The GOP Plan to Slash Unemployment Benefits Puts the Whole Economic Recovery at Risk

The $600 cushion has allowed people to invest in their futures, and to spend. That could all disappear.

Closed stores line the streets of New York City's Times Square.Niyi Fote/Zumapress

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From her apartment in New Jersey, Elise Nussbaum has spent the past four months counseling dozens of people all over the country—in New York, California, Texas, and beyond—about their money, in the middle of the worst economic downturn since the Great Depression.

Nussbaum is a financial coach with Neighborhood Trust, a New York nonprofit that offers free financial coaching to low- and middle-income people. Before March, most of her clients wanted to work on forward-looking financial strategies, like improving credit or getting out of debt. But as many of them lost jobs, started caring for sick relatives, or got sick themselves, they were forced to focus on the immediate moment. If somebody had saved up to pay off a debt, she’d tell them to hold on to that money instead to cover the basics: rent, food, electricity.

“Everybody’s mode switched from long-term to short-term,” she says. “It became much more: ‘Let’s figure out how we’re going to handle the next few months, or the next month. Let’s figure out how we’re going to handle next week.’”

That changed in late March, when as part of the sweeping coronavirus relief package known as the CARES Act, Congress enacted an extra $600 weekly benefit for workers on unemployment. That money, Nussbaum says, was a “godsend” that transformed the financial outlook of her clients. The extra $600 payments, called Federal Pandemic Unemployment Compensation (FPUC), have been the reason that many are able to cover basic needs. But the money has also allowed many to put aside funds for the first time in years, or ever. It’s given them a chance to think about their long-term financial health again, rather than starting each month or week at zero.

One of her coaching colleagues, Justin Enany, says that for the first time ever, he’s been able to help clients plan. “If someone’s fixed expenses are 95 percent of their income, like I see all the time, there’s not a whole lot you can recommend,” he says. “You’re just trying to prevent the worst of the worst.”

The expiration of this $600 benefit is right around the corner—July 31, absent an extension by Congress. The Democratic-controlled House passed a bill in May to extend the benefit until January 2021. The GOP Senate majority has continued to debate how much, if anything, of the benefit it will leave standing.

Economists and advocates have long warned that an end or reduction of enhanced unemployment will usher in an “income cliff”—an enormous drop in monthly income and a wave of immediate household pain and financial struggle at a moment when many families’ financial situations have not returned to pre-pandemic normal.

But there’s a related loss that would come with the expiration of the unemployment benefits: for individuals, a loss of the ability to put themselves on stabler financial footing in the long term, and for the economy as a whole, a retreat from exactly the kind of consumer spending that’s needed to create jobs. The combined impact could jeopardize the ability of Americans, and of the US economy, to rebound from the current crisis when the virus finally begins to ebb.

As Americans in low-wage sectors like food service have disproportionately been the ones to lose work in this pandemic, the weekly $600 addition has meant that many people are bringing in more money than they once did at their regular jobs. This has allowed legions of people like Nussbaum and Enany’s clients to invest in their financial health: paying off outstanding bills, working down a debt, or putting money into improving a small business that will later reap dividends. This sort of investment, say economists, is a feature, not a bug, of the enhanced unemployment program. Almost all spending right now—whether on short-term needs like rent or food or on longer-term ones like paying off a debt— will help stimulate the pandemic-battered economy.

“The bottom line here is there isn’t necessarily a clean distinction between long term and short term in terms of the nature of the spending,” says Greg Leiserson, the chief economist at the Washington Center for Equitable Growth. “What we have writ large is scenarios where people are using funds to maintain their standard of living and improve it, and doing so with a variety of spending that can have positive spillover effects.”   

As Senate Republicans race to come to an agreement about how to move forward, many have made clear they would like to see the benefit expire. Their latest proposals include the possibility of reducing the benefit to as little as $100 per week, with the goal of replacing 70 percent of workers’ regular pay. But they have yet to unveil a final plan.

As the expiration date approaches, Nussbaum says, “everyone is sort of holding their breath.”

Republicans’ argument for ending or reducing the additional $600 payment goes like this: The benefit, which amounts to at least $2400 in additional monthly income, is too generous and therefore discourages workers from reentering the workforce. In their thinking, small businesses are clamoring for workers to return, but their employees would rather sit back and collect unemployment. Senate Majority Leader Mitch McConnell called the $600 benefit akin to paying people “a bonus not to go back to work.”

Many economists, however, point out that there are not enough jobs to go back to. According the Bureau of Labor Statistics, in May there were 3.9 unemployed people per job opening. “Cutting benefits to incentivize people to take jobs that aren’t there is terrible economics, and just cruel,” says Heidi Shierholz, a senior economist at the Economic Policy Institute. “It will cause a huge amount of human suffering.” What’s more, she adds, many people aren’t going back to work not because of unemployment checks, but due to the risk of contracting COVID-19, or because of childcare responsibilities while schools, summer camps, and daycares remain closed. “It doesn’t matter how much you cut their benefits; it’s impossible to incentivize them to take a job because they cannot,” she says. “So if you cut their benefits, you’re only hurting them.”  

A number of economic analyses have found no evidence of a connection between enhanced unemployment benefits and people’s likelihood of taking a job. “I lean more and more that UI [unemployment insurance] generosity should be maintained,” former Treasury economist Ernie Tedeschi wrote on Twitter, after doing his own analysis and finding no evidence that the generosity of the benefit is dragging the labor market.

If anything, the opposite is true: The extra $600 is likely to lower unemployment rates, explains Alix Gould-Werth, the director of family economic security policy at the Washington Center for Equitable Growth. That’s because as the income helps people cover bills, it leads to spending that props up businesses—and eventually creates more jobs.

