Saturday, October 30, 2010

One Million to Lose Unemployment Benefits in December: Macro Effects

Unemployment benefits are creating jobs faster than practically any other program
-Speaker of the House Nancy Pelosi
July 1, 2010

That quote was reported by Fox on July 1.
On July 2 Media Matters' headline was "UPDATED: Pelosi was right: Economists say unemployment insurance stimulates the economy" and said it wasn't fair to do the reductio ad absurdum.

As a sidecar to the mental, emotional and spriritual devastation that prolonged unemployment wreaks there are other, more societally diffuse questions that the current situation raises.
For example, what happens to GDP when the checks stop?

Okay, maybe that wasn't the question you had but it struck me as a good one.
Another good question is What happens to GDP when, per the CBO, the net interest paid on the federal debt triples over the next nine years to $723 Billion, which, assuming a 400mil. population, works out to an average of $1807.50 per person.

Family of five? Pony up 9 Grand. Per year. Forever. And that's only if you balance the budget in 2020.
Here are the CBO's numbers. Summary.
and here's a look at the first question.
From The Big Picture:

...Not Finer for the “99er”

I had dinner last Sunday night with David Rosenberg. He is beginning to look at the possible effects from what he calls the “99ers” going off extended unemployment benefits. I knew this was coming but had not really looked into the fine print. He wrote me later:

“The looming expiry of the emergency unemployment benefits in the U.S. poses a very large risk to aggregate personal income over the next few quarters. Currently, combined with state programs, someone who loses their job is entitled to 99 weeks of unemployment benefits (a “99er”). However, the extended benefits are set to expire on November 30th, and our back-of-the-envelope calculations shows nearly a million 99ers will be cut off in December alone, with the remainder (about 3 to 4 million) falling off the rolls by April.

“Given that the average weekly unemployment cheque is about $300/week, this amounts to nearly $80 billion (annualized) loss of aggregate income over the next few quarters. This means that personal income could fall by 1.0% QoQ annualized for each of the next three quarters, starting in Q4. The 2% QoQ real GDP estimates pencilled in for Q4 2010 to Q2 2011, will look far too optimistic if such a loss of income does occur. Given that material downside risk to growth going forward, we intend to do more detective work on this file.”

Government checks of one form or another are about 20% of total personal income in the US. Will the lame-duck Congress extend those benefits? Will they extend the Bush tax cuts? I just (literally) got off the phone with Suze Orman. She said she thinks they should raise the limit to $500,000 or $1 million. That higher number would be a reasonable compromise, in my humble opinion. Will the Republican Congress and Senate agree when they come back?

I don’t want to get into the small-business person making $300,000 and living in a very volatile business climate where they feel the need to save rather than invest and create new jobs. These guys need all the working capital they can get. And let’s be clear, this year’s “profits” becomes next year’s working capital when you are a small business owner. Your credit line at the bank just isn’t cutting it anymore.