Hospitals & Asylums

Supplemental to Extend Unemployment Insurance Benefits HA-5-3-08

By Tony Sanders

All told, there were 7.6 million people unemployed as of April, up from 6.8 million a year earlier. Long-term unemployment is much higher now than at the onset of the last two recessions. At the onset of the 2001 recession, 696,000 workers were unemployed for more than six months, representing about 11 percent of all unemployed workers. Similarly, at the start of the 1990 recession, the long-term unemployed comprised 9.8 percent of all jobless workers. Today, nearly 1.3 million workers have been unemployed for more than six months (representing nearly 17 percent of all unemployed workers). The percentage of workers exhausting UI benefits (36%) is higher today than at the beginning of any of the past five recessions. Given this high exhaustion rate, the Congressional Budget Office (CBO) assumes that roughly 3.5 million Americans will run out of unemployment benefits before finding work this year. When economic conditions deteriorate over a period of months, Congress has routinely provided extended unemployment benefits to dislocated workers during the last five decades. Such federally funded extensions have occurred in 1958, 1961, 1972, 1975, 1982, 1991, and 2002. Unemployment insurance (UI) is estimated to mitigate the loss in real GDP by 15 to 17 percent and saves more than 130,000 jobs in the average recession’s peak year.

Over the first three months of this year, the U.S. economy lost a total of 232,000 jobs. The total number of unemployed workers has already grown by 1.1 million over the last twelve months. In the last three economic downturns (1981, 1990, and 2001), a one million increase in the number of jobless Americans over one year occurred four to five months into the recession. Claims for UI benefits have increased significantly. For the week ending March 29, initial claims jumped to 407,000 (up nearly 90,000 from the same week in the prior year), and continuing claims rose to almost three million (up nearly 450,000 from the prior year). While there are varying degrees of unemployment among the States, local areas of high unemployment exist throughout much of the nation. There are over 100 metropolitan areas located in every region of the country with unemployment rates of six percent or higher, according to the Bureau of Labor Statistics.

In response to the Department of Labor’s release of its April employment report, which showed a loss of 20,000 jobs in the American economy - the fourth consecutive month of job losses, Rep. Jim McDermott the Chairman of the Income and Family Support Sub Committee said,

"Today’s employment report is further proof that our economy is deteriorating under the current economic policies of this Administration, and American workers are losing their jobs through no fault of their own. We have just marked the fourth straight month of job losses, with a total of 260,000 jobs vanishing from our economy to date, and few believe that the economy has bottomed out yet. This is a sober reminder that Congress should act quickly to extend unemployment benefits, a belief strongly supported by governors in a letter to the Ways and Means Committee yesterday, in which they called for an extension of UI benefits. With gas prices and foreclosures continuing to climb, too many Americans find themselves living at the margins of our economy. The time is right and the time is now to extend unemployment benefits."

In response to nearly every recession over the last 50 years, Congress has provided extended unemployment benefits to both help jobless workers who are looking for work and to stabilize the overall economy. Congress should act now to establish this basic safety net again before more workers are left without assistance. Of the five historical recessions beginning in 1969 simulations showed that the UI program mitigated the loss in real GDP by about 15 percent over all the quarters in each recession. The impact of UI in the 1990’s recession was found to be more robust than in the 1980's recession, although less so than in the 1970's recession. The average peak annual number of jobs saved was 131,000. While the simulations showed a decline in annual jobs saved during the 1980s as compared with the prior decade, the number rose slightly in the 1990s. The first federal action to provide so-called “extended benefits” came during the recession of 1958, when the Congress enacted a temporary extended benefits program for workers who had exhausted their regular benefits. Proposals to make extended benefits a permanent part of the UI program were debated in the 1960s, but the concept did not become law until 1970. The Extended Benefits program allowed claimants to receive additional benefits for up to 13 more weeks, or 50 percent of the duration of their original coverage period. The cost was shared 50-50 by States and the federal government, and the federal unemployment tax was raised by 0.1 percent to fund the federal government’s share. Under the law, extended benefits were to be triggered when the unemployment level in a state reached a specified point; the program could be triggered nationwide if the national insured unemployed rate reached a specified level. Despite the addition of the Extended Benefits program to UI, the recessions of the 1970s, 1980s (includes two recessions), and 1990s left severe long-term unemployment in their wake, with hundreds of thousands of individuals having exhausted both regular and extended benefits. In each of these economic contractions, federal lawmakers enacted temporary supplemental benefit programs financed solely by the federal government. These emergency benefits programs, which provided payments beyond the 39th week of unemployment, were tied to state unemployment rates as triggers.

