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Tuesday, November 30, 2010

Jobless aid loss could choke economic growth

Jobless aid loss could choke economic growth

This article describes the issue and possible consequences involving the cutting of unemployment benefits in the near future. Some of the consequences that economic analysts believe could occur in the next year if benefits ran out include: “1. Economic growth could fall almost 1%; 2. 1 million people could lose their jobs, 3. Hundreds of thousands more could fall into poverty.” 1

It is estimated that in 2009, unemployment checks kept 3.3 million people from falling into poverty. If unemployment benefits stopped, 2 million people would lose their benefits by Christmas. 1

The timing of this decision is crucial. Bush-era tax cuts are set to expire on December 31, and congress is currently in the process of working to extend these tax cuts. If they were not extended, “marginal income tax rates will rise across the board, tax credits that benefit families will be slashed, and rates on capital gains and dividends will increase.” 2 While this will likely not affect many receiving unemployment benefits, it represents a significant burden to employed individuals.

The economic impact of both of these decisions is quite significant. Unemployment benefits help supplement the income of individuals not currently working, and according to The Congressional Budget Office, “every $1 spent on unemployment benefits generates up to $1.90 in economic growth” because jobless tend to spend every dollar they receive. 1 Tax cuts help the employed, but when compared to unemployment benefits, tax cuts are believed to generate less economic benefit because taxpayers tend to save a larger amount of their budget. As we discussed class the other day, lower taxes for individuals and businesses stimulates economic growth, because when entrepreneurs benefit, wages benefits, which helps out the economy.

Both programs have an impact on the government budget deficit, which is currently at $1.3 trillion. Unemployment benefits would increase this deficit by about $5 billion per month, while it is estimated that permanently extending the Bush-era tax cuts could result in $5 trillion in foregone revenue in the next decade. 2

So what gives? Do you extend tax cuts, but kill unemployment benefits, which will hurt the economic growth, but help the currently employed? Do you let the Bush-era tax cuts run out, and extend unemployment benefits, which will further strain the currently employed, but continue to provide relief to the unemployed and economic growth? Do you do both?

I think you have to do both, and it appears that both are on the brink of being passed. While I do not want the federal budget deficit to increase anymore, the consequences of not extending each would result in serious impact on the future state of our economy. If tax cuts were not extended, the average family would pay $2,600 in additional taxes annually 2 which would further hurt economic growth, pushing more people into unfavorable financial situations. If unemployment benefits are not extended, economic growth will take a huge hit, and many more people will fall into poverty. In the current state of our economy, it is almost unfathomable to not extend both.

1 http://www.msnbc.msn.com/id/40430391/ns/business-stocks_and_economy/

2 http://www.bloomberg.com/news/2010-11-16/senate-s-durbin-not-very-optimistic-bush-era-tax-cuts-will-be-extended.html

Where does the money come from the extend "unemployment benefits?"

I know the national government has a program of "unemployment insurance." And, I think employers, and employees at least through incidence, make annual payments (taxes) into a fund that pays "unemployment insurance benefits." If the insurance terms are that the money, collected as it is, will provide a specific benefit, e.g. so many $$$ for so many months, then once the terms have been met for the insurance are you sure additional payments should be added? And, where will the additional monies for payments, beyond the original terms of the insurance benefits, come from? Given that the government budget is already in deficit, does extending "unemployment benefits" mean that government is borrowing money to support what was supposed to be an insurance program?
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