On Friday, Jason Furman threw down the gauntlet on Twitter, challenging those proposing automatic stabilizers to come up with a plan to phase down the extra unemployment insurance benefits. He argued that $400 a month was not unreasonable given the latest unemployment report putting the unemployment rate at about 8.4%, and suggested that if you are arguing for $600 a month now, then that means $600 a month was far too low when the unemployment rate was much higher a few months ago. Opponents argued that the latest research shows that the extra unemployment benefits had no impact on employment, so we should keep the full $600 in benefits even though the unemployment rate is much lower.
After considering these concerns for a bit, I think I squared the circle in this debate. I think it is true the research shows that the extra unemployment benefits have no impact on employment, and this holds true even when unemployment is at its current levels. We know this because the dramatic cut in extra benefits down to zero for August did not lead to a surge in employment during the month, where gains in employment actually slowed compared to the month before. This would seem to imply that right now, in the midst of a pandemic, there really is no trade off between more generous unemployment insurance benefits and employment, so we should just set the benefits at the level we need to get the optimal amount of social insurance right now.
Ideally, this means we would set the unemployment insurance benefits so that they would replace 95% to 100% of income, but the state unemployment insurance systems aren't sophisticated enough to do that, so we're kind of stuck setting it at a fixed amount for everyone. If we do that, then we'll have to give a bit too much to low income people and not quite enough to high income people, but Democrats believe in redistributing income to the poor anyway, so they would probably prefer to err on the high side. Some research has indicated that an extra $600 a month in benefits means that about two-thirds of the unemployed will get more in benefits than they earn from their job, and this doesn't seem like an unreasonable number given that low income workers have been hit the hardest as a result of the virus. Plus, there is some evidence that the percent of households feeling food insecure has risen since the pandemic began, so this would indicate that perhaps we aren't doing enough.
My contribution to this debate is to argue that *while the pandemic continues* there is no trade off between higher benefits and employment so we should offer the amount the provides the optimal level of social insurance, which is probably around $600 a month. Once the pandemic goes away, however, then we are back to the normal situation where we want to encourage more people to go to work as the unemployment rate declines, since more jobs are becoming available. To accommodate both considerations, I would set some threshold level for the virus, where perhaps as long as the number of new daily cases in a state stays above 1 for every 100,000 in population (or about 3,000 new cases for the whole country), then we continue to provide the full $600 a month in extra benefits. Then, once the virus is under control, we can link the extra unemployment benefits to a specific unemployment rate. For example, an unemployment rate above 11% in a state would garner $600 a week in extra benefits, and rate between 10% and 11% would lead to benefits around $500 a week. This would keep going down so that benefits would fall to $400 for 9% to 10%, $300 for 8% to 9%, $200 for 7% to 8%, and $100 for 6% to 7%. You could tweak the numbers a bit so maybe the benefits phased down from 5% to 10% rather than 6% to 11%, but that's generally how I would think about phasing the extra benefits down.
I think the main point here is that we want to make sure we get the incentives right. For now, the highest priority should be getting the virus under control, and only once that problem is solved do we want to create incentives to get back to work. Until then, we need to make sure people can meet all their needs through unemployment insurance benefits alone, and given that we are stuck with a fixed amount of extra benefits for everyone, $600 a week seems reasonable. True, some people will get more than they earned working, but there are signs that there is still an unmet need even with extra benefits at $600 a week, and the main argument against it, that it discourages people from returning to work, is refuted by the latest evidence available. I think this proposal balances the arguments coming from both sides, and strikes a nice middle ground that can guide us on how to proceed going forward into the future.
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