“Should American families that are receiving these extra $600 checks right now expect that money to stop in August?”, Jake Tapper asked Larry Kudlow, during a Sunday interview that, frankly, could have gone worse, considering who was involved.
Tapper was, of course, referring to the debate around extending extra unemployment benefits on top of state aid as part of the next coronavirus relief package.
This is a point of contention, and it’s one of three fiscal cliffs the US faces over the next two months (the other two being tax payments and ambiguity around the future of the Paycheck Protection Program).
Read more: Will Trump Let Republicans Jeopardize His Reelection By Refusing More Virus Relief?
In the linked post, I discussed this at length and encouraged readers (market participants and otherwise) not to underestimate the risk associated with Congress failing to come to an agreement around another virus relief package.
The key to this discussion (and regular readers will forgive the repetitiveness) is that existing legislation is not properly “stimulus”. Until recently, there was nothing to “stimulate” as the economy was shuttered. The trillions in aid earmarked for individuals, families and businesses was designed to bridge the gap between the time incomes and cash flows ceased, to when they flowed anew.
If what the administration wants to do is “stimulate” activity ahead of the election, they will need to spend more into the economy now that it’s reopened.
That should be self-evident (and it is to Trump, by the way) but budget hawks are starting to circle, emboldened by recent gains in the stock market and the May jobs report.
The Fed has been keen to suggest (if only tacitly) that it would be a mistake to read too much into one month’s jobs numbers, especially considering jobless claims are still running in the millions.
At the post-FOMC press conference last week, Jerome Powell effectively confirmed that in his view, more fiscal stimulus is necessary and Steve Mnuchin was unequivocal on the subject when speaking to lawmakers on Wednesday.
Unfortunately, Kudlow continues to parrot the notion that extending the extra unemployment benefits will discourage people from working, a contention which, while doubtlessly true in some cases, was severely undermined by the very same May jobs report which Kudlow himself was so proud of.
“Unemployment benefits will not stop in August but what may well stop is…”, Kudlow then cut himself off, pivoting briefly to a circumspect claim about bipartisan support for his view, before resuming: “The $600 plus up — that’s above the state unemployment benefits they will continue to receive — is in effect a disincentive”.
“I mean, we’re paying people not to work”, Kudlow continued. “It’s better than their salary”.
Facts matter, folks. Kudlow is appealing to intuition, and that’s fine. Often, intuition lines up well with the facts, especially when those doing the intuiting are honest, rational people.
But in this case, Larry’s claims don’t stand up to an admittedly superficial read on the labor market.
First, the combination of state and federal aid is not, in every industry, “better than” the salary of the unemployed. It is in some industries, particularly those that were hard-hit by the virus. But not in all industries, or even in most of them.
The figure below shows the actual breakdown, from Goldman.
What you’ll note is that, on the right-hand side, Goldman provides the employment-weighted average and the layoff-weighted mean. On average, the combined federal and state assistance compensates workers laid off during the pandemic approximately commensurate with their previous wage (more here).
So, Kudlow isn’t wrong, but he isn’t telling the public the whole story, and he is arguably overstating the case.
Crucially, the variation by industry is where Kudlow’s argument seems to fall apart. I’m going to repeat the language from a post published here last week, because this is a truly important debate.
Some lawmakers who argued in April and May that extra assistance was encouraging workers to remain jobless are now arguing that the return of workers (as evidenced by the May jobs report) suggests the extension of benefits to those who are still without work isn’t necessary.
But that is duplicitous. 2.5 million people (many of whom presumably could have chosen to remain unemployed, especially if their mindset is akin to that ascribed to them by Kudlow) went back to work in May.
At least for some workers, the extra benefits were not, in fact, a disincentive.
Moreover, a quick look at the breakdown of the May jobs report shows massive gains in the two categories of workers who, on Goldman’s estimates, were making considerably more to stay home.
I do not pretend to have conducted any kind of in-depth analysis beyond that implied by the figures shown and discussed above. But I would be willing to wager that some lawmakers who are against the extension of the extra unemployment benefits have not even bothered to do a cursory analysis (i.e., a simple compare/contrast) between which workers were receiving more in benefits than they made to work, and which returned to their jobs in May at the first available opportunity.
If it’s true (as it appears to be) that retail workers and those working in leisure and hospitality ran back to their jobs when given the chance last month, then Kudlow’s argument falls apart because, as you can see from Goldman’s analysis, those were the sectors where workers were being paid more to stay home.
Discussing the potential for the three fiscal cliffs mentioned above to derail the recovery, JPMorgan’s economists wrote last month that “these factors could add turmoil at a time when activity will be starting to pick up due to the easing of social distancing restrictions”.
Larry Kudlow is not an economist.
My understanding is that people if someone’s prior place of work opens back up, and they decline to return to work for whatever reason, they are considered to have quit and they lose their unemployment benefits. In that case, there really isn’t an option to just stay home and continue to collect unemployment and the argument about disincentives is entirely moot.
