Economics is all about incentives. To keep the country prosperous, our public policies should reward productive behavior rather than punish it. But it is too bad the $2 trillion “stimulus bill” does just the opposite. We supported key elements of the coronavirus rescue package because of the urgency of funding emergency lending to prevent a tsunami of asset liquidations and bankruptcies, and of providing money to the millions of people losing jobs. But the bill makes unemployment pay 100 percent of what people would earn on the job and, in some circumstances, they can get more money for not returning to work when the economy is back up.
This puts us in danger of an “L shaped” recession with flat growth, as we saw under Barack Obama, instead of a “V shaped” recovery with strong growth, as we saw under Ronald Reagan. The flat growth path may even have been the intention of the forces against Donald Trump. Democrats claimed that their expanded unemployment program would grant “only” 100 percent wage replacement. That by itself is a foolish policy. But the actual law that Trump signed is even worse. The legislative language that emerged in negotiations with Treasury Secretary Steven Mnuchin had no such limit on payments. Instead, the law sets unemployment benefits for the next 120 days at the level of state benefits plus an extra $600 a week.
Consider $600 a week is the pay before taxes for an employee who works 40 hours a week at $15 an hour, or 30 hours a week at $20 an hour. So not working will pay that person the $600 federal benefit on top of the regular benefit of $300 depending on the state. So it is $600 a week if you work, and $900 a week if you do not. For the minimum wage person who makes $400 a week, the effect is more extreme. The unemployment program will pay more than twice as much as working. Benefits do max out at different levels in different states but, in most, even an employee who makes $800 a week can make about $200 more on this unemployment than working.
We are not suggesting that Americans are lazy. Millions of workers across the country are itching to get back to work and earn a paycheck. The vast majority of people would surely rather work than collect unemployment. Millions of workers in tough jobs, however, will opt to take the money for not working. This will add tens of billions of dollars to our budget deficit and deprive many companies of the workers they need. It also is a matter of fairness. If a construction company has a crew of 100 workers, and 50 of them go back on the job and 50 of them stay home on a paid vacation thanks to Congress, why should those staying home be paid the same or more? How is that fair to the employees working hard 40 hours a week?
It is true that private health insurance serves as an incentive for some, but many hourly wage workers qualify for Medicaid or subsidized ObamaCare plans, and Democrats want to expand both programs even further. But the bottom line is that, for a significant number of workers now unemployed because of the shutdown, and we have more than three million in just the first week, their economic incentive for the next four months is to stay on unemployment, even after the closures due to the coronavirus are over.
This policy may have been a back door scheme by Democrats to greatly raise the minimum wage. Employers will, in many cases, be forced to pay in effect a minimum wage hike to around $23 an hour, even higher than what Bernie Sanders wants, or more to lure employees to start working again. For many businesses, that will mean they simply will be unable to afford to hire people, right at the time they start to get moving again as the economy reopens. This will certainly stall out much needed growth.
So when Republicans saw the unemployment benefits that Democrats had repeatedly described as providing 100 percent of wages actually provided as much as 200 percent of wages, Ben Sasse forced a Senate floor vote to limit the unemployment benefits to 100 percent. Only one Democrat, Joe Manchin, supported this proposal. Democrats made clear that this policy was intentional. “Supercharging unemployment benefits has long been a priority for Senate Democrats,” said Ron Wyden, the ranking member of the Senate Finance Committee. “Our proposal was not a drafting error.”
We would bet our money that this will become the new policy standard in Washington when the 120 days of relief are done. This is not complicated, and most Americans understand the outrage here. Many politicians want to make more Americans dependent on the federal government. During the Obama years, Democrats made unemployment benefits, combined with food stamps and housing benefits, often pay better than working.
Guess what happened? Unemployment stayed elevated for several years as caseloads for all these programs skyrocketed during the recovery and decreased only when extended unemployment benefits were allowed to expire. This is why incentives in economics matter. Washington made a big mistake by not making work pay as much as unemployment. What is truly infuriating to many is that it looks like this was not even a mistake.
Stephen Moore serves as chairman and Phil Kerpen serves as president for the Committee to Unleash Prosperity, an organization that was founded to promote strong national economic growth through free market principles.