Jobless funds help economy

WASHINGTON – If Congress lets unemployment benefits expire this week for the long-term unemployed, they won’t be the only ones to feel the pain. The overall economy would suffer, too.

Unemployment benefits help drive the economy because the jobless tend to spend every dollar they get, pumping cash into businesses. A cutoff of aid for millions of people unemployed for more than six months could squeeze a fragile economy, analysts say. Among the consequences they envision over the next year:

• Annual economic growth could fall by one half to nearly 1 percentage point.

• Up to 1 million more people could lose their jobs.

• Hundreds of thousands would fall into poverty.

“Look for homelessness to rise and food lines to get longer as we approach Christmas if the situation can’t be resolved,” says Diane Swonk, chief economist at Mesirow Financial.

The issue is expected to be taken up in the lame-duck session of Congress that resumed Monday.

The average weekly payment for the roughly 8.5 million people receiving unemployment benefits is $302.90. But it ranges widely: from an average of $118.82 in Puerto Rico to an average of $419.53 in Hawaii. Each state sets the amount through a formula meant to replace a portion of an unemployed person’s old income.

That money ripples through the economy. The Congressional Budget Office says every $1 spent on unemployment benefits generates up to $1.90 in economic growth. It’s the most effective government policy for generating growth among 11 options the CBO has analyzed.

Analyst Mark Miller of William Blair & Company figures that, in particular, discount retailers like Dollar General and Family Dollar will see their revenue pinched by a couple of percentage points next year if extended unemployment benefits expire.

“If you’ve been unemployed for six months, you’ve gone through your savings,” says Heidi Shierholz, economist at the Economic Policy Institute. “You have no choice but to spend (benefits) immediately.”

In July 2008, Congress began extending unemployment benefits, which can now last for up to a record 99 weeks: 26 weeks of regular benefits from the states, plus up to 73 weeks in federal aid in states with high unemployment rates. As of last week, about half the states offered the maximum 99 weeks of benefits. The extended federal benefits will start phasing out today if Congress doesn’t act.

When lawmakers extended the benefits, they were responding to a jobs crisis: Unemployment was on its way to double digits for the first time since the 1981-’82 recession. The long-term unemployed – those out of work for more than six months – hit a record-high 6.8 million in May this year. Those people represented 46 percent of all unemployed Americans. That’s the highest such proportion on record dating to 1948.

Unemployment peaked at 10.1 percent in October 2009. It’s been stuck at 9.6 percent the past three months.

At its peak in the first week of this year, just over 12 million people were receiving unemployment benefits – the most on records dating to 1986. The Labor Department estimates that if the aid runs out, nearly 2 million people will lose their benefits by Christmas.

Without an extension, the number of impoverished Americans would rise, economists say. Income from unemployment checks kept 3.3 million people from falling into poverty in 2009, according to government estimates. The Census Bureau defines poverty as annual income of less than about $22,000 for a family of four.

Thirty-three economists have signed a statement circulated by the liberal Economic Policy Institute calling for benefits to be extended for 12 more months. Signatories included Alan Blinder, a former vice chairman of the Federal Reserve, and five winners of the Nobel Prize in economics, including Joseph Stiglitz and Robert Solow.

Republican lawmakers oppose an extension of the unemployment aid if it would enlarge the government’s $1.3 trillion budget deficit. They insist that the cost – around $5 billion a month – be offset with budget cuts elsewhere. Some in Congress want to pair an extension of unemployment aid with a deal to also extend the Bush-era tax cuts.