UA economist says unemployment benefits and $600 supplement propped up U.S. economy

University of Arkansas Walton College of Business economist Mervin Jebaraj says the doom and gloom expected in the second quarter lived up to its billing, and he warned more financial turmoil is in store without Congressional agreement on a new pandemic package.

Jebaraj, who is also director of the University of Arkansas Center for Business & Economic Research, said the second quarter U.S. GDP drop of 32.9% on a seasonally-adjusted annualized basis was as bad as advertised.

“I think if you were to look for any silver lining in any of this report was that we were fully expecting a horrible second-quarter report and we got a horrible second-quarter report,” he said during an interview on this week’s edition of Talk Business & Politics.

He noted that when you look quarter-to-quarter, U.S. GDP declined about 9.5%, which is in line with most Western economies. However, countries like Germany were more rigid in their response to the COVID-19 pandemic, and while their country saw a 10.5% quarterly GDP decline, they’re likely to see a faster recovery due to a more disciplined public health approach.

“In Germany, quarter to quarter, their economy declined about 10.5%, so slightly worse than us. But the key difference between Germany and the United States right now is that even though they might’ve traded about a percent worse in quarterly growth than we did, they’ve gotten far better control of the pandemic in their country, and therefore their third quarter and fourth quarter will obviously look a whole lot better,” Jebaraj said.

“[It] obviously will cost the government a lot less in stimulus to keep their economy going than here in the United States because they’ve gotten better control of the pandemic for the trade-off, which was a near 10% decline quarter-to-quarter in the economy,” he said.

Congress has stalled over a new pandemic relief package as Republicans and Democrats failed to agree on funding for local governments and extending unemployment benefits. President Donald Trump signed an executive action on Saturday (Aug. 8) to extend unemployment benefits, but at a lower rate than the $600 supplement that ended July 31. There is a question as to where the money will be appropriated for the action and there is speculation the order may not pass constitutional muster.

Jebaraj said the $600 unemployment benefit supplement that ended July 31 after months of stimulating the economy was very effective in keeping the economy from cratering further. He said anecdotes that the supplement disincentivized workers to return to jobs may not sync with actual data and logic.

“We’ve seen several studies come out that indicate that, on aggregate, the unemployment boost – the $600-per-week additional unemployment boost – has not been a work disincentive. In fact, of all the people that went back to work in May and in June, 70% of them were on unemployment benefits, making more on employment benefits than they made at their jobs that they returned to in May and June,” he said.

“When you consider why workers might go back to work and give up their unemployment boost, there’s a couple of reasons. One is because if your employer calls you back and you refuse to go, in most cases, your unemployment benefits get cut off. Secondly, even if there are some exceptions around there, workers would rather have the permanence of a job than the temporary benefit of an unemployment benefit that they know will expire at some point,” he added.

While jobs are slowly adding back into the U.S. economy, they are not nearly coming back to the levels before the pandemic-led wipeout jobs in April, when 20.5 million jobs were shed. Jebaraj said the Paycheck Protection Program (PPP), which is set to expire, has propped up some job returns, but consumer demand is still dictating the speed of a jobs recovery.

“At the end of the day, the reason why the unemployment rate is as high as it is to this day is because there simply aren’t jobs coming back. We’ve lost millions of jobs. We’ve made back a small portion of them again, in large part because of the PPP loans, a lot of which expires, again, in the end of July or in a couple of weeks, and those workers are coming back off the company’s payroll. So, the unemployment rate is probably going to tick up some more, and all of that is going to be in this environment where there’s uncertainty about where unemployment benefits are going,” he said.

Jebaraj warned that going a month with fewer jobless benefits – and therefore less stimulus – could have a catastrophic effect on the economy.

“Even if Congress today decided to extend unemployment benefits, it’ll be a week or more before they can actually extend those unemployment benefits. And a one-month cutoff in unemployment benefits will reduce the size of the U.S. economy by about 4.3%, at least the consumer side of it, which would equal the entire decline in consumption spending during the last recession. That’s how significant the unemployment boost has been for the economy,” he said.

Watch Jebaraj’s full interview in the video below.