The lame-duck Congress has a long “to-do” list in the final month of the year. Negotiations on a compromise to avoid the fiscal cliff are underway, and lawmakers on both sides of the aisle are also discussing whether or not to extend unemployment insurance for 12 million unemployed Americans before the benefits expire on December 29. What are the economic consequences of failing to extend unemployment benefits? Who will be most affected? What weight should we give to news from the Congressional Budget Office that extending benefits will add more than 300,000 jobs to the economy?
On December 5, The Hamilton Project’s Adam Looney took your questions in a live web chat moderated by Vivyan Tran at POLITICO.
Read a full transcript of the chat below.
12:29 Vivyan Tran: Welcome everyone, let's get started!
12:30 Adam Looney: Hi, thanks for inviting me.
12:31 Comment from Jason: Can you talk about the distinction between what unemployment benefits do for individuals vs. what they do for the economy?
12:35 Adam Looney: In normal times unemployment insurance benefits help workers put food on the table and pay rent in the interval between when they're laid off and when they find a new job. That's obviously an important role right now just by itself. But unemployment benefits tend to get spent quickly and in a weak economy help boost the economy at large. The Congressional Budget Office estimates that each $1 in benefits increases aggregate economic activity by $1.10.
12:35 Comment from Lucille: How much does renewing extended unemployment insurance cost?
12:37 Adam Looney: Completely extending the full emergency unemployment compensation and extended benefits package would cost about $30 billion next year, but extending certain components rather than all would obviously cost a bit less.
12:37 Comment from Cory: Building off Lucille's question, can you discuss the validity of negative effects (other than cost) to extending unemployment insurance? For example, even in this special environment can it discourage employment-seeking?
12:41 Adam Looney: Long-term unemployment is unusually high in this recession, and some have argued that extended benefits are a contributor. Research suggests that increases in the generosity of benefits do have a modest effect on search effort and the duration of unemployment, but the best estimates suggest that extended benefits added only between 0.1 and 0.5 percentage point to the unemployment rate in 2011. So not much. The real culprit is a weak labor market: job openings haven't increased enough to make a big enough dent in the unemployment rolls.
12:42 Comment from Taylor S.: What value is there in letting the unemployment benefits expire overall? Do the costs to the unemployed and their dependents outweigh the benefits in spending cuts?
12:47 Adam Looney: With the economy still on fragile ground, many people experiencing long spells of unemployment, and the job finding rate still very low, unemployment benefits and extended benefits are helping stave off a lot of economic pain in the households of the jobless and are contributing to the broader economy. That was true last year and today, and it's still going to be true January 1st, so the imperative for extending benefits is just as strong.
12:48 Comment from Mark: If the CBO estimates "each $1 in benefits increases aggregate economic activity by $1.10" , what is the downside to not continuing benefits?
12:52 Adam Looney: Well, these benefits do add to the deficit and do have some effects on unemployment durations. The question is: are those concerns the most pressing issues today? And with interest rates low and labor demand weak, it's hard to make that strong a case that those are overriding issues.
12:53 Comment from Cory: Should we think of this as a primary or a secondary element of the current fiscal negotiations? The extra $3 billion (plus $30 billion spent) can seem small in comparison to many of the other figures being thrown around.
12:57 Adam Looney: The debate seems focused on revenues and particularly the high-income tax rates. In comparison to the revenues arising just from letting the high-income tax cuts expire (to say nothing of letting all the rates expire as legislated), extended benefits are indeed small, at least in budget terms. But they do have a disproportionate effect on economic activity on a per-dollar basis. So I think it remains to be seen where the debate resolves, and whether there's a compromise that extends these policies.
12:57 Comment from Anonymous: When was the last time we extended unemployment insurance to this degree?
12:59 Adam Looney: I don't think we ever have. In the 1980s, benefits were available for as many as 55 weeks. (But the recoveries from the 1980s recessions were also much faster, and long-term unemployment never had a chance to rise as high as it did today.)
1:00 Comment from Mark: What is your estimation of the chances benefits will be extended given the fiscal cliff negotiations and if so, would it come as part of a fiscal cliff agreement or would it likely be a separately handled issue?
1:02 Adam Looney: I think if they're going to be extended it would be in a compromise within the broader fiscal cliff discussion. It's hard to see how, if they were left on the table in a fiscal cliff bargain, they would be extended in a separate or stand-alone agreement.
1:02 Vivyan Tran: Thanks for the questions everyone, see you next week.
1:02 Adam Looney: Thank you!