New estimates from the Congressional Budget Office show that extending the extra $600 unemployment benefits until 2021 would boost consumer spending but stifle growth in other areas.
The CBO estimates that if the benefits are extended until January 31, 2021, then roughly 80% of people would take home more through unemployment than they would if they were employed.
Consumer spending on food, housing, and goods and services would be closer to levels seen prior to pandemic-induced unemployment.
Economic activity would be higher in the second half of the year but activity in 2021 would be lower if the benefit were to be extended.
Overall employment would also be lower in the second half of the year, and in 2021.
The CBO chalks these effects up to two separate issues: demand and incentives to work.
Extra unemployment benefits will boost demand for consumer goods and services because people will have more cash on hand—that will boost output and employment.
The benefits would also put pressure on the economy in the other direction—the CBO says the benefits would reduce incentives to work for those who take home more from unemployment than they would otherwise earn, and that has the potential to depress both output and employment.
Over the past 11 weeks, more than 42 million people have filed new unemployment claims.
Other CARES Act benefits—like a moratorium on certain evictions—will also run out next month and lawmakers haven’t agreed on how to extend them, or whether to extend them at all. The most widely discussed aspect of the CARES Act—those $1,200 stimulus checks—has come and gone. House Democrats included provisions for extending enhanced unemployment benefits through January and sending out another round of checks in the Heroes Act, but Republicans have been opposed to the idea. If lawmakers don’t come to an agreement to shore up benefits before they expire, the Washington Post is projecting that $1 trillion in emergency aid will be lost. “The CARES Act was massive, but it was a very short-term offset to what is likely to be a long-term problem,” Aneta Markowska, chief financial economist at Jefferies, told the New York Times. “This economy is clearly going to need more support.”
Last week, a top White House official indicated that the Trump administration could support a GOP proposal to provide unemployed workers who return to work an extra $450 a week on top of their wages. Republicans have expressed opposition towards extending the expanded unemployment program, arguing that it disincentives work. Democrats, on the other hand, want to keep the program going.
What to watch for
The Labor Department will release the unemployment rate for May on Friday. Economists are expecting it to come in at a whopping 20%. As businesses closed their doors, the unemployment rate rate shot up to 14.7% in April after hitting a 50-year low of 3.5% just two months earlier.
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