There’s new information out this morning that should be a critical input into ongoing negotiations in the U.S. Senate. Senators are debating whether the economy needs another relief package, and, if so, what should be in it, and this morning’s income report from the Bureau of Economic Analysis is virtually yelling what the answer should be.
The report shows that aggregate income—all the wages and profits and interest payments, etc. that go to U.S. households—fell by a large, but expected, 4 percent in May. More importantly, spending was up a robust 8 percent; in an economy that’s 70 percent consumer spending, that’s an important boost.
But how do you get falling income and higher spending? Is it higher earnings coming out of May’s jobs report? Is it people spending out of their savings? There’s a bit of both, as pay rose 2.5 percent in May and while the savings rate is still hugely elevated at 23 percent, that’s down from April.
But the big story, one that is highly germane to the Senate’s negotiations, is that consumer spending is being driven by relief payments in general, and Unemployment Insurance in particular. The figure below, by economist Jay Shambaugh, tells the story. It shows how incomes have actually gone up (the y-axis is trillions of nominal dollars), compared to pre-crisis levels, not due to higher pay, of course, but due to all the transfers, among which Unemployment Insurance is playing a particularly important role.
This focus on UI payments, especially the $600 weekly plus-up that expires at the end of next month, links direct to the Senate negotiations (the plus-up is called “Pandemic Unemployment Compensation” or PUC). Senators are said to be considering different options, but there are those who want to pull back significantly from the $600, or even let it expire, on the basis that it is disincentivizing work as states reopen for business. Such concerns might be arguable if there were enough jobs to go around. But when the unemployment rate is this high, and labor supply far surpasses labor demand, such disincentive effects simply don’t bite. In fact, a careful, new study of the most recent hiring patterns “found no evidence to support the view that the temporary $600 supplement, which meant many workers received benefits higher than their wages, drove job losses or slowed rehiring substantially.”
In another new study out this morning, economist Josh Bivens shows just how important PUC (and UI payments in general) are to sustaining whatever growth we’ve got in the current economy. To give you a sense of the magnitudes we’re talking about here, Bivens first shows the unprecedented role UI benefits are playing as share of wage income.
This morning’s income report showed that PUC payments alone, at an annualized rate, came to about $840 billion in May, over 4 percent of total, personal income. Biven than goes on to simulate the impact of extending PUC through the middle of next year, finding that it would increase GDP by 3.7 percent and jobs by over 5 million. Of course, those results would be sacrificed if PUC were allowed to expire. As Bivens puts it: “This estimate shows us how enormously important expanded unemployment insurance over the next year will be to aggregate demand, as new job openings are all but guaranteed to be fewer than jobless potential workers over that time, so any incentive effect in keeping workers from searching actively for work will not be the binding constraint on the economy’s growth.”
In fact, economist Jason Furman make precisely this point in a similar analysis from the flip side of Bivens, estimating the impact of eliminating PUC on GDP and jobs. His results, shown below, estimate that the PUC repeal would lower GDP by almost 3 percent by the end of this year, and cost millions of jobs through 2022.
These are not unusual or the least bit unexpected results. With the economy still so demand constrained, due to not just the extent of coronavirus but its recent increase in “hot spots” across the country, consumers lack the confidence and employees lack the paychecks to get back to anything approaching normal levels of commerce. It doesn’t matter a whit how much government officials exhort people to get out and spend. As long as there’s no vaccine and we’re so deeply lacking in leadership around controlling the spread of the virus, jobs, spending, and demand in general will be suppressed.
Senators, take heed! In this climate, it would be political and economic malpractice not to expand UI benefits. The data and analysis could not be clearer: people’s economic circumstances and outlook are still suffering from the pandemic-induced recession and they thus still need considerable assistance as we haltingly make our way through the crisis.