With U.S. congressional leaders negotiating another round of coronavirus relief during the lame duck session, numerous economic studies show several provisions supported by Democrat legislators would incentivize unemployment and reckless spending by states and localities.
On March 27 of this year, the House passed and President Trump signed into law the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which included an additional $600 weekly unemployment insurance (UI) benefit supported by Democrats. This benefit equals exactly what a worker making $15 per hour would receive for a standard 40-hour work week. This is the same number Democrats nationwide have called for in a federal minimum wage and which several cities and states have enacted.
When this bonus was combined with other state and federal benefits, the majority of recipients were earning more from these new government benefits than they were from their previous job. A study published in August from the University of Chicago found 69 percent of UI-eligible unemployed could collect benefits greater than their lost wages, creating a massive disincentive to return to work.
Research from the Congressional Budget Office estimated if these benefits were extended for six months from July 31 to January 31, approximately five out of six beneficiaries would earn more from taxpayer-provided government benefits than they would from expected wages. Before the $600 weekly benefit expired on July 31, many small businesses reported they were unable to hire back their workers because they would make less returning to their jobs than they were receiving in government benefits. In a poll conducted in late May by the Foundation for Government Accountability, 65 percent of small business owners expressed fears of losing their employees.
In testimony before the U.S. Senate Committee on Homeland Security and Governmental Affairs, Mercatus Center Senior Research Fellow Veronique de Rugy argued, “If Congress is serious about helping the cautiously reopening economy to recover, a conversation about extending unemployment benefits should be informed by these costs too, including the CBO’s finding that renewing the benefits as written in the CARES Act would reduce both employment and output.”
Americans for Tax Reform recently pointed to past precedent of UI benefits increasing unemployment. A 2013 study from the New York Federal Reserve showed the unemployment rate would have been 3 percent lower in 2010 and 2.2 percent lower in 2011 had the Obama administration not increased UI benefits, equating to 4 million unemployed American workers.
Another budget provision that Democrats in Congress have been pushing hard is hundreds of billions of dollars in aid to bail out states and localities. The Health and Economic Recovery Omnibus Emergency Solutions Act (HEROES Act) passed in May by House Democrats included almost $500 billion in state and local funding, but the Senate did not take it up. The most recent bipartisan Senate package, released on December 1, calls for $160 billion in aid to state and local governments.
Recent economic research questions the need for this funding. The Heritage Foundation just published a report pointing out the federal government has already provided $360 billion in funding to state and local governments, an amount that far exceeds revenues lost. The study finds state and local revenues decreased by only 1.4 percent in fiscal year 2020, and state rainy day funds totaled $75.5 billion at the end of 2019. The report’s authors state, “Congress has already authorized federal aid to state and local governments equal to 17 times their 2020 revenue losses and two times their expected 2020 and 2021 combined losses.”
The Heritage paper argues further money for the states would set a poor precedent for bailing out irresponsible states and cities in the future, many of whom were facing severe budget problems prior to the COVID-19 pandemic, such as pension underfunding, and simply redistributes local costs to federal taxpayers.
The COVID relief negotiations continue among Congressional leadership, who may reach agreement very soon. What the final package looks like should reveal whether members of Congress have paid close attention to the evidence of unintended consequences and perverse incentives in these spending provisions.