The only situation in which the disincentive argument makes any sense, is in cases in which someone is laid off, doesn’t anticipate getting their prior job back, and will need to find something new. That situation also comes with the risk that if you don’t take a job, in order to collect temporarily enhanced unemployment, businesses may not be hiring later and you may find yourself unemployed longer than you otherwise would have.
Admittedly, I’m not an economist either so I may be entirely wrong. But, Larry’s argument seems entirely disingenuous and appears to ignore the reality of the choices that workers are faced.
Larry, disingenuous? It’s either that or stupid or both.
What Kudlow seems to imply is a bonus for those who do go back?? They may want to direct the money at something specific. Employers passing on the bonus to those they rehire? Election year nonsense?
Leisure and hospitality employees who earn tips usually earn more in tips than wages. Payments may exceed their wages, but not their compensation, so payments that make them whole would have to exceed their wages.
I agree Paul. Perhaps also it would be less likely that if people are paid to stand around and punch the clock it would remove any suggestion of universal basic income. Privatize it. Why not both. As it is, until daycares are opened it may become disproportionately a female issue. Even Grandparents are removed from daycare during Covid.
Earning tips by the leisure and hospitality groups is probably the chief financial incentive propelling them to go back to work as quickly as possible. If they drag their feet, someone else will get those jobs. It’s also likely that hospitality workers enjoy being with other people, were anxious to get out of lockdown, and want to feel productive.
As you say, Sheldan, the fear of permanently losing one’s job shouldn’t be underestimated. Let’s say a worker earns $300 a week more with the extra $600 for her usual weekly pay. How much sense does it make to take in an extra grand or so and risk permanently losing a job? People aren’t stupid. Normalcy and predictably–particularly when in it comes to one’s income–has value. And, pride in one’s work does, too. So I also agree with you on the intrinsic drive to get back to work.
It’d be nice if the Kudlow crowd would get off the “blame the poor and unemployed” schtick and start looking at their buddies who are forcing so many into precarity in the first place.
No calculations exist for the so called underground economy and who benefits …. There are a lot of ways to fool this system because of the sloppy, hasty way in which it was implemented (due to necessity ).. Downside potential for unintended consequences of extending the $600 benefit are a calculation that seems to be avoided like the third rail…..Welcome to main street everyone !!!!
Thank you Paul.wiener,
What Kudlow and even this article is missing out on is the effect of undocumented tips. It is an open secrete hospitality industry is reliant on cash tips. How much of these cash tips are reported or not is an open question, but some estimates put tips as much as 30% of after tax income. That $600 is taxed at all levels reducing take home below this estimate except for the workers that are earning only minimum wage and no tips. These are the workers most likely to lose their job in a downturn and therefore more likely to go back to work even if the incentive is not there. Obviously it would be easily possible for the FED to gross up these people with a tax holiday (by subsidizing all taxes, not starving hated programs like SS). However that would help the poor like the legendary Jesus Christ which by the way is anthemic to the Evangelical crowd and our Right wing government, so seems to be a non-starter.
If workers are given the option of returning to work, and decide not to, they lose their unemployment benefits as they’re considered to have quit. For those folks, this disincentive argument is complete nonsense as they simply don’t have the option to choose to stay home and continue to receive enhanced unemployment.
The only situation in which this argument has any merit at all, is in the case of people who lost jobs that aren’t coming back and they are trying to decide whether or not to take another job elsewhere.
“If what the administration wants to do is “stimulate” activity ahead of the election, they will need to spend more into the economy now that it’s reopened.” Trump and Congress are out of practice on this kind of thing. Back in the day when we had effective political machines in New York, Boston, Chicago, and Philly, the pols would wait until just before the election when it was cold and they’d fan out into the “neighborhoods” with trucks full of blankets and food to remind the population about who their real friends were and ask them to be sure and vote for those friends. To paraphrase the “Usual Suspects,” with the current crowd by time for the election, poof, the memory of the stimulus will be gone.
In general, people want to be productive and earn a living wage for doing so. Most people recognize that it is too easy to get into “trouble” when doing nothing in life.
It might be “great” to collect unemployment for a short time period, but soon anxiety and stress from doing nothing but watching Netflix and from worrying about how to earn a living for the long term will set in.
There will always be a subset of the population that does not want to work and collect as much in “government aid” as possible- a carrying cost of our society.
Lots of ways exist to exchange goods and services that forgo the use of w-2 and withholding forms as well as SS…1099 form as well as cash payments can be involved even in normal times and at this point the lag time before potential discovery is so great that any payments of the Fed $600 weekly allotments would be unrecoverable…The focus on tip income is unrealistic if it serves as an attempt to describe this problem…
What is interesting in light of the 3 fiscal cliffs, which needs to be more openly discussed, is the forecast for the TGA account to collapse to 700bn ish. How does this make sense if you are getting taxes paid to the Treasury?