The 1969-70 recession was more typical of the expected countercyclical pattern, in that there was a UI surplus of $0.4 billion in nominal dollars in 1969 (peak). During the trough of 1970, the deficit in nominal dollars was $1.3 billion. Even though the trough was reached in that year, the deficit ballooned to $2.3 billion in 1971. The brief 1980 recession started in January (peak) and ended in July (trough), producing a deficit in UI taxes of $2.4 billion. The UI deficit shrank to $1.6 billion during the 1981 economic growth, but then expanded to $8.4 billion in 1982. Because the second recession was deeper, the UI deficit remained above its 1980 recession level in 1983, when it totaled $3.2 billion. The first surplus in UI taxes since 1979 occurred in 1984, when the surplus reached $6.2 billion in nominal dollars. The recession of 1990-91 saw the countercyclical UI activity eliminate a 1989 surplus of $2.8 billion in UI taxes and replace it with a deficit of $2.1 billion in 1990, a year in which the economy peaked in July and then moved downward. The economic trough was reached in March of 1991, and the UI deficit climbed rapidly to $10.1 billion in nominal dollars that year. The deficit continued, but at declining levels, until 1994, when UI taxes showed a surplus of $1.4 billion. The recession of 2001 was devastating to the state budgets and the trust funds were depleted, they were replenished during the economic boom and in 2005 the trust funds showed a surplus of $29.3 billion. As the result of the surge in unemployment over the past nine months funds the growth in surplus has declined however judging from the secrecy regarding trust funds balances is can be presumed that they are flush with more than enough cash to finance a $10 billion supplemental extending benefits.

State	Revenues (000) {Past 12 Months}	Benefits (000)	TF Balance (000)	Interest Earned (000)
United States Total	$36,293,745	$7,015,453	$29,744,198	$354,101
Alabama	$306,530	$58,941	$366,233	$4,383
Alaska	$152,086	$19,215	$219,806	$2,516
Arizona	$262,432	$62,469	$762,841	$9,072
Arkansas	$273,352	$55,024	$139,506	$1,643
California	$5,273,430	$1,052,924	$1,696,165	$21,967
Colorado	$505,461	$66,906	$275,860	$3,184
Connecticut	$632,454	$127,374	$597,640	$7,077
Delaware	$79,411	$22,415	$210,913	$2,528
District of Columbia	$109,720	$22,501	$359,906	$4,254
Florida	$1,167,770	$221,809	$1,833,175	$21,880
Georgia	$731,629	$136,382	$1,146,224	$13,515
Hawaii	$134,210	$22,346	$439,073	$5,099
Idaho	$133,970	$19,554	$121,006	$1,376
Illinois	$2,619,692	$374,987	$509,767	$6,400
Indiana	$594,646	$135,661	$595,246	$7,286
Iowa	$262,210	$55,781	$682,958	$8,005
Kansas	$347,196	$58,700	$460,880	$5,432
Kentucky	$359,708	$84,269	$293,065	$3,556
Louisiana	$183,954	$131,102	$1,428,957	$17,682
Maine	$98,162	$19,290	$442,679	$5,191
Maryland	$547,128	$89,885	$885,649	$10,488
Massachusetts	$1,694,162	$301,025	$523,940	$6,131
Michigan	$1,513,141	$388,891	$630,976	$8,267
Minnesota	$858,177	$110,620	$77,853	$736
Mississippi	$142,469	$45,793	$716,864	$8,592
Missouri	$524,549	$95,590	$106,513	$0
Montana	$75,338	$10,203	$215,375	$2,500
Nebraska	$140,085	$23,085	$163,788	$1,951
Nevada	$313,420	$49,472	$568,150	$6,584
New Hampshire	$85,802	$13,946	$265,441	$3,120
New Jersey	$1,714,836	$432,673	$989,982	$12,055
New Mexico	$85,848	$25,916	$560,704	$6,617
New York	$2,652,855	$549,780	$179	$168
North Carolina	$926,820	$197,440	$11,212	$386
North Dakota	$58,067	$4,407	$90,844	$1,026
Ohio	$995,697	$234,082	$614,297	$7,586
Oklahoma	$294,372	$37,270	$591,478	$6,855
Oregon	$762,793	$112,980	$1,368,128	$15,867
Pennsylvania	$2,645,488	$470,496	$1,080,194	$13,061
Puerto Rico	$200,843	$56,855	$543,346	$6,421
Rhode Island	$190,097	$43,451	$177,412	$2,102
South Carolina	$282,088	$82,402	$314,558	$3,841
South Dakota	$18,805	$3,937	$21,425	$260
Tennessee	$462,135	$104,901	$676,694	$8,135
Texas	$1,718,104	$318,910	$1,381,107	$16,670
Utah	$208,377	$23,065	$491,848	$5,620
Vermont	$53,903	$13,500	$219,854	$2,613
Virgin Islands	$2,175	$1,708	$33,493	$402
Virginia	$536,983	$75,255	$517,122	$6,063
Washington	$1,477,907	$162,555	$2,103,084	$23,539
West Virginia	$140,010	$29,342	$231,867	$2,767
Wisconsin	$711,101	$153,357	$809,009	$9,540
Wyoming	$35,628	$5,007	$179,910	$2,092

