Head of Global Economics
BofA Global Research
The Edge of the Income Cliff
Today the CARES1 Act’s $600 of weekly supplemental unemployment insurance expires, as Congress continues to battle over the next round of fiscal stimulus for the U.S. economy.
Although it’s likely there will be a stopgap bill to extend these benefits, the question of how much supplemental unemployment insurance people should get while the economy digs itself out of a hole is one of the major sticking points holding up the passage of a new stimulus package.
We’re concerned that scaling back the $600 a week by too much, and too soon, could snuff out the consumer spending power that’s fueling the economic recovery.
Some argue for a reduction in the $600 a week because they think it could be a disincentive for some to seek work. They base that on estimates suggesting that about two-thirds of the people getting the $600 a week are now getting paid more than they were in their previous jobs. And that if they don’t seek jobs, there won’t be enough people to meet labor demand as the economy recovers.
Wanted: More Jobs
But misaligned incentives are not the main challenge for the labor market. The overall weakness of the economy is.
Any reduction or elimination of the roughly $10 billion a week in supplemental benefits is likely to hurt consumer spending, and less spending could have knock-on effects on businesses. That in turn could lead to even more layoffs - at time when we are still seeing over 1 million people file for unemployment insurance every week;2 more than we saw even during the 2008-9 financial crisis.
We also heard a cautious tone from the Federal Reserve at its Federal Open Market Committee (FOMC) meeting this week. The FOMC emphasized that although we’ve seen economic data improving, there’s still a lot of work ahead to fully repair the economy, and the economy’s fate is still inextricably linked to the course of the virus. And just how much more work is needed was made abundantly clear by news that second-quarter U.S. GDP dropped at a record 32.9% rate compared to the first quarter3.
All that said, it is important that people have the right incentives to find work, but we believe that demand for labor should be stronger before any scaling back of supplemental unemployment benefits is considered.
Please visit our Global Macro Snapshot webpage weekly for our latest insights.
- The Coronavirus Aid, Relief, and Economic Security (CARES) Act. An over $2 trillion economic relief package signed into law by President Trump on March 27, 2020
- Based on weekly jobless claims filed
- The 32.9% GDP contraction in Q2 vs Q1 2020 is a seasonally adjusted annual rate (saar)
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