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Avoiding Hooverville: Why We Need to Extend and Reform Pandemic Unemployment Insurance

Unfortunately, even with the trillions of dollars already pumped into the economy, great damage is being done.
August 7, 2020
Avoiding Hooverville: Why We Need to Extend and Reform Pandemic Unemployment Insurance
NEW YORK, NEW YORK - JULY 30: New Yorkers in need receive free produce, dry goods, and meat at a Food Bank For New York City distribution event at Barclays Center on July 30, 2020 in New York City. In addition to unemployment and homelessness, millions of Americans face food insecurity as a result of the economic downturn caused by the coronavirus pandemic. (Photo by Michael Loccisano/Getty Images for Food Bank For New York City)

Just like that, the additional $600 a week pandemic unemployment supplements have expired. With the livelihood of American workers and the economy at risk, Congress and the Administration are deeply divided on how—or whether—to renew the lifeline that has sustained both. This is a much more complex debate than the combatants recognize, and misunderstanding the dynamics may hold big consequences for workers and the economy.

First, let’s consider the workers and their families. Over 25 million are set to fall off a steep “income cliff” if this supplementary unemployment insurance bonus is not renewed. As the labor market continues to weaken and initial unemployment claims start to climb again, a significant portion of the 25 million receiving these benefits will have no other prospects for replacing income that has been paying for housing, food and other necessities. 

Republicans have argued since the enhanced benefits were created back in March that the additional payments would discourage workers, especially low-wage workers, from going back to work since they could make more by staying home and collecting benefits. It’s important to keep in mind that the main thing standing between workers and their jobs is not the unemployment benefits, but COVID-19 itself. People aren’t avoiding work; they are avoiding illness and the potential for it. A recent review of the pandemic supplement by Yale University found no evidence that the additional $600  “encouraged layoffs… [or] deterred people from returning to work.” Though the research around this latter point is muddy, there is evidence that the Pandemic Unemployment Assistance, or PUA, may not have a disincentive effect for another reason: even with the $600 supplement, unemployment insurance (UI) payments are below what they were making as an employee once non-wage compensation is included. 

An exclusive focus on UI benefits through the lens of homo economicus—the idea that human beings make decisions solely on the basis of rational economic considerations—is excessively narrow and ignores other aspects of the roles work plays in our lives. Human beings require work to thrive personally, emotionally, and financially. If the virus disappeared tomorrow, people who have been cooped up for months would happily return to their jobs in droves. It is comforting to “retreat to priors” and try to apply long-held policy concerns about welfarism to COVID-induced layoffs, but it is a category error nonetheless.

Leaving aside the pain inflicted on individuals and families, abruptly terminating these expanded UI benefits also threatens to further blunt whatever economic momentum we currently have. With GDP in an apparent free-fall, failing to renew UI benefits to spur consumer demand is a kind of economic death wish, reminiscent of efforts by the Hoover Administration and a divided Congress to limit relief measures in the teeth of the Great Depression. We’ve seen this kind of frustration, exasperation, and exhaustion before it didn’t end well as the Depression gained momentum. 

What should focus the minds of our elected representatives is that, as in 1932, there might not be a “do-over”. Once the damage to business and employment is done, it is terribly difficult to reverse and holds the potential not just to impoverish millions of Americans, but take the rest of the global economy down with us. If you think UI payments and other federal backstopping of the economy is expensive, consider the potential cost of a prolonged depression inflicting severe damage on entire industries and business sectors while plunging our trading partners and the developing world into even deeper crises. 

While we await the production of new COVID therapies and vaccines that are the real cures for the pandemic and the economic slump, we do need to begin considering how we will reform the COVID unemployment supplements in a way that will incentivize and support the return to work. To address this challenge, our recent report, A Roadmap to Reemployment in the COVID-19 Economy, proposes diverting a portion of the $600 UI supplement to personal reemployment accounts that can be used for education, training, and other work- or training-related costs. Even a modest, initial shift of $50 per week to such accounts would signal to UI recipients that a return to work was necessary and expected while providing worker-controlled resources to build skills, finance relocation, or pay for childcare, transportation or other work-support services. As outlined in the report, it may also be possible to convert these accounts to a long-term strategy for reskilling by creating a reliable source of funds to support the “life-long learning” that is increasingly required in our dynamic, technology-driven economy. 

Unfortunately, even with the trillions of dollars already pumped into the economy, great damage is being done. In this health-driven economic crisis the top priority must be, “First, do no harm.” If we can help workers and businesses hang on until effective solutions to the COVID-19 virus are widely available, a full recovery—for public health and the economy—is possible. 

Brent Orrell and Matt Leger

Brent Orrell is a senior fellow at the American Enterprise Institute. Matt Leger is a research analyst at the American Enterprise Institute.