Established under the Social Security Act of 1935 unemployment insurance, protects against the hazard of unemployment through the regularization of employment, by having employers foot the costs through taxation, facilitating return to employment, and maintenance of purchasing power -- and thus economic stability -- during contractions in the economy. The Bureau of Employment Security described this latter purpose in a 1950 document as follows: “By maintaining essential consumer purchasing power, on which production plans are based, the program provides a brake on downturns in business activity, helps to stabilize employment, and lessens the momentum of deflation during periods of recession.” The general framework of the Federal-State partnership undergirding the unemployment insurance system has remained standing although the details of the federal and state roles – and the balance between them -- have been constantly in evolution. Under the program, employers pay state and federal employment taxes on employee wages. Within broad federal guidelines, States basically shape and administer their programs individually, setting state taxation rules, eligibility criteria, and benefit levels. State and federal UI tax receipts are held in a federal unemployment trust fund until they are needed.

For January 2008, when the national unemployment rate was 4.9 percent, 5 states had unemployment rates of 6.0 percent or more, while 4 states had unemployment rates under 3.0 percent. From January 2007 to January 2008, 15 states experienced a decline in unemployment, while 13 experienced increases of 0.5 percentage points or more. In response a Letter of the National Governor’s Association Calling for an Extension of Unemployment Benefits stated,

“In the last month, 3 states experienced an increase in the unemployment rate. The national unemployment rate increased to 5.1 percent in March 2008. Most notable, however, is the significant number of individuals that are unemployed for 27 weeks or longer, thus exhausting all unemployment benefits. Today, approximately 18.7 percent of jobless individuals are experiencing long-term unemployment compared with approximately 11 percent at the beginning of the last recession…At the same time, any proposal to extend unemployment benefits must also address the reality that states need additional resources to administer unemployment claims for a larger number of individuals for a longer period of time. This year alone, states may have to administer an average of nearly 400,000 unemployment insurance claims without federal funding. Federal support is needed by state employment and workforce agencies to administer increased initial unemployment claims, to support weekly unemployment benefits and to provide employment and training services”.

Federal, state and local governments are hiring new workers at the fastest pace in six years, helping offset job losses in the private sector. The Bureau of Labor Statistics reported that Governments added 76,800 jobs in the first three months of 2008, reports the Bureau of Labor Statistics. That's the biggest jump in first-quarter hiring since a boom in 2002 that followed the terrorist attacks of Sept. 11, 2001. By contrast, private companies collectively shed 286,000 workers in the first three months of 2008. That job loss has led many economists to declare the country is in a recession. The Government hiring began to boom around July 1, 2007 when most state and local governments started new fiscal years. The United States has nearly 88,000 units of government, mostly local, that employ 22 million. Hiring has been strong at every level. The federal government increased its workforce by 13,800 in the first three months of 2008. Local governments added 47,000 and states 16,000. Some states may cut hiring to save money. Governors have announced hiring freezes in California, Delaware, Louisiana, Massachusetts, New Hampshire, New Jersey and New York, but the actions seldom trim total employment. Louisiana has hired 4,100 new workers, mostly replacements, since a freeze began in January.

Unlike the federal government, almost all states are legally required to balance their budgets. To meet this requirement in times of economic stress, states may take such steps as tapping reserves, borrowing from trust funds, securitizing future revenue streams, delaying spending from one fiscal year to the next, etc. Even after such efforts, states frequently need to increase taxes or cut spending on Medicaid, post-secondary education, aid to localities, or other priorities. All of the latter actions tend to worsen the economic downturn. One way states can avoid making deep reductions in services during a recession is to build up rainy day funds and other reserves. At the end of FY2006, state reserves, general fund balances and rainy day funds, totaled 11.5 percent of annual state spending. These reserves are estimated to decline to 6.7 percent of annual spending by the end of this fiscal year. Reserves can be particularly important to help states adjust in the early months of a fiscal crisis, but generally are not sufficient to avert the need for substantial budget cuts or tax increases.

