Unemployment Benefits Are Stimulus

Created: May 28, 2010 16:19 | Last updated: July 31, 2020 00:00

Robert Reich has a good column on”why deficit hawks are killing the recovery.”

Consumer spending is 70 percent of the American economy, so if consumers can’t or won’t spend we’re back in the soup. Yet the government just reported that consumer spending stalled in April – the first month consumers didn’t up their spending since last September. Instead, consumers boosted their savings, probably because they’re worried about the slow pace of job growth (next Friday’s report will likely show gains, but the number will continue to be tiny compared to the overall ranks of the jobless), as well as a lackluster “recovery.” They’re also still carrying enormous debt burdens. One in four home owners is still underwater. And median wages are going nowhere.

So what’s Congress doing to stoke the economy as consumers pull back? In a word, nothing. Democratic House leaders yesterday shrank their jobs bill to a droplet. They jettisoned proposed subsidies to help the unemployed buy health insurance, as well as higher matching funds for state-run health programs such as Medicaid. And they trimmed extended unemployment insurance. “Members who are from low unemployment areas are very concerned about the deficit,” Nancy Pelosi explained.

It is worth noting explicitly that unemployment benefits are stimulus, and a highly effective form of it. When the government cuts an unemployed person a check, that person is necessarily jobless. He tends to have close to nothing in savings; Harvard’s Raj Chetty has calculated that the median person currently unemployed had only $250 in liquid savings at the time of job loss. He tends to have no other source of income. And so he generally goes out and spends his unemployment check — raising consumption, that all-important 70 percent of the economy — rather than saving it. That means that if Congress trims $40 billion in unemployment benefits, it trims $40 billion in stimulus and somewhere close to $40 billion in consumer spending as well.