Cutting unemployment benefits would hamper recovery: study

Eliminating the $600 in additional weekly unemployment benefits could hamper the economic recovery, according to a study released last week.

The study found that failing to renew the benefits at all would lead to a massive 4.3 percent drop in consumption, the central driver of the American economy.

“The decline in consumption from ‘no supplement’ is greater than the entire peak-to-trough decline of the Great Recession,” University of Chicago professor Peter Ganong, one of the study’s authors, wrote on Twitter.

“This reflects just how much the US economy is on life support right now through UI [unemployment insurance] benefits,” he added.

The $600 expansion, which expired last week, is at the center of tense negotiations between congressional Democrats and the White House.

“Our estimates suggest that expiration will result in large spending cuts, with potentially negative effects on both households and macroeconomic activity,” said the study, released by the JPMorgan Chase Institute and authored by several prominent scholars.

The one-month drop in spending would be 2.3 percent if benefits continued at $200, and 1.4 percent if they continued at $400.

The study found evidence that people receiving unemployment benefits were likely to spend them quickly, rather than save them, pushing the money back into the economy.

But the paper also found that the economy could stay afloat with smaller payments.

Republicans have frequently cited Ganong’s earlier work estimating that some 68 percent of unemployment insurance recipients were earning more than their previous salaries because of the extra $600 weekly. That, they say, is stopping people from going back to work.

In their recent paper, however, Ganong and his co-authors suggested that the extra benefits were serving as additional economic stimulus. Without it, they estimated spending among unemployed households would have fallen 7 percent. Instead, it rose 22 percent.

It would only take $350 to bring the overall average spending back up to pre-pandemic levels, he study said.

Still, the authors noted that a drop in spending would leave the economy worse off, as businesses already hit with health concerns and social distancing restrictions would face a sharp drop-off in demand.

“Even a partial restoration of pre-pandemic relationship between UI benefits and spending would imply that eliminating the $600 supplement could result in large spending cuts and thus potential negative effects on macroeconomic activity,” the study said.

House Speaker Nancy Pelosi (D-Calif.), who has been pushing for keeping benefits at $600, circulated a Wall Street Journal article citing the figures on Thursday.