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  • The extra $600 a week boost to unemployment insurance is set to expire at the end of July.
  • Lawmakers, particularly Republicans like Mitch McConnell and Donald Trump, do not want to extend the benefit.
  • But not extending the boost to the payments would cause a major demand shock and seriously harm the US economy as it tries to emerge from the coronavirus pandemic.
  • Neil Dutta is head of economics at Renaissance Macro Research.
  • This is an opinion column. The thoughts expressed are those of the author.
  • Visit Business Insider's homepage for more stories.

Lawmakers across the federal, state, and local levels ought to be commended for quickly responding to the economic damage wrought by the coronavirus pandemic and measures taken to slow the spread of the virus, but it is important for policymakers to not rest on their laurels.

 To be sure, the news in recent weeks has been encouraging. The pace of testing has increased and the rate of positives has come down. US equity markets have advanced. There are tentative signs that a recovery is underway.

But it appears some policymakers have lost their appetite for more action to support the economy.

For more than a year before the pandemic hit, President Trump was clamoring for the Federal Reserve to cut rates in an effort to boost the economy. But now, the Fed is still taking aggressive steps and it's the Trump administration that is signaling it wants to do less.

As an example, White House economic adviser Kevin Hassett quipped, "I think it's possible that we'll see a strong enough economy that we don't need [another stimulus]."

Lifting off the gas before the race is over

There is a risk to declaring victory too soon and expecting the reopening of the economy to drive a robust labor market recovery. The risk of too much stimulus is negligible — especially with negative real interest rates as far as the eye can see . But there is plenty of obvious risk in waiting to see how economic conditions unfold and doing too little to lift the economy. Now isn't the time to hesitate.

Nowhere is this risk greater than if lawmakers allow the enhanced unemployment insurance benefits to lapse in July.

As part of the CARES Act, unemployment insurance was supplemented with a $600 per week boost. In many cases, particularly in the affected industries of leisure & hospitality and retail, the enhancement ends up paying more than the previous wages of the workers. But given the state-mandated shutdowns and the public health imperative to encourage people to stay home, the addition was a necessary bridge for households during the pandemic.

A number of lawmakers are reluctant to extend the program since the economy is starting to reopen. The thinking is pretty straightforward: extra unemployment insurance raises incomes beyond what someone would otherwise get in the marketplace creating a perverse disincentive to look for work.

I sympathize with the idea. Academic research supports the notion that extensions in unemployment benefits can lengthen unemployment spells, creating a disincentive for job search. Recently, some restaurateurs have argued that workers won't bother coming back because benefits are too generous.

However, in these highly unusual times, these concerns should put on ice. Labor supply considerations are secondary to demand. Reopening the economy will be a long process, not a light switch.

Those workers that tend to see better than one-for-one income replacement also tend to work in industries that require close physical proximity to others like restaurant workers, cashiers, and retail salespersons.

Given the slow moving recovery underway in these industries, it is highly unlikely that come July these hard hit sectors will be ready to hire back all the recently laid off people. And so many of these workers will still be stuck without a job when the extra, needed benefits lapse.

Should the benefits expire without a replacement the fallout is obvious. Many of those on unemployment insurance may indeed be more willing to look for work, but few of them will be picked up right away and the lack of additional income support will mean these folks will spend less. When they spend less, demand will drop, and when demand drops, employers will have less reason to hire more workers in the first place.

Frankly, I am more worried about the funding lapse over unemployment benefits than the other big fiscal item on the agenda: aid to state governments. All legislators represent states that are seeing massive budget shortfalls, and so, political resistance should be somewhat limited. By contrast, the unemployment insurance debate brings more of an ideological opposition than other fiscal issues.

For investors, the risk is that policymakers have lost their sense of urgency. This would imply that the strike price on the fiscal policy put – the drop in equities needed to get policymakers to act – is lower than commonly believed. If that's the case stocks have room to fall.

For the economy, failure to continue to extend support or provide a replacement scheme once the current program ends would be bad for consumers' spending.

 

This is an opinion column. The thoughts expressed are those of the author(s).