirely clear what will happen when that contracts, especially when you combine that with supply chain issues that have depressed consumer spending and made it difficult to fulfill manufacturing orders. Plus, we are not totally done with the pandemic globally; a variant in Vietnam, a country that hasn’t really been stricken by COVID-19, could have a disproportionate impact because so much manufacturing production has been shifted there.
It was very in vogue to compare Biden to FDR early in his term. The apt comparison now could be to Roosevelt’s too-soon turn to austerity in 1937. There’s been so much federal support in the past year that we should be humble about what might happen when that support goes away. It’s welcome that wage growth is rising and holding, and that may just save the economy. But it’s going to be difficult to sustain certain types of demand amid the pullback. The cuts specifically target unemployed people and student debtors, poorer elements of society, and could ripple out to harm the low-wage retail businesses that will see subsequent cutbacks. This will only exacerbate our unequal recovery.
Over the long term, there’s a good story to tell about the economy. In the short term, the shock of pulling back fiscal support is likely to be dangerous. Maybe consumers have enough reserves to keep demand high. But that will only return debt levels to the unsustainable area they were in recently. It’s good for ordinary people to have savings, and we shouldn’t allow them to be drained again. The idea here, I had thought, was to build back better; with this Obama-style austerity pivot, we may not even build back.