Recessions bring about a paradox in government spending, although more people become eligible for public services state spend less in order to balance their budgets. Generally, a 1 percentage point increase in the unemployment rate causes state General Fund revenue to drop by 3 to 4 percent below expected levels. If states must balance their budgets and all state spending is reduced proportionately, a 1 percentage point increase in unemployment would therefore entail a 3 to 4 percent reduction in Medicaid and SCHIP spending. However a 1 percentage point rise in the national unemployment rate would increase Medicaid and SCHIP enrollment by 1 million (600,000 children and 400,000 non-elderly adults) and cause the number of uninsured to grow by 1.1 million. That would increase Medicaid and SCHIP costs by $3.4 billion, including $1.4 billion in state spending. This represents a 1 percent increase in total Medicaid and SCHIP expenditures.

Already, Governors and other state officials are proposing significant cutbacks. Medicaid and SCHIP cuts are proposed in 13 states; K-12 education is targeted in 9 states; higher education funding is proposed for reductions in 12 states; and 7 states have either increased taxes or are considering such increases. While serious budget problems loom in many places, state circumstances vary. Many localities are experiencing significant fiscal difficulty. Most cities depend on property tax revenues, which can be disproportionately affected by the problems of the housing market that are a driving force in the current downturn. According to the National League of Cities, 62 percent of cities have seen an increase in foreclosures, and 33 percent are experiencing or projecting a drop in revenue, compared to one year ago. In prior slowdowns, by contrast, housing was an area of economic strength, helping limit fiscal damage. Compared to past downturns, states now have less capacity to address their budget challenges by shifting responsibilities to localities or cutting their aid.

In response to the last economic downturn, which took place earlier this decade, the federal government passed the Jobs and Growth Tax Relief Reconciliation Act (JGTRRA), which provided $20 billion in fiscal relief to states: $10 billion in the form of block grants and the other $10 billion in a 2.95 percentage point increase to each state’s federal medical assistance percentage. This round of state budget problems may present particular challenges to state policymakers, for several reasons. First, many states have less capacity than in the past to make relatively painless reductions. The three previous economic downturns occurred roughly once a decade – in the early 1980s, the early 1990s, and the early years of the current decade. The present downturn is beginning with approximately half that much time having elapsed since the last economic slowdown. Accordingly, compared to previous downturns, states have restored fewer prior reductions to Medicaid and other services. This new round of cutbacks will therefore be made against a lower baseline service level. The Economic Stimulus Package of 2008 HR 5140 began administrating $160 billion in $600 tax rebates to taxpayers, $300 per child and social security beneficiary as well as relief for mortgage lending.

As the country heads into economic downturn, 28 states (including the District of Columbia) are forecasting budget deficits for the coming fiscal year, which collectively exceed $39 billion. The 25 states in which revenues have fallen short of or are expected to fall short of the amount needed to support current services in fiscal year 2009 are Alabama, Arizona, California, Delaware, Florida, Georgia, Illinois, Iowa, Kentucky, Maine, Maryland, Massachusetts, Minnesota, Nevada, New Hampshire, New Jersey, New York, Ohio, Oklahoma, Rhode Island, South Carolina, Tennessee, Vermont, Virginia, and Wisconsin. In addition, the District of Columbia is expecting a shortfall in fiscal year 2009. The budget gaps total $40.1 to $42.1 billion, averaging 8.4 - 8.8 percent of these states’ general fund budgets. Another three states face or faced budget shortfalls for fiscal year 2009, but information on the size of those deficits is not available. They are Louisiana, Michigan, and Mississippi. Analysts in three other states - Connecticut, Missouri, and Texas - are projecting budget gaps a little further down the road, in FY2010 and beyond. This brings the total number of states identified as facing budget gaps to 31 - more than half of all states. The remaining 19 states did not foresee FY2009 budget gaps at the time of the survey either because their budgets remain strong or because they have not yet prepared updated revenue and spending projections for fiscal year 2009. Some mineral-rich states - such as New Mexico, Alaska, and Montana - are seeing revenue growth as a result of high oil prices.

