“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).
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.