Earlier today Trump announced by executive order that he’ll be extending additional unemployment benefits by $400/week through the end of the year. Previously it was $600/week, which expired July 31st. The $400 is the max amount, where the federal government will pay 75% ($300) and the states are expected to contribute 25% ($100).
This happened after two weeks of deadlocked negotiations. How did Trump arrive at $400? Well, the Democrats wanted $600/week and the Republicans wanted $200/week, so he split the difference.
How will this affect consumption and the economy? Let’s dig in.
$600/week so far
First off, there are about 32 million unemployed people who were receiving the $600/week stimulus. The media typically reports the state unemployment number, which is 15–16 million, but there’s an additional 13 million people, largely contract workers, claiming Pandemic Unemployment Assistance (PUA) and a little over one million people claiming Pandemic Emergency Unemployment Compensation (PEUC). Those who claim PUA/PEUC do not get state unemployment insurance (UI), but both sets of workers are eligible for the $600/week benefit.
JP Morgan Chase has an incredibly thorough report on how this $600/week benefit affected consumption and the economy. They sampled over 70,000 Chase households receiving unemployment benefits to see how spending changed.
Once the lockdowns came into effect in March and April, they found that employed people spent 10% less than before. For the unemployed, it’s a startling story. We know from history that when you’re unemployed, spending drops about 7%. During the COVID period, after unemployment benefits kicked in, spending actually increased by 22% to baseline, for a total change of 29%.
The average household spends about $1,500/week. So a 29% increase implies an additional $435/week in spending. Multiply that by 32 million unemployed people and you get $14 billion in additional spending/week which supports the economy and businesses.
So what happens when you cut that $600/week to $400/week?
There are a few ways to tackle this. First, note that if the average household is spending ~$1,500/week, and there’s 130 million households, that’s about $195 billion in weekly spend.
We know people were spending an additional $435/week, and saving the rest. So if that’s essential spend, you could argue that people will spend the max possible i.e. spend all $400. This will lead to a drop in $35/week in spending, which seems small, but results in a drop in $1 billion in spending/week. So overall spending drops by 0.5%, which can have cascading effects, but overall not massive. That’s the optimistic case, and it misses a few points. For example, maybe you need an additional $500/week for your family because you’re in a high cost area, so the $400 cut is crippling. There are different ways to slice this but too complex for us to break down right now.
Another case is where spending drops proportionally. Ganong and Noel (2019) found that 83% of unemployment benefits are typically spent, and the JP Morgan data shows that 73% of the additional benefits were spent. Let’s assume that 75% of unemployment is spent, then with $400/week we get a spend of $300/week, which is a $135/week drop from the prior number. That translates to a loss of $4 billion in spending/week, or 2% overall. The same issues as before are exacerbated.
It’s important to note that a 2% drop can have massive effect. US GDP dropped a little over 1% in Q1 as the pandemic broke out and we locked down, and it dropped 9% in Q2. It’s likely going to improve from here, but a 2% drop in aggregate consumption can be massive because several households/businesses might have been just at break-even and can now go out of business with a drop in demand.
This is also complicated by state benefits expiring. Most states are currently offering about 40 weeks of unemployment, so if you lost your job in April, then you won’t get unemployment after November. That might get extended again, but the government needs to support state budgets to keep these programs funded. Now is not the right time to cut back on these benefits.
My overall take is that spending will drop in unemployed households by $140–540/month on average. This means that people who were saving more will save less, and those who really needed the money are going to struggle even more and face hardship. It’s not a good time to cut benefits for people who need it, even if it means overpaying others. There’s also the impending cascade of rent, mortgages, and loans, but the current plan is to defer, forget, and hope it works out later.
Hopefully employment picks up to reduce the need for UI as the country recovers.