My colleague Michael Leachman explains why the proposal by House Ways and Means Committee Chairman Dave Camp and the Senate Finance Committee’s ranking Republican, Orrin Hatch, to let states use federal emergency unemployment insurance (UI) funding to pay off loans rather than provide payments to unemployed workers is bad UI policy. It’s also bad economic policy, because it will take purchasing power out of the economy and put a drag on an economic recovery still struggling to gain traction.
Here’s the situation. The economy still needs the boost that federal emergency UI benefits provide, and workers struggling to find jobs in a tough labor market still need help. At the same time, many states went into the recession with seriously inadequate reserves for meeting their obligation to pay 26 weeks of regular UI and had to borrow from the federal government. Those loans have now come due. Without new legislation, states will have to find a way to meet their repayment obligations or accept the automatic increase in federal taxes on employers required to repay the loan principal under current law.
The Camp-Hatch proposal offers states a way out by relieving them of the obligation to use their remaining 2011 federal UI payments to provide benefits to the long-term unemployed. Under their proposal, states instead could use the funding to pay off their loans, avoiding a temporary increase in federal taxes. Or, states could take the money intended for the long-term unemployed and deposit it in their UI trust funds, which would reduce the taxes businesses will otherwise pay over the next few years to maintain the funds.
That’s a bad deal for workers and a bad deal for the economy. As this Congressional Budget Office (CBO) report observes, unemployment insurance helps preserve and create jobs in a weak economy because it “adds to overall demand and raises employment over what it otherwise would have been during periods of economic weakness.” Indeed, CBO found that UI is one of the most effective measures available for that purpose. The tax breaks for business over the next few years that will result if states use the money to pay off their loans or deposit it in their trust funds will do much less to give the economy the short-term boost it needs. (In the longer run, employers try to pass the cost of UI taxes on to their employees in the form of smaller wage increases, but as the intense opposition from businesses to these taxes attests, businesses probably absorb most of the costs in the short run.)
Weak sales, not high taxes, are the biggest barrier to business expansion and job creation; this proposal would aggravate the problem of weak sales. As this Economic Policy Institute analysis illustrates, it would result in fewer, not more jobs.
There is a better way. Senators Durbin, Reed, and Brown have introduced legislation (S. 386) that would give states immediate relief from interest and principal payments on their loans and implement a plan for rewarding states that prepare properly for the next recession without cutting benefits for the long-term unemployed or hurting the economic recovery.