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Ending Coronavirus Jobless Benefits for Millions Will Be Tricky

Ending Coronavirus Jobless Benefits for Millions Will Be Tricky

(Bloomberg Opinion) -- Two record weeks of jobless claims totaling almost 10 million — with millions more likely to come — mean huge number of workers will soon be claiming the new enhanced unemployment benefits. Although it will be weeks before any governor or mayor thinks about reopening the economy in their communities amid the coronavirus lockdowns, it's not too soon to think about what that normalization process might look like. What should be clear by now is that we won't be able to flip a switch and immediately return to the economic conditions of February. The return to normalcy will be a process. For this reason, enhanced unemployment benefits should continue for as long as hard economic times persist, and Congress should establish labor-market benchmarks before discontinuing the program.

One way to think about this is to envision a relatively optimistic scenario for the U.S. economy during the next four months. Let's assume that with strong mitigation efforts and programs to test and trace infections, the economy slowly begins to reopen in May or June. But as we've seen in China, progress may be uneven, with restaurant and travel demand down a lot from pre-pandemic levels. Business investment might stay sluggish as companies wait to see stronger signs of recovery before going ahead with capital-intensive projects. Employment grows in June and July, but millions of people remain out of work with $600 weekly checks from the federal government set to expire.

It's difficult to imagine Congress allowing all these workers to lose that income support three months before a presidential election. Extending the program for a while would seem like good politics and policy. This would then raise the question about when and how to wind down the program.

Let's hope that decision would be based on labor-market fundamentals rather than the timing of an election or who controls the White House in 2021. A good parallel for this might be the Federal Reserve's approach to winding down its monetary policy stimulus programs in the aftermath of the financial crisis.

The key phase of this process started for the Fed in 2013, when it began to reduce the monthly purchases of treasuries and mortgage-backed securities that were part of the central bank's quantitative-easing program. By this time the unemployment rate had fallen from a peak of 10% in 2009 to about 7.5%. Then-Chairman Ben Bernanke brought up the idea of a "taper" in congressional testimony in May, and the gradual slowing of asset purchases was formally announced in the Fed's December 2013 meeting statement. The first interest-rate increase took longer still, occurring two years later at the end of 2015.

Many factors should be taken into account before making changes to the enhanced unemployment-benefit program. The first is the state of the virus and the extent to which parts of the economy remain closed. Until we have a vaccine or the disease disappears, it's unlikely that things will be able to go back to the way they were. After that we should use the actual labor market data to dictate the extension of benefits.

There are a variety of indicators that could be used to make this determination. The easiest one might be the unemployment rate — maintain full benefits for as long as the unemployment rate exceeds a certain threshold. We can also track the pace of job gains, wage growth and continuing unemployment claims to make forecasts about how long the program is likely to be needed.

It's also important to be mindful of how, once the economy is growing again, a $600 weekly benefit can distort the labor market. That works out to the equivalent of $15 an hour for a 40-hour work week, a level that substantially exceeds the minimum wage in most states. When restaurants are open for business again, they are likely to complain if they can't hire dishwashers who understand that it's not worth giving up unemployment benefits. One step to winding down the program might be reducing the benefit over time in response to labor-market conditions and monitoring the impact that's having on workers accepting jobs.

Without knowing how big a hole we have to dig out of and how fast the recovery will occur, it's not worth getting too specific about how a wind-down should occur. And it could be that the program will prove so popular that Congress may decide to make some level of federal unemployment benefits permanent. But what should be clear is that the labor market won't be strong enough in four months to eliminate the program, and as we reopen the economy we should be thoughtful about how to handle a program that millions of families will depend upon for the foreseeable future.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Conor Sen is a Bloomberg Opinion columnist. He is a portfolio manager for New River Investments in Atlanta and has been a contributor to the Atlantic and Business Insider.

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