Disaster Looms if Congress Fails to Renew Jobless Benefits

More than 1 million U.S. citizens lost their extended unemployment benefits last weekend. What happens if Congress doesn’t reinstate the program?

Jan 4, 2014 at 10:00AM

On December 27, 2013, more than 1.3 million Americans lost their extended unemployment benefits, an emergency measure funded by the federal government to allow the long-term jobless to continue collecting benefits after the expiration of their home state's program. While state benefits generally end after 26 weeks, the crisis-era extension program, in effect since 2008, allows the benefits' timeline to stretch to somewhere between 54 and 73 weeks.

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Senate Democrats plan to vote on a program renewal when Congress reconvenes on Monday, but House Republicans may vote down such a proposal, claiming that the cost is too high. Not extending the program, however, could have detrimental effects not only on hundreds of thousands of American families, but on a still-unstable economy, some analysts say.

Long-term jobless will suffer
The average monthly payment of $1,166 will be sorely missed by those who lost their benefits this past Saturday, but that's only part of the picture. According to the Democratic members of the congressional Ways and Means Committee, close to 72,000 additional persons will drop off the benefit rolls each week until mid-2014. This adds up to an astounding 1.9 million people -- on top of the current 1.3 million -- who will face life without a job or unemployment benefits by the end of June.

That's well over 3 million families that could be pushed into poverty, with states that were hard-hit by the recession leading the way. In California alone, nearly 540,000 will be left without that backstop, with another 260,000 in New York, and almost 180,000 in New Jersey.

A body blow to a recovering economy
The personal suffering will be terrible enough, but the damage to the fragile economy is sure to cause further disruption. Monthly stipends are recycled back into the economy as recipients buy the necessities of everyday life. Preserving that cash infusion, despite the cost of the program, could increase the country's gross domestic product by 0.2% this year, while adding another 200,000 jobs. 

Another problem involves the unemployment rate, which could drop by 0.5% as the long-term jobless are no longer counted as "looking for work." A similar scenario occurred last year in North Carolina, when 170,000 people lost jobless benefits in a bid to cut state costs. The state's unemployment rate dropped quickly to 7.4% from 8.8% as those people were no longer considered unemployed.

A drop in the national unemployment rate could have more serious consequences. The Federal Reserve has specified a jobless rate of 6.5% as one economic indicator that would prompt the Fed to cut back on its accommodative monetary policy and consider raising short-term interest rates.

While the Fed stresses that interest rates will very likely stay low well beyond the time the jobless rate hits the 6.5% mark, a falling unemployment rate will likely spur the speed-up of the so-called taper. It's very possible the announced reduction of $10 billion in the Fed's monthly $85 billion bond and mortgage security buying plan could be accelerated if the jobless rate hits 6.5%, particularly if the rate continues to drop.

This could send long-term interest rates surging, hurting housing and the greater economy. Clearly, there are other factors, such as inflation, that the Fed will consider as it moves to wean the economy from its quantitative easing policy. It is notable, however, that the Federal Open Market Committee clearly regards a national unemployment rate of 6.5% as a sign of an improving economic climate -- not the byproduct of shutting off the benefit supply to those who have been unable to secure viable employment.

President Obama, National Economic Council Director Gene Sperling, and Senate Democrats are pushing for an extension of benefits when Congress reconvenes on January 6. For the sake of the U.S. economy, let's hope they get their wish.

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