Recovering fully from the coronavirus shock will require large increases in federal debt—and there’s nothing wrong with that
The economic shock of the coronavirus has been as sudden and jarring as any in U.S. history. Even if policymakers did nothing to respond to it, the income losses generated by the shock and the automatic expansion of some safety net programs would have led to large increases in the federal budget deficit. But the correct policy response to a shock like the coronavirus is to push deficits even larger than they would go on their own by providing expansions to relief and recovery efforts.
As always, there are some who seem more concerned about the rise in federal budget deficits and public debt than by the rise in joblessness and losses of income generated by the shock. But prioritizing the restraint of debt in coming years over the restoration of pre-crisis unemployment rates is bad economics.
We must prioritize the restoration of pre-crisis unemployment rates over restraint of debt. Anything else is bad economics.
Joblessness and income losses in the wake of the coronavirus shock really are large enough to spark an economic depression that lasts for years. A rising ratio of debt to gross domestic product (GDP), on the other hand, will be mostly meaningless to living standards in the next few years. If baseless fears about the effects of adding to debt block this effective response, then it will cause catastrophic economic losses and human misery. It is often said that economics is about making optimal decisions in the face of scarcity. But we need to be clear what is and what is not scarce in the U.S. economy. The federal government’s fiscal resources—its ability to spend more and finance the spending with either taxes or debt—are not scarce at all. What is scarce is private demand for spending more on goods and services. We need to use policy to address what is scarce—private spending—with what is not.
In this blog post I attempt to answer a few of the many questions I hear about the deficit and debt in light of the current economic crisis. We have created an ongoing web feature here to answer these questions and new questions that come up. A common root to the answers of many questions about the effects of deficits and debt concerns whether the economy’s growth is demand-constrained or whether it is supply-constrained (i.e., at full employment). Because this distinction is so important to so many questions about deficits and debt, we provide this background first.
Joblessness remains at historic levels: The extra $600 in UI benefits expires next week—Congress must extend it
Last week, 2.4 million workers applied for unemployment insurance (UI) benefits. This is the 17th week in a row that unemployment claims have been more than twice the worst week of the Great Recession. Of the 2.4 million workers who applied for UI, 1.5 million applied for regular state unemployment insurance (not seasonally adjusted), and 0.9 million applied for Pandemic Unemployment Assistance (PUA).
Many headlines this morning are saying there were 1.3 million UI claims last week, but that’s not the right number to use. For one, it ignores PUA, the federal program for workers who are not eligible for regular UI, like gig workers. It also uses seasonally adjusted data for regular state UI, which is distorted right now because of the way Department of Labor (DOL) does seasonal adjustments.
Before I cover more of the details of today’s UI release, I want to take a moment to note that the across-the-board $600 increase in weekly unemployment benefits is set to expire next week.
Many are talking about the potential work disincentive of the extra $600, since the additional payment means many people have higher income on unemployment insurance than they did in their prior job. The concern about the disincentive effect has been massively overblown. First, it ignores the realities of the labor market for working people, who will be unlikely to turn down a permanent job—particularly in a time of extended high unemployment—for a temporary boost in benefits.
Extending the $600 weekly unemployment boost would support millions of workers: See updated state unemployment data
The U.S. Department of Labor (DOL) released the most recent unemployment insurance (UI) claims data yesterday, showing that another 1.4 million people filed for regular UI benefits last week (not seasonally adjusted) and 1.0 million for Pandemic Unemployment Assistance (PUA), the new program for workers who aren’t eligible for regular UI, such as gig workers. As of last week, more than 35 million people in the workforce are either receiving or have recently applied for unemployment benefits—regular or PUA.
Figure A and Table 1 show the total number of workers who either made it through at least the first round of regular state UI processing as of June 27 (these are known as “continued” claims) or filed initial regular UI claims during the week ending July 4. Three states had more than one million workers either receiving regular UI benefits or waiting for their claim to be approved: California (3.1 million), New York (1.7 million), and Texas (1.4 million). Seven additional states had more than half a million workers receiving or awaiting benefits.
While the largest U.S. states unsurprisingly have the highest numbers of UI claimants, some smaller states have larger shares of the workforce filing for unemployment. Figure A and Table 1 also show the numbers of workers in each state who are receiving or waiting for regular UI benefits as a share of the pre-pandemic labor force in February 2020. In four states and the District of Columbia, more than one in six workers are receiving regular UI benefits or waiting on their claim to be approved: Hawaii (19.7%), Nevada (19.3%), New York (17.8%), District of Columbia (17.6%), and Oregon (17.0%).
