On July 31, 2020, 28 million jobless Americans lost the $600 per week bonus that the CARES Act provided in March. Despite the looming deadline, Congress was unable to strike a deal to continue some form of extra unemployment benefits.
According to the National Bureau of Economic Research, the loss of that weekly unemployment bonus may cripple economic recovery with a 44% drop in consumer spending.
“One person’s spending is another person’s income,” explained Julia Lane, NYU Professor and co-author of the report. “When one group stop spending, then there’s a knock-on effect. It’s like a ripple in a pond.”
What About President Trump’s Executive Action?
In lieu of a stimulus deal from Congress, President Donald Trump announced an Executive Order to provide extended unemployment benefits to jobless Americans.
The Federal Emergency Management Agency (FEMA) will provide funds from the Disaster Relief Fund (DRF) in partnership with the U.S Department of Labor to help states continue to deliver extra unemployment funds. It’s titled the Low Wages Assistance (LWA) program. States must apply by September 10 to receive funds to their Unemployment Insurance agencies, and all benefits are retroactive to August 1.
States have two options for LWA:
- Option 1: Offer an additional $300 per week without spending any additional state dollars
- Option 2: Offer an additional $400 per week by adding $100 in benefits through state funds
FEMA expects the funds to last about 5-6 weeks, depending on how many states participate.
Missouri, for example, was one of the first states to apply for LWA. It just received $200 million from FEMA and DOL. The state intends to provide $300 in extra unemployment benefits so that the federal government foots the entire bill. This nearly doubles Missouri’s current weekly unemployment maximum of $320.
The Economic Domino Effect
While it’s true that all states are eligible to use LWA to boost unemployment benefits for the next few weeks, the initial COVID-19 bonus of $600 per week is long gone. Without any LWA bonus, out-of-work Americans have absorbed a drop in benefits ranging from 52% to 72%. For some, that’s a plunge from $812 per week to $257 per week.
So it’s no surprise that NBER predicts a dramatic fall in consumer spending. “Consumer spending is a large portion of economic activity and that’s the main stimulus that has been happening,” Lane said. “44% is a very big hit to worry about.”
If all states use LWA and provide $100 of their own unemployment insurance to total a weekly bonus of $400 for the jobless, the hit on spending would be closer to 12%; not disastrous, but still troubling.
Of course, the bigger question lingers: What happens when the LWA benefits run dry in a month? Nearly 7 million unemployment Americans could be out of a job into 2021.
“There’s going to be a benefits exhaustion,” Lane said. “As people are on the unemployment rolls for longer and longer, what you really need to worry about is even that [base] $257 is going to run out.”