CBO shows Democrats' plan to extend unemployment benefits would hinder economic comeback

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We have previously warned about the dangers of extending enhanced unemployment benefits beyond their current expiration in July. Now, in a blistering new report, the Congressional Budget Office has provided more reasons to fear the economic consequences of such a misguided action.

Back in March, as part of its $2.2 trillion package to counter the economic effects of the coronavirus, Congress included a provision that boosted standard unemployment benefits by an additional $600 per week.

Pretty soon after passage, it became clear that the proposal made it a better deal for many people to stay home rather than return to work. This was especially problematic because of how the policy interacted with another provision, which offered money to small businesses that maintained or rehired their workers.

As a short-term measure, this was somewhat defensible. Government leaders were ordering the closure of businesses to encourage people to stay home to slow the spread of the coronavirus. It was a unique time when there was a reason to provide a disincentive to work.

As the economy slowly reopens, however, the enhanced payments are going to make it harder for business owners to try and rehire their workers, because they will have to compete against unemployment benefits that pay better than actual jobs. Yet House Democrats stunningly passed a bill that would extend the $600 weekly boost through next January.

The CBO has now weighed in on their proposal, however, and the results are not pretty.

CBO estimated that were the extra $600 payments extended through next January as Democrats want, five out of every six recipients would be receiving more money than if they were working.

It found that employment would be lower for the rest of this year and next year than if the enhanced benefits were allowed to expire. While economic output would likely be higher in the remainder of this year than it would be otherwise, the benefit would be short lived. By 2021, CBO predicts the extension would be a drag on economic output.

“The estimated effects on output and employment are the net results of two opposing factors,” the CBO explained. “An extension of the additional benefits would boost the overall demand for goods and services, which would tend to increase output and employment. That extension would also weaken incentives to work as people compared the benefits available during unemployment to their potential earnings, and those weakened incentives would in turn tend to decrease output and employment.”

The report noted, “In calendar year 2021, both output and employment would be lower than they would be if the increase in unemployment benefits was not extended. That would occur mainly because the effect of the reduced labor supply would, in CBO’s assessment, last longer than the effect of increased overall demand.”

It was one thing to deploy enhanced unemployment benefits for a limited time to help complement public health policy. It’s another thing entirely to create an enduring entitlement that is going to be a barrier to getting the economy moving again.

On Friday, the Bureau of Labor Statistics shocked everybody by reporting that 2.5 million jobs were created in May and unemployment rate actually declined by 1.4 percentage points, which it said “reflected a limited resumption of economic activity.” If that’s what a limited resumption could do, it suggests that a broader reopening could lead to an even more rapid economic comeback. That will be impossible if Congress unwisely extends enhanced unemployment.

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