Expiration of Extended Unemployment Benefits at the Start of 2012 Will Take $37 Billion Out of the Economy

The Next Big Hit to the Economy?

July 11, 2011

The Lookout - The recovery is weak now--but it could be headed for a major hit that will leave it even weaker.

At the start of 2012, the extended unemployment benefits approved by Congress in December 2010, which cover a maximum of 99 weeks per person, will expire. Though the benefits are hardly lavish--a little more than $300 a week for most recipients--their total impact on the economy is huge, because so many Americans are currently taking advantage of them. Moody's Analytics estimates that when the benefits expire, $37 billion will be taken out of the economy, the New York Times reports. That's enough to exert a significant slowing effect--at a time when the recovery is already a long way from robust.

Government benefits that go to poorer Americans, like unemployment insurance, tend to boost consumer spending more than other kinds of stimulus, because people living paycheck to paycheck have little choice but to spend the money, rather than saving it. So the disappearance of jobless benefits will take money out of circulation when economic growth is seeking to gain some traction.

Indeed, economists say that the withdrawal of jobless benefits will create a major ripple effect on growth as a whole. Consumer spending accounts for around 60-70 percent of U.S. economic activity, economists say. But with so many Americans having lost wealth in the housing bust, spending has been tepid for a while, preventing the recovery from gaining any momentum. Now, the end of the extended benefits will likely soon put a further crimp in spending.

And that, of course, leaves out the role the benefits play on an individual level, providing a crucial lifeline to millions of struggling Americans.

On the bright side, some studies have shown that when people face the loss of their benefits, they're more likely to look for a job, and to look more aggressively. So the loss of benefits could motivate some job-seekers. But most economists appear to agree that jobless benefits have a larger stimulative impact--meaning, in other words, that the benefits likely lead to more jobs, rather than fewer.

What's more, observers note that the expiration of jobless benefits will come at around the same time that some other measures intended to create growth will also disappear: The payroll tax cut, enacted at the same time, which is scheduled to expire at the end of the year; federal aid to states; and the Federal Reserve's asset-buying program, which wound down at the end of last month.

Put it all together, and it suggests that things aren't likely to get much better any time soon.