What (Are) You Gonna Do? Part 1

Short term solutions for high unemployment

This is the first part of a three-part series on solutions for unemployment.

In 2002, I “did” tax returns. I worked in a high Earned Income Tax area helping workers complete 2001 tax filing. We had just come through the 2001 recession, which only seemed (to me) to affect low-income taxpayers.

It broke my heart to see them. It also broke my heart to see the abuse of undocumented workers by employers in my area.

The problem wasn’t with federal income taxes for these workers. Their state tax bill was what caused concern—Georgia doesn’t have the equivalent of Earned Income Tax credits.

Most states don’t.

I remember one single father fuming at his bill. He’d struggled to find and keep work all year. He needed extra help during that short recession.

Last week we introduced fiscal policy, focusing on automatic and discretionary stabilizers. This week we’ll apply that knowledge to the problem of unemployment.

Automatic Stabilizers

The federal government relies on automatic stabilizers to help the economy keep moving during temporary or sustained downturns. Adjustments to unemployment insurance payouts, tax collections, and transfer payments are the main forms of automatic stabilizers.

Transfer payments can technically include payouts to businesses, such as the Payroll Protection Program (PPP) administered by the Small Business Administration (SBA.gov) in 2020 and 2021 but usually apply to households.

For example, unemployment insurance payouts go up as more people lose their jobs and fall as the economy prospers and more people take jobs. But you must enough weeks to qualify, My single dad did not. Since federal taxes are progressive, taxes fall disproportionately as incomes fall. [1] As incomes rise during expansions, taxes rise disproportionately.

Transfer Payments

Transfer payments are like gifts: they are payments with no expectation of goods or services in return. There are three types of transfer payments that kick in when the economy experiences high unemployment: social insurance programs, such as social security and unemployment insurance, welfare programs, such as TANF (Temporary Aid to Needy Families), food assistance programs, and business subsidies, such as farm subsidies.

If the worker loses work completely, then transfer payment systems are in place to help households keep minimum standards for living. Some of these systems are payment based. Unemployment insurance benefits pay those who have lost work and are eligible for a weekly stipend.

The Department of Labor bases the payment on what employers have paid into the system. The unemployment insurance system requires employers to fund the system with a proportion of the wages they pay. Unemployment insurance can also have extra payments funded by the government.

While workers with higher pay get larger stipends, these are capped—currently $365 a week as of June 2021 (when pandemic subsidies ended) in GA. [2] This amounts to $9490 per eligible person per household in GA.

After a round of layoffs in the high-tech sector, most employees didn’t bother with unemployment insurance. They found that the opportunity cost of taking time to apply for benefits was higher than that of looking for a new job. This was also true during the 2007-2009 recession when the unemployment rate in that sector was close to zero (0). This may not be true of the next recession.

Congress and most state limit unemployment benefits to 26 weeks under normal circumstances. Under unusual circumstances, such as the Pandemic and the recession of 2007-2009, Congress can increase the number of weeks, as they did with the CARES (Coronavirus Aid, Relief, and Economic Security) programs in 2020 and 2021. More on that in the section on discretionary policy.

Other aid programs include TANF and food assistance programs, which also automatically increase during recessions. More people become eligible when unemployment rises. As unemployment begins to fall, the payment and in-kind benefits also decline because fewer are eligible.

Sometimes our fiscal authorities choose to amend one part of a policy when there is a crisis.

Discretionary Stabilization Policy

Discretionary policy means that the authorities have to act. These policy options involve making decisions about how best to help. For example, in 2020, Congress enacted the CARES program to combat the recessionary period caused by lockdowns early in the pandemic.

The authorities decide: do we change spending, taxes, or interest rates to combat a problem? Sometimes they use a combination of the three options.

Note that monetary policy always requires action.

During the extraordinary periods of instability of the housing and stock market crashes of 2008 and the Pandemic, the fiscal authorities passed stimulus packages. These were exceptionally large spending and tax packages.

In January 2009, Congress passed ARRA (American Recovery and Reinvestment Act). ARRA included tax relief for families, and extra spending on infrastructure projects, healthcare, and education. The Act aided the use of electronic medical record keeping helping tame health care costs.

Also, in 2009, the Federal Reserve started a program of quantitative easing. According to Forbes, “quantitative easing—QE for short—is a monetary policy strategy used by central banks. With QE, a central bank buys securities to reduce interest rates, increase the supply of money and drive more lending to consumers and businesses.

The Fed used quantitative easing in addition to the usual monetary policy of buying bonds, which lowers the federal funds rate and increases the money supply.

In March 2020, Congress passed the CARES act. CARES included benefits for furloughed workers and small businesses. The act also provided extra benefits to families with children. The act extended unemployment benefits periods and included extra weekly payments. There were also provisions for mortgage and rent relief. CARES and ARRA are examples of stimulus packages.

I’m suspending the Thursday Classroom until January. We’ll look at long-term strategies for reducing unemployment then.

Thank you for reading and happy holidays,

Nikki

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[1] I’ll discuss progressive taxes in 2025. FICA taxes, on the other hand, are regressive, maxing out at $160,800 for 2024, increasing to $176,100 in 2025. They are often the largest tax burden for lower- and middle-income workers but also provide much of their safety net after retirement.

[2] Varies by state, GA Department of Labor.