“If we cut this $600 at a time when we’re seeing the worst rates of unemployment that we’ve seen since the Great Depression, what will happen is the unemployment that’s being faced by people already on the rolls is going to be contagious, much like the virus itself,” Gould-Werth says.

An Economic Policy Institute analysis found that extending the $600 benefit until the middle of 2021 would create 5.1 million jobs. “Cutting off the $600 doesn’t just hurt the people who are recipients,” says Shierholz. “It hurts all of us.”

Ramona Ferreyra, one of the clients of Trust Plus, Neighborhood Trust’s coaching program, knows this firsthand. Two years ago, Ferreyra started a small online retail business selling children’s clothes inspired by her Hispanic heritage, after a Google search for “Hispanic onesies” while hunting for a gift for her nephew turned up baby clothes that said “bad hombre.” Receiving the extended unemployment, she says, has not just made up for the lost income from canceled events and an initial drop in sales; it has allowed her to invest in expanding her business by buying Facebook and Google ads she couldn’t afford before and paying an intern. The most immediate impact of losing those extra funds, she says, will be having to let the intern go.

Due to a disability, Ferreyra is no longer able to work in traditional jobs. The business, as well as government support, is what she and her 89-year-old grandmother live on, in a one-bedroom apartment in a public housing complex in the Bronx. The unemployment income far exceeds the approximately $200 in discretionary spending that she holds herself to each month, and it’s allowed her to assemble some savings to get them through the uncertain future of the coronavirus economy.

Investing part of the unemployment money into her business has already boosted her sales. “I feel more confident and more ready for the future than I have in years,” she says. She’s expecting the benefit to expire, and she fears the consequences. “It’s unsafe for people to go back to work,” she says. “Every time they try to reopen the economy, it’s people of color who end up paying for that. It’s service workers like in my community and throughout the Bronx that are going to keep dying.”

To understand the economic significance of the extra $600, it is important to note that regular unemployment insurance was never intended to help people through systemic, long-running economic crises like the one wrought by the pandemic. When the federal government created the program following the Great Depression, it was designed to replace about half of a worker’s regular wages, functioning as a stopgap that could supplement workers’ savings or community help to weather a short spell of unemployment. (In practice, it replaces 40 percent of wages on average, and less in some states.) The aim of limiting benefits was to create an incentive for workers to find a job, in order to return to their former standard of living.

“Let’s say that in a normal economic climate, that kind of makes sense,” Gould-Werth says. “But this is not a normal economic climate. There aren’t jobs to be found right now, and it’s unclear when that’s going to get better.” 

In most states, unemployment insurance maxes out at a few hundred dollars a week; on average, workers get $370 weekly. Congress enacted the extra $600 in March with the idea that it would fill the gap left by this partial wage replacement—making people whole, and in doing so, ensuring that they keep spending, stimulating the economy.

“The unemployment program right now is serving a dual role—one part social insurance, a program that alleviates hardship, and one part macroeconomic stabilizer,” says Leiserson. “Both of those are happening at the same time.”

Take spending on rent and housing. The $600 benefit has allowed many families to make rent, says Diane Yentel, president of the National Low Income Housing Coalition. If it expires, paying the rent becomes a lot more difficult—just after the federal eviction moratorium enacted by the CARES Act, which applies to about 30 percent of households, expires on Saturday.

This has enormous implications. When huge numbers of people can’t pay their rent, it sets off an economic chain reaction: Suddenly their landlords can’t pay their mortgages, and they in turn spend less on goods—and then the workers who make those goods lose their jobs.

“We’re at risk of a massive collapse in spending if [the additional] unemployment insurance expires,” says Leiserson. “Part of how that would be transmitted through the economy is missed rent payments and missed mortgage payments.”

If this gets bad enough, for long enough, across a large enough mass of people, slews of owners could default on their home loans, leading the banks that lent them the money to book losses, and the economy to slide further into crisis.

The $600 benefit—along with federal and state eviction moratoriums and the one-time $1,200 stimulus checks issued following passage of the CARES Act—has been key to staving off a national wave of missed rent and evictions, says Yentel, Though not completely. In June, nearly a third of Americans missed their housing payments. In the more than 20 states that have already allowed their own eviction moratoriums to expire, eviction filings and proceedings have been on the rise, Yentel says, while emergency rental assistance programs have been depleted in a matter of days or hours. In Los Angeles, a program with enough funding to help 50,000 renters saw double that number of applications in its first day. Houston’s program closed 90 minutes after opening, due to overwhelming demand. New York State’s website crashed after only eight minutes. “This is with expanded unemployment still in place,” Yentel says, predicting a housing catastrophe once that benefit ends. “The imminent tsunami of evictions is both entirely predictable and preventable,” Yentel says.  

Nussbaum says most of her clients who have lost their job are able to pay their rent only because of the added $600 benefit. “If the enhanced unemployment continues, then the rent is manageable,” Nussbaum says. “The one-two punch of having [the benefit and the federal eviction moratorium] expire at the same time is going to be horrific.”

Nussbaum and Enany have been advising their clients to save their extra unemployment dollars ahead of the July 31 expiration. But not all of them can manage to build savings, and the funds people have been able to assemble from the $600 supplement that has only existed since March are not enough to ride out a long economic slump. “There’s no way you could put together a six-month emergency fund in three months when you’re dealing with everything else that we’ve been dealing with,” Nussbaum says.

As Congress continues to debate the future of the unemployment benefit, Nussbaum and Enany have done their best to advise their clients with the limited information they have. “People are asking what’s going to happen, and you don’t have an answer for them,” Enany says. “You just stress how uncertain things are and recommend that they save as much as possible for uncertainty. Because uncertainty is what we have.”


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