The better than expected jobs figures for June is already sparking talk of pulling back government aid for the economy.
That would be premature.
Enhanced unemployment benefits, direct grants to taxpayers, and the Paycheck Protection Program played a strong role in support income, spending, and employment. Allowing them to run off or expire now would risk creating conditions for a new crash in employment.
Consider enhanced unemployment. There are currently 19,290,000 Americans receiving unemployment benefits. Allowing the federal government’s $600 weekly enhancement to expire would reduce household income by around $46.3 billion a month. That amounts to an annualized rate of over half a trillion dollars of income sucked out of the part of the economy that is most likely to spend it.
While the economy is adding back jobs at a record pace, nearly one and half million Americans continue to lose their jobs each week. That’s twice the pre-coronavirus all-time record. This heightened level of job insecurity will dampen spending by those who are still working or have found new work, because they will attempt to save more in advance of a possible loss of income. Enhanced unemployment benefits help combat this because incomes don’t fall by as much, and sometimes even rise, when jobs are lost, making the prospect of unemployment less worrying.
The direct grants can also help combat the fearful savings effect by giving households the nest egg they might otherwise seek to build. People can continue to spend their incomes at a normal pace because the government has given them an extra dose of savings.
It is unlikely that the economy will produce anything like 4.8 million jobs in the months ahead. For one thing, the snapback rehires into temporarily closed business have largely already happened. There will be some incremental hiring if businesses are permitted to expand capacity—which will depend on whether infection rates rise or fall—but nowhere near what we say in May and June. As a result, unemployment is likely to remain elevated through the rest of the year.
The Wall Street Journal‘s Justin Lahart explains that ongoing social distancing at work and at school will also take a toll on employment:
It is difficult for people in many jobs to work together safely, and that will still be true in the fall. Sitting cheek-to-jowl in an office, for example, is too risky now, and will likely be viewed as such by many employers and employees, possibly until there is a vaccine. So desks will be reconfigured, partitions will go up, and many business places won’t be able to accommodate as many workers as before, leading to staggered shifts and work-from-home arrangements where people will only come in a few times a week. Companies that are able to will allow employees to work entirely from home through at least the end of the year, as Facebook and Alphabet’s Google have already said they plan to do.
As a result, businesses with sales that depend on commuting workers will continue to struggle. The downtown coffee shop, the fast casual restaurant across from the office park and the business-district gym could be in for a difficult autumn that leaves them employing far fewer workers.
What the fall will look like for schools is up in the air, as districts across the country balance the need for in-person instruction with the importance of keeping students and staff safe. Many are considering hybrid models, where students come in a couple of days of week and learn remotely on other days. For parents who don’t have the luxury of working remotely as well, and who are unable to secure child care, this amounts to a crisis. Many will opt not to work, resulting in lost income and spending power.
Note that the last sentence is not necessarily true. We can support incomes for those who cannot work because they have school-age children to care for. The easiest way to do this is simply to extend enhanced unemployment benefits to those who are unemployed for this reason. If we do not want to penalize families financially for our education policy, we will have to do this.
This does not mean there should not be changes or reforms to our policies. In order to make sure we aren’t discouraging workers from taking jobs that pay less than unemployment, we can extend the federal enhancement benefits into the first month or two after a worker returns to the job. Call it a re-employment benefit. The Paycheck Protection Plan can be expanded and its requirement made less stringent, allowing business owners to use more of the funds for things such as modifications to workplaces to reduce infection.
There’s no doubt we can afford these policies. Long-term interest rates are extremely low, meaning investors are willing to lend to the federal government to support additional spending at yields that are lower than they were when the economy was stronger. There’s no real risk of inflation. If anything, deflation is the more likely risk to the economy. The government of the United States is in a great position to be able to borrow cheaply to support the economy.
Two months of better-than-expected jobs numbers should make Americans feel more confident about the economy. But they should not tempt politicians into pulling the rug out just as many Americans have regained their footing.