Cuts to the state and local public sector will disproportionately harm women and Black workers
The coronavirus pandemic has created a severe budget crisis for state and local governments, as tax revenue has fallen precipitously at the same time that governments are facing extraordinary demands for public health and welfare supports. Because states are severely limited in how they can borrow, the only way to address this crisis is through Congress authorizing significant additional fiscal support to state and local governments. Without federal aid, many states will likely make devastating cuts to the services and staffing they provide, sending the country into a prolonged depression with 5.3 million jobs both public and private likely lost before the end of next year.
Failing to provide aid to state and local governments would be not only be an act of needless economic self-sabotage, it would also exacerbate racial and gender disparities. If state and local governments are forced to cut personnel, those cuts are likely to fall hardest on women and Black workers.
Historically, the public sector has been a key employer for women and people of color. During the Civil Rights era of the 1960s and 1970s, the federal government—through executive actions and legislation—adopted various anti-discrimination and affirmative action measures that boosted the employment of women and Black workers in government. Now, decades later, all state and local government jobs are subject to the federal regulations requiring equal opportunity, and some states and localities have additional affirmative action programs. Consequently, state and local government has generally achieved a more diverse workplace than the private sector.
Almost four months in, joblessness remains at historic levels: Congress must extend the extra $600 in UI benefits, which expires in a little more than two weeks
Last week, 2.4 million workers applied for unemployment insurance (UI) benefits. This is the 16th week in a row that unemployment claims have been more than twice the worst week of the Great Recession. Of the 2.4 million workers who applied for UI, 1.4 million applied for regular state unemployment insurance (not seasonally adjusted), and 1.0 million applied for Pandemic Unemployment Assistance (PUA). PUA is the federal program for workers who are not eligible for regular unemployment insurance (UI), like gig workers. It took some time, but all states except New Hampshire and West Virginia are now reporting PUA claims.
It’s important to note that some initial claims from last week are likely from people who got laid off prior to last week but either waited until last week to file a claim, or applied earlier and their application had been caught in an agency backlog. Why do I think that’s likely? In May, there were more than 8 million initial claims in regular state UI programs, but last week’s Job Opening and Labor Turnover Survey (JOLTS) data show there were only 1.8 million layoffs, which is back to pre-virus levels. This suggests many May UI claims were from earlier layoffs, and that dynamic is likely still in play.
Figure A shows continuing claims in all programs over time (the latest data are for June 20). Continuing claims are more than 31 million above where they were a year ago. The latest figure in “other programs” in Figure A is 1.2 million claims. Most of this (0.9 million) is Pandemic Emergency Unemployment Compensation (PEUC). PEUC is the additional 13 weeks of benefits provided by the CARES Act for people who have exhausted regular state benefits. The number of people on PEUC can be expected to grow dramatically as the crisis drags on and more and more of the nearly 17 million people currently on regular state benefits exhaust their regular benefits and move on to PEUC.
Hires up, layoffs down but more economic pain is on the horizon: Policymakers must act in order to protect workers’ health and economic well-being
Last week, the Bureau of Labor Statistics (BLS) reported that, as of the middle of June, the economy was still 14.7 million jobs below where it was in February. Today’s BLS Job Openings and Labor Turnover Survey (JOLTS) reports that the labor market was down 13.1 million jobs at the end of May. The labor market began picking up in May, and more so in June, as states began relaxing their stay-at-home orders. Congress’s aid to workers and households also helped to boost demand and spending. Unfortunately, what’s clear from the latest coronavirus data is that the relaxed restrictions on social distancing also had the effect of increased cases and subsequent re-shuttering in certain parts of the country.
Today’s data show that at the end of May, the number of hires increased by 2.4 million to a series high of 6.5 million—the largest monthly increase and largest number of hires on record (series began in 2000). The hires rate also rebounded significantly to 4.9%, the highest rate on record. At the same time, layoffs dropped considerably to 1.8 million, consistent with the average number of layoffs in the pre-coronavirus period. This is a significant fall off from previous months. In April and May, layoffs totaled 19.2 million. Further, 1.8 million layoffs is much lower than the initial unemployment insurance (UI) claims we saw in May. In May, there were more than 8 million initial UI claims in regular state programs. This suggests that a significant share of the initial UI claims in May were from layoffs in March or April—people either waited until May to file claims, or state agencies were working through backlogs of claims.
Unfortunately, there are more recent indicators that layoffs are going to pick up again as people are being laid off for the second time, and hires will likely slow as well.
What to watch on jobs day: A false start to the recovery
The latest jobs data for June released this Thursday will likely show some improvements in the labor market. We should remember that these improvements come at a cost: increased spread of COVID-19. In the states that have lifted restrictions ahead of others, there are measurable increases in coronavirus cases. Given the likelihood that states may have to re-shutter parts of their economies with the rise in cases, the job gains we saw last month may not last. So even if we continue to see job gains in this week’s jobs report, the losses this spring were mammoth and, given recent trends on the health front plus the upcoming fiscal cliff, the economic pain will certainly be long lasting.
