The UI fiscal stimulus
Apropos my previous post, a new NBER paper by Casado et al estimates the effect of pandemic unemployment benefits on local spending:
The FPUC supplement to unemployment insurance of $600 ended at the end of July 2020. Prior to its expiration, the average weekly benefit paid was $812, which would fall to $257, implying a decline in the replacement rate of 68%. The replacement rate was roughly 1.25 in the latest data, so the new replacement rate would be roughly .4, all else equal. At the unemployment rate of .077 in the latest data, spending this reduction in benefits would lead to a decline in spending of 44%. If the FPUC supplement is reduced to $200, the replacement rate would fall by 44%. The implied reduction in spending from these benefits would be 28%. Even if the FPUC supplement is reduced to $400, the replacement rate would fall by 19% and spending would fall by 12%. Thus, substantial declines in the generosity of UI benefits are predicted to have dramatic adverse effects on local spending.
Sure, you can question the results, and wonder about the size of multipliers, but this could be a disaster and the only reasonable policy choice is to extend the UI benefits.
First, you have to assume people care.
https://www.nber.org/papers/w27576.pdf
August, 2020
The Effect of Fiscal Stimulus: Evidence from COVID-19
By Miguel Garza Casado, Britta Glennon, Julia Lane, David McQuown, Daniel Rich, and Bruce A. Weinberg
Abstract
Policymakers, faced with different options for replacing lost earnings, have had limited evidence to inform their decisions. The current economic crisis has highlighted the need for data that are local and timely so that different fiscal policy options on local economies can be more immediately evaluated. This paper provides a framework for evaluating real-time effects of fiscal policy on local economic activity using two new sources of near real-time data. The first data source is administrative records that provide universal, weekly, information on unemployment claimants. The second data source is transaction level data on economic activity that are available on a daily basis. We use shift-share approaches, combined with these two data sources and the novel cross-county variation in the incidence of the COVID-19 supplement to Unemployment Insurance to estimate the local impact of unemployment, earnings replacement, and their interaction on economic activity. We find that higher replacement rates lead to significantly more consumer spending β even with increases in the unemployment rate β consistent with the goal of the fiscal stimulus. Our estimates suggest that, based on the latest data, eliminating the Federal Pandemic Unemployment Compensation (FPUC) supplement would lead to a 44% decline in local spending. If the FPUC supplement is reduced to $200, resulting in a reduction of the replacement rate by 44%, spending would fall by 28%. Even if the FPUC supplement is reduced to $400, the replacement rate would fall by 29% and spending would fall by 12%. Because these data are available in every state, the approach can be used to inform decision making not just in this current crisis, but also in future recessions.
Sure, you can question the results, and wonder about the size of multipliers, but this could be a disaster and the only reasonable policy choice is to extend the UI benefits.
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This must be 2009, 2001, 1992, 1981, all of the recessions right in schedule with this same report. All of them leading to lower growth, and more inequality, all of them repeating the same scenario about eight years later.
We should just schedule this post each time we schedule a recession. Damn near use our regularly scheduled recessions for a calendar and just skip the economics all together.
Matthew:
Please keep the same log on. Thank you.
A line from my dissertation (2008) during the meltdown:
Mass unemployment leads to mass homelessness, which in turn makes an economic snake eating its tail. Even with massive inflation and the relatively new Federal Reserve’s ability to adjust benchmark rates to suppress inflation, the risks and severity all rely upon spending to not have the adverse, rapid deflation and a bifurcated economic recovery, where one population does not see the same economic recovery will only exacerbate the future recessions to come during the normal, average ten year cycles.
Meaning, we stabilized in 2010 but what we were seeing is that the profiteers took profits and the underlying 25% or more of the population was no better off than where they were in 2006. This sets up for a calamity in a future recession (depression) unless the sand is stabilized very early under the overall economic structure. Avalanche if you will.
MS:
I agree. I had to reread your last line a couple of times. The “sand” confused me until I understood your drift
Yeah, I’ve been studying the period between 2010-2014 and the overall economy stabilized but the underlying was still soft, sandy. So it doesn’t take much to wash it away. Poor metaphor.
The overall economy will survive, my current focus is the overwhelming amount of food that comes not from our own country and where COVID is killing folks at almost double the rate than the US. With processors exiting the market on meat production or shuttering plants, producers culling herds, and then 60% of our produce from Mexico having supply chain issues in the future…food and water security are going to be paramount next year. Which is why the wife and I cashed in all the chips, bought land and started a farm.
Somebody should ask the Republicans to imagine what the country would look like if we hadn’t had the $600 backup and the eviction protection for the last four months. That’s what it is going to look like now.
And worrying about how a few people might get lazy — in the middle of this medical and economic blow out — talk about throwing out the baby with the bathwater!? Do these Repubs even think anything might be going wrong?
But, the poors won’t go back to work if we give them money.
The fact that this is controversial demonstrates the wisdom of non-means-tested programs. Giving $600 to every adult would:
-avoid political resentment
-reduce administrative costs
-increase the stimulus
-evade most of the expensive gaming by corporations that we saw in the income replacement program
-assure that between 28 and 35% of the “wasted subsidy” would be recovered by marginal taxation