1.3 Million Americans Are About to Have a Terrible Christmas

How the Grinch Stole Christmas, 1966 Photograph by Everett Collection

For the past few years, Congress has functioned as a millstone weighing down the country’s recovery: The combination of austerity, manufactured crises, and an actual government shutdown has delivered a series of blows to economic growth. That’s why the modest budget deal that may be shaping up in Congress ahead of Friday’s deadline is such good news, despite its small size and the criticism it’s drawing from professional budget scolds, who want something bigger. Simply avoiding another shutdown and default scare will leave Americans better off than they would be otherwise. The October shutdown reduced projected fourth-quarter gross domestic product growth by about a half percent, while Republican default threats pushed up U.S. bond yields across every maturity, raising U.S. borrowing costs and adding to the federal debt.

While a shutdown now seems unlikely, a further impending fiscal blow isn’t getting nearly the attention it should: On Dec. 28 emergency federal unemployment compensation (EUC) is set to expire for 1.3 million Americans who have been looking for work for at least six months. One reason the economic effects of this cutoff haven’t gotten more attention is that the issue tends to be viewed through a moral and political lens—that’s how Senator Rand Paul (R-Ky.) framed it on Fox News Sunday when he claimed that extending emergency benefits would be “a disservice” to the unemployed, and how former Governor Jon Huntsman framed it on Morning Joe today while criticizing Paul for those remarks.

Cutting off benefits for 1.3 million unemployed workers should also be viewed through a fiscal lens: The effect would be to further dampen economic growth in an already weak recovery.

How much does growth stand to suffer? Well, according to the U.S. Labor Department, the cost of extending federal benefits through 2014 would be about $25 billion. But the economic impact of cutting them off would be larger. That’s because the unemployed reliably spend the benefits they get, creating a “multiplier effect” in the economy. Mark Zandi, chief economist at Moody’s Analytics, estimates that every dollar of unemployment benefits generates about $1.55 in economic activity, meaning that the federal benefits set to end later this month will cost the economy about $39 billion in spending next year (which would, in turn, have supported 310,000 jobs, according to a recent study by the Economic Policy Institute).

However, the effect on the economy will be worse than just the lost spending from those 1.3 million people. Throughout the year, state unemployment benefits will expire, with those who lose them having no emergency federal benefits to fall back on. Last week, a report from the White House Council of Economic Advisers and the Labor Department estimated that an additional 3.6 million people stand to lose access to benefits next year, so the drop in demand will be much larger than $39 billion.

The Congressional Budget Office recently took a stab at estimating what’s at stake. It concluded that “extending the current EUC program and other related expiring provisions until the end of 2014 would increase inflation-adjusted GDP by 0.2 percent and increase full-time-equivalent employment by 0.2 million in the fourth quarter of 2014.” If you use Zandi’s multiplier, the GDP increase is more like .3 percent.

So letting emergency benefits expire would be as much a self-inflicted blow to the recovery as the shutdown was—only worse. The shutdown mainly postponed demand that later materialized when federal workers were paid, whereas demand lost from cutting off benefits is unlikely to reappear.

Right now, the chances of Congress extending federal unemployment benefits as part of the budget deal appear slim. That’s bad news for the recovery. One line I’ve been hearing a lot lately is that only the Grinch would support cutting off 1.3 million unemployed workers over Christmas. That’s intended as a moral judgment. But if the Grinch were bent on hurting the economy of Whoville, cutting off emergency unemployment benefits would be one way to do it.

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