On Thursday morning, we will also get the latest data on unemployment insurance claims for the week ending June 27. Later that day the Congressional Budget Office will be releasing their economic forecasts, which provide their estimates of future economic growth and the unemployment rate, among other key economic indicators. (At the end of the blog post, I list reminders on what information we get from each labor market data release.) Unfortunately, these releases will show enormous economic hardship that will last for a long time.
As I see it, policymakers have three primary objectives with regard to the labor market: First, make sure those who have to go to work are given adequate compensation and a safe work environment, which means, at a minimum, guaranteeing health and safety protections for workers so that they are able to protect themselves and members of their families from contracting COVID. Second, make it possible for workers who are unable to find a safe job to stay home without becoming financially devastated by delivering sufficient earnings replacement through the unemployment insurance system. Third, ensure the economy can fully recover when we get on the other side of the pandemic.
Nearly 11% of the workforce is out of work with no reasonable chance of getting called back to a prior job
Expanded unemployment insurance continues to be a crucial lifeline for millions of workers: See updated state unemployment data
The U.S. Department of Labor (DOL) released the most recent unemployment insurance (UI) claims data yesterday, showing that another 1.5 million people filed for regular UI benefits last week (not seasonally adjusted) and 0.7 million for Pandemic Unemployment Assistance (PUA), the new program for workers who aren’t eligible for regular UI, such as gig workers. As we look at the aggregate measures of economic harm, it is important to remember that this recession is deepening racial inequalities. Black communities are suffering more from this pandemic—both physically and economically—as a result of, and in addition to, systemic racism and violence. Both Black and Hispanic workers are more likely than white workers to be worried about exposure to coronavirus at work and bringing it home to their families. These communities, and Black women in particular, should be centered in policy solutions.
As of last week, more than one in five people in the workforce are either receiving or have recently applied for unemployment benefits—regular or PUA. These benefits are a critical lifeline that help workers make ends meet while practicing the necessary social distancing to stop the spread of coronavirus. In fact, the $600 increase in weekly UI benefits was likely the most effective measure in the CARES Act for insulating workers from economic harm and jump-starting an eventual economic rebound, and it should be extended past July.
To be clear, our top priority right now should be protecting the health and safety of workers and our broader communities. To accomplish this, we should be paying workers to stay home when possible, whether that means working from home some or all of the time, using paid leave, or claiming UI benefits. When workers are providing absolutely essential services, they must have access to adequate personal protective equipment (PPE) and paid sick leave.
Cutting off the $600 boost to unemployment benefits would be both cruel and bad economics: New personal income data show just how steep the coming fiscal cliff will be
Key takeaways:
- The Bureau of Economic Analysis (BEA) released data today on personal income showing that the extra $600 in weekly unemployment insurance (UI) benefits—set to expire at the end of July—boosted incomes by $842 billion in May (expressed at an annualized rate).
- We estimate that extending the $600 UI benefits through the middle of 2021 would provide an average quarterly boost to gross domestic product (GDP) of 3.7% and employment of 5.1 million workers.
- The economy’s growth will continue to be tightly constrained by insufficient demand for goods and services, and cutting off a policy support that helps households maintain spending is a terrible idea, both for these households’ welfare and for macroeconomic stabilization.
Congress passed the CARES Act in March to provide relief and recovery from the economic effects of the coronavirus. By far the best part of the CARES Act was a significant expansion of the unemployment insurance (UI) system, which included a $600 per week boost to UI benefits. Congress settled on a flat $600 top-up to weekly benefits because the antiquated state UI administrative capacity could not handle more tailored ways to increase UI benefit generosity, and giving everybody an extra $600 guaranteed that most workers would receive at least as much in UI benefits as they did from their previous employment.
In normal times, economists and policymakers have focused a lot of attention (almost surely too much) on the incentive effects of UI benefits. If these benefits were too generous, the worry was that this would blunt workers’ incentives to actively search for new jobs. The negative economic impacts of these incentive effects have always been exaggerated, but these effects become truly trivial during times when the economy’s growth is clearly constrained by insufficient aggregate demand (spending by households, businesses, and governments).
When growth is demand-constrained, there are more potential workers than available jobs, so hounding these potential workers into more intense job-searching by making UI benefits less generous doesn’t result in more jobs being created, it just results in more frustrated job searches. This logic became even more compelling during the first phase of the economic collapse caused by the coronavirus. Not only were there not enough jobs to employ willing workers, for public health reasons we didn’t want enough jobs to employ these workers, as the shutdown in economic activity and employment was the point of lockdown measures. Even as official lockdowns ease in coming months (often prematurely), jobs will be sharply constrained by demand, not workers’ incentives.