Friday brought positive economic news for the first time since the coronavirus crisis and ensuing government-mandated societal shutdown brought the economy to a halt.
For the month of May, many economists had projected further job losses of up to 8 million and an increase in the unemployment rate to 20 percent. However, the Bureau of Labor Statistics found that the economy actually added 2.5 million jobs last month and that the unemployment rate fell to 13.3 percent. There is some reason to question these figures, but they are still a sign of a rebounding economy, stemming in large part from the move in many states to reopen businesses and restart economic life.
Regardless, if we want any kind of recovery, we must reject the Democrats’ latest COVID-19 policy proposal. A new report from the nonpartisan Congressional Budget Office gives us strong reason to believe that if congressional Democrats successfully pass their plan, the economy will suffer—and slip into a welfare state coma.
Here’s the backstory.
In the immediate aftermath of the COVID-19 crisis, Congress wanted to make it financially feasible for workers to stay home amid a pandemic and to provide additional support for those whose employment was terminated during the shutdown. So, the original $2.2 trillion CARES Act stimulus and relief bill added $600 a week in federally funded supplementary unemployment benefits—which, for most workers, meant they could make more money staying home than working.
The example offered by Kentucky small business owner Sky Marietta helps demonstrate how the expansion has gone haywire:
“We basically have this situation where it would be a logical choice for a lot of people to be unemployed,” said Sky Marietta, who opened a coffee shop along with her husband, Geoff, last year in Harlan, Ky… Even though she had customers, Marietta reluctantly decided to close the coffee shop.
“The very people we hired have now asked us to be laid off,” Marietta wrote in a blog post. “Not because they did not like their jobs or because they did not want to work, but because it would cost them literally hundreds of dollars per week to be employed.”
With the federal government now offering $600 a week on top of the state’s unemployment benefits, she recognized her former employees could make more money staying home than they did on the job.
These augmented benefits only even arguably made sense as an extremely short-term provision, but the CARES Act left them in place through July 31. This has actively sabotaged and weakened the economic recovery, as many employers try to rehire their workers but can’t get them to come back to work so long as welfare pays more.
The Heritage Foundation found that this initial unemployment expansion led to 14 million additional Americans filing for unemployment, and a $1 to $1.5 trillion drop in the size of the economy.
Now, congressional Democrats want to double-down on this economic illiteracy. Speaker of the House Nancy Pelosi and her fellow House Democrats—along with a few misguided Republicans such as New York Rep. Peter King—voted to pass the HEROES Act, a follow-up COVID-19 bill which extends the augmented benefits through January 2021.
Basic economics tells us that paying people more to stay home on welfare until the new year is a recipe for disaster, not economic recovery.
After all, people respond to incentives. And, naturally, when you make the payoff to returning work less financially attractive, fewer people will choose to do so. It doesn’t make these individuals evil or lazy, just human. (If you could stay home and not have your income drop off, wouldn’t you?) But encouraging this phenomenon on a widespread scale through government policy creates dependency, shrinks production, and lowers the standard of living. Also, it only discourages economic growth and recovery.
The CBO’s report examined the proposed unemployment extension in detail, and the results offer a jarring confirmation of everything economic theory would have predicted.
It finds that under the Democrats’ proposal, 4 in 5 unemployment insurance beneficiaries would earn more staying on benefits than they would by working. That means tens of millions of Americans would face every financial incentive not to go back to work.
The CBO does predict that extending the benefits would provide a brief boost to economic output because people would spend more money in the short-term. This is an optimistic projection that relies on dubious assumptions that spending boosts the economy, which other economists contest. More importantly, the CBO finds that extending the benefits means unemployment will be higher throughout 2020 and 2021, and that it will decrease the size of the economy in 2021.
Per the report, the unemployment expansion “would 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.” But in an interesting twist that has to some degree gone overlooked amid the focus on employment impacts, the CBO also points out that the budget deficits run up by extending the program will contribute to the economic slide.
“In the short term, the increased spending from the additional benefits would have a much larger effect on output than would the increased deficits,” the report reads. “In the longer term, those deficits would drive interest rates up—lowering investment and the economy’s maximum sustainable output.”
Many skeptics are warning against this path.
“It was one thing to deploy enhanced unemployment benefits for a limited time to help complement public health policy,” noted the Washington Examiner editorial board. “It’s another thing entirely to create an enduring entitlement that is going to be a barrier to getting the economy moving again.”
“[The HEROES Act] reduces incentives to re‐enter the labor market, negatively affecting an eventual economic recovery,” the Cato Institute’s Jeffrey Miron and Erin Partin wrote. “Especially as businesses re‐open, the economy will need a ready supply of workers, perhaps in industries different from where the unemployed originally worked.”
The solution here is quite clear: It’s economically illiterate and illogical to extend welfare benefits that pay more than work through the new year. But unfortunately, the Democratic push to do so was always inevitable after the original provision was passed.
Once the welfare state expands, politicians have a strong political incentive to disregard the laws of economics and keep the programs in place into perpetuity. It was Nobel laureate Milton Friedman who said “Nothing is so permanent as a temporary government program.” This principle, articulated by many other economic philosophers as well, has borne out time and time again.
This case is no different. Indeed, it will be easy to malign Republicans who vote against extending benefits as cruel and heartless, while sympathetic liberal media outlets will paint Democrats as kind and compassionate for their support for down-on-their-luck workers.
But the laws of economics are not susceptible to emotional appeals. If the Democrats’ welfare expansion plans become law, economic reality will mug their good intentions—and the American economy will pay the price.
