Spending Worries Put Jobless Benefits at Risk

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The Wall Street Journal
By: Janet Hook & Sara Murray
November 16, 2010

Congress is unlikely to agree to extend jobless benefits for two million unemployed workers by the time the program begins to lapse in two weeks, as lawmakers struggle with a packed lame-duck session and voter antipathy toward government spending.

But cutting off benefits could drag on a fragile economic recovery by reducing consumer spending, economists say, and Democrats are looking for a compromise that could put the program back on track before Christmas

In two weeks, jobless benefits will expire for two million unemployed workers, an issue Congress is ill-prepared to tackle amid a packed lame-duck session and tension over spending. Sara Murray has details.

The program, which provides aid for up to 99 weeks after workers are laid off, has been extended seven times during the economic downturn. Last summer when Congress extended it, the battle was so pitched that benefits lapsed for over a month.

Democrats are under pressure from supporters to extend benefits because their prospects will likely dim after Republicans take over the House in January.

In a concession, senior congressional aides say Democrats are weighing options to scale back the program and its costs. One option would be to extend it for one year but reduce the number of weeks aid would be provided as the economy improves.

The issue could also be swept into the debate over the Bush-era tax cuts for the highest earners. Liberal Democrats, disappointed their party likely will have to compromise and allow those tax cuts to be extended at least temporarily, want that move linked to an extension of unemployment benefits.

Republicans opposed an extension last summer on the grounds it would have added to the deficit, a concern that has grown more prominent since the midterm elections. But the party's current position is still taking shape, with most arguing for now that any extension would have to be funded.

An aide to Sen. Charles Grassley (R., Iowa) said Republicans' leading concern will be to make sure the cost of any extension will be offset with cuts in other areas. One option, the aide said, would be to use unspent money from the economic stimulus bill.

Given the complexity of negotiations over the tax cuts, aides say it's unlikely the debate will be resolved before benefits begin to expire Nov. 30. The lame-duck Congress convened Monday amid uncertainty about a wide range of issues. Congress is scheduled to take off again Thanksgiving week and return Nov. 29.

The patchwork nature of jobless-benefits system means the impact of a lapse would roll slowly through the ranks of the unemployed. Without an extension, jobless workers in most states would receive a maximum of 26 weeks of benefits through their regular state programs.

A separate state-federal program, currently 100% federally funded, offered another 13 to 20 weeks of benefits to workers in high unemployment states. Some 800,000 workers in those programs would be quickly cut off.

Another 1.2 million jobless Americans would stop receiving benefits by the end of December. Some of those workers would exhaust state benefits and be unable to access the federal program. The majority that is already receiving federal emergency extended benefits would gradually lose them.

Congress initiated federal extended benefits in July 2008, relatively early on in the downturn. In past recessions, Congress tended to wait longer to initiate benefits and didn't let them expire until the jobless rate had fallen further. When extended benefits expired after the 1980s recession, the jobless rate was 7.2%. Today, it is 9.6%.

The economy grew at a 2% annual rate in the third quarter, which has not been enough to bring down the unemployment rate.

Goldman Sachs analyst Alec Phillips estimated that if the extensions were allowed to expire it would shave half a percentage point from growth.

Every dollar spent on unemployment insurance has the effect of $2 spent in the economy, according to a report the Labor Department will release this week.

The report, commissioned by the Bush administration and conducted by research firm IMPAQ International and the Urban Institute think tank, showed an average of 1.6 million jobs were preserved each quarter because of unemployment insurance and 1.8 million job losses were averted in the depths of the current recession.

"When you give a dollar to the unemployed they're the most likely to spend it," said Betsey Stevenson, the Labor Department's chief economist.

Capping benefit recipients at 60 weeks would be a better alternative than cutting extended benefits altogether, said James Sherk, senior policy analyst in labor economics at the conservative Heritage Foundation.

"Certainly you don't want to be doing anything cold turkey," he said, but "if Congress is going to pass another extension they should at least budget for this."

Write to Janet Hook at janet.hook@wsj.com and Sara Murray at sara.murray@wsj.com

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