Published: December 1, 2010
The Modesto Bee

Forecast dire if jobless benefits cut

By Paul Wiseman | Associated Press

(Matt Rourke / The Associated Press) - In this photo
taken Nov. 22, 2010, Frank Wallace, who is unemployed,
displays a sign during a "Vigil for the Unemployed" at the
Arch Street Methodist Church in Philadelphia. The
number of people applying for unemployment benefits
fell sharply last week to the lowest level since July 2008
, a hopeful sign that improvement in the job market
is accelerating.

WASHINGTON — If Congress lets unemployment benefits expire this week for the long-term unemployed, they won't be the only ones to feel the pain. The economy would suffer, too.

Unemployment benefits help drive the economy because the jobless tend to spend every dollar they get. A cut-off of aid for millions of people unemployed for more than six months could squeeze a fragile economy, analysts say. Among the consequences they envision over the next year:

• Annual economic growth could fall by one half to nearly 1 percentage point.

• Up to 1 million more people could lose their jobs.

• Hundreds of thousands would fall into poverty.

"Look for homelessness to rise and food lines to get longer as we approach Christmas if the situation can't be resolved," said Diane Swonk, chief economist at Mesirow Financial.

The average weekly payment for the roughly 8.5 million people receiving unemployment benefits is $302.90. But it ranges from an average of $118.82 in Puerto Rico to $419.53 in Hawaii. Each state sets the amount through a formula meant to replace a portion of an unemployed person's old income.

That money ripples through the economy, allowing businesses to hire more people, who, in turn, spend more money.

The Congressional Budget Office says every dollar spent on unemployment benefits generates up to $1.90 in economic growth. The program is the most effective government policy for generating growth among 11 options the CBO has analyzed.

Mark Zandi, chief economist at Moody's Analytics, puts the bang-for-a-buck figure at $1.61, and a recent Labor Department study estimates it at $2.

"If you've been unemployed for six months, you've gone through your savings," said Heidi Shierholz, economist at the Economic Policy Institute. "You have no choice but to spend (benefits) immediately."

By contrast, money given to higher-income families — say, through tax cuts — tends to deliver less economic benefit because those taxpayers typically save a big chunk of their windfall.

In July 2008, Congress began extending unemployment benefits, which can now last for up to 99 weeks: 26 weeks of regular benefits from the states, plus up to 73 weeks in federal aid in states with high unemployment rates. As of last week, about half the states offered the maximum 99 weeks of benefits. The extended federal benefits will start phasing out today if Congress doesn't act.

When lawmakers extended the benefits, unemployment was on its way to double digits. The long-term unemployed — those out of work for more than six months — hit a record-high 6.8 million in May. Those people represented 46 percent of all unemployed U.S. residents. That's the highest such proportion on record dating to 1948.

Unemployment peaked at 10.1 percent in October 2009. It's been stuck at 9.6 percent the past three months.

At its peak in the first week of this year, slightly more than 12 million people were receiving unemployment benefits — the most on records dating to 1986. The Labor Department estimates that if Congress lets the aid run out, nearly 2 million people will lose their benefits by Christmas.

Without an extension of aid, the number of impoverished U.S. residents would rise, economists say. The income from unemployment checks kept 3.3 million people from falling into poverty in 2009, according to government estimates. The Census Bureau defines poverty as annual income of less than about $22,000 for a family of four.

Republican lawmakers oppose an extension of the unemployment aid if it would enlarge the government's $1.3 trillion budget deficit. They insist that the cost — about $5 billion a month — be offset with budget cuts elsewhere. Those cuts would reduce the economic impact of extending the benefits.