Congress is in negotiations for the next round of coronavirus relief. The Republican proposal attempts to fix mistakes made in the Cares Act and extend some of its features to deal with the ongoing problems, however, we see more of the same kicking the can down the road.
The headlines focus on the Republican proposal to decrease the expiring $600 weekly federal enhancement to $200. Unemployment insurance in the United States generally aims to give benefits proportional to but less than previous wages. Pegging benefits to income deals with variation in worker incomes and local wage levels, and setting the replacement rate under 100 percent preserves some incentives to work. The $600 weekly benefits differ greatly from standard practice and made unemployment more lucrative than going back to work for some people.
Congress took this approach in the spring because it was quick and easy. Everybody knew the states would see a tidal wave of new unemployment claims, and their systems could handle only a simple extra feature. If, as the Cares Act implicitly assumed, we are back to something like normal, we could end unemployment insurance supplements. However, we are not back to normal, and some states need more assistance.
The Republican proposal increases the replacement rates to 70 percent, therefore expanding unemployment insurance benefits without creating disincentives for work. This is a smart idea for the long term, but it is also another fantasy, since it cannot be implemented quickly. The Republican proposal recognizes this and grants states up to four months to fix their systems, along with $200 weekly supplements in the interim.
However, if we knew in the spring that the unemployment system was excessively fragile and complex, why was there no effort to solve this problem? Crises often expose weaknesses in social organizations, but they should also motivate leaders to take action and fix them.
Upgrading the American unemployment insurance system is essential, but it would be difficult while it handles unprecedented waves of applications, when state and local governments face falling tax revenues, and while all institutions must deal with the worst health crisis in a century. A sensible restructured unemployment insurance system must feature consistency and coordination across both the state and federal programs.
The far better performance of most European systems in dealing with the economic fallout of the pandemic reveals how badly the American system performs. European countries, which all have more robust unemployment benefits and social safety nets than the United States, learned from their experiences during the last financial crisis. So as a result, they fine tuned their unemployment insurance systems well before the current economic turmoil, which enabled them to react fast to support workers.
As part of its comprehensive bailout package, the European Commission also launched an unemployment program to assist the member states in protecting jobs and workers affected by the pandemic. It was set in place to last until the end of 2022, so this was a solution that goes well beyond the short term. When American leaders get past this crisis, they need to take a hard look at how to reform their economic safety nets.
The calendar tells us we will not have serious answers soon. There will be the recess from Congress and two weeks of party conventions in August, which is followed by the Labor Day holiday. Lawmakers will likely provide another quick fix to keep millions of people all across the country afloat, punt some problems to the states, and then hope they can get past the election in the fall without another major economic collapse.
That may be expedient, but it helps no one. Many politicians will lose in the election in November, although we do not know which ones. When will lawmakers turn their focus to the endgame and implement policies that have lasting and essential solutions to meet the needs of citizens, especially the most vulnerable? American workers are waiting.
Kenneth Judd is an economist and a senior fellow at the Hoover Institution at Stanford University in California. Karl Schmedders is a finance professor at the International Institute for Management Development in Switzerland.