25 STATES PLUS DC WITH GAPS FOR FY2009
	Amount	Percent of FY2008 General Fund
Alabama	$784 million	9.2%
Arizona	$1.9 billion	17.8%
California¹	$16.0 billion	15.4%
Delaware	$100 million - $254 million	2.9 - 7.4%
District of Columbia	$96 million	1.5%
Florida	$3.4 billion	11.0%
Georgia	$200 million - $300 million	1.0 – 1.5%
Illinois	$1,8 billion	6.6%
Iowa	$350 million	6.0%
Kentucky¹	$266 million	2.9%
Maine¹	$124 million	4.0%
Maryland¹	$808 million	5.5%
Massachusetts	$1.2 billion	4.2%
Minnesota	$935 million	5.5%
Nevada¹	$898 million	13.5%
New Hampshire	$50 million - $150 million	1.6 – 4.8%
New Jersey	$2.5 - $3.5 billion	7.6 - 10.6%
New York¹	$4.9 billion	9.1%
Ohio	$733 million - $1.3 billion	2.7 - 4.7%
Oklahoma	$114 million	1.6%
Rhode Island	$380 million	11.2%
South Carolina	$250 million	3.7%
Tennessee	$400 million - $500 million	3.6 - 4.4%
Vermont	$59 million	5.1%
Virginia¹	$1.2 billion	6.9%
Wisconsin	$652 million	4.8%
TOTAL	$40.1 - $42.1 billion	8.4 - 8.8%
¹These states have adopted new or revised budgets that address these shortfalls

Poorly targeted stimulus can exacerbate macroeconomic problems, even during a national economic downturn. If fiscal relief dollars go to states with relatively healthy economies, the federal deficit can increase without the countervailing advantage of providing stimulus. In principle, an automatic stabilizer acts to dampen fluctuations in the level of economic activity. Automatic countercyclical programs are designed to ensure that fiscal injections or withdrawals occur in a timely fashion, without design or implementation delays that accompany discretionary policy. As an automatic stabilizer, a fiscal instrument works with no discretionary policy decisions required. Recessionary declines in economic activity are met with expansionary levels of fiscal expenditure and reduced taxes. Potential inflationary expansions are slowed by the increased levels of taxes and reduced expenditure. Public expenditures act as fiscal injections in the macro-economy. Fiscal injections also act on the economy with a multiplier effect. Changes in government expenditures lead to changes in the level of economic activity in the same direction. Increasing public expenditure adds to the level of aggregate demand for a given level of income. Macro-economic multiplier effects of the increased government expenditures work through the economy and lead to increases in the level of income. Decreased public expenditure slows the economy. Reducing government spending for a given level of income reduces aggregate demand and aggregate expenditure.

The expenditures and taxes of the UI program act in tandem as an automatic stabilizer. In the core UI program (regular and extended benefits), expenditures and taxes operate without external intervention. That is, during periods of expansion and rising employment, taxes are collected automatically according to pre-established guidelines. During economic contractions, employment levels fall, tax collections slow, and benefit payouts rise to UI claimants under pre-established terms and conditions. Consistent with the theory and empirical evidence of automatic economic stabilizers, these attributes serve as counterbalances to the direction of the economy: During an expansion, UI taxation rises and UI benefits fall, dampening inflationary pressures of economic growth. During a contraction, injections of UI benefits flow into the economy and UI taxation decreases, moderating the contraction’s severity. There are currently three tiers of UI benefits, each with a different level of automaticity. The regular benefits program is the most fully automatic: regular UI benefits flow to qualified unemployed workers immediately, without any external policy intervention required. Extended benefits, which flow to qualified claimants who have exhausted their regular benefits, are less automatic: they become available when unemployment reaches a specified “trigger” level. Supplemental UI benefit programs are the least automatic tier of UI benefits: they become available only by an act of the U.S. Congress.

For the UI program to serve as an automatic stabilizer, without any intervention of government, it should increase benefit expenditures during recessions and collect more UI taxes during recoveries. After five years of solid expansion the UI trust funds should have more than enough money to extend benefits. Because the program is not 100 percent automatic, however, empirical evidence must be gathered and analyzed to monitor the degree to which it helps smooth the fluctuations in business cycles over time. UI is not completely automatic because its temporary components are activated only by Congressional action, and because some of the governing regulations of its permanent components are determined by state lawmaking. Congress should extend UI benefits and coverage in a supplemental appropriation from the trust funds estimated at $10 billion nationally. UI trust fund surpluses should aim for zero and the more solvent states should assist the more depressed states. A UI account deficit is not expected until 2009, if the recession continues. UI is the most effective form of relief from economic recessions. It is time for Congress to pass a supplemental and begin extending benefits.

Works Cited

1. Aversa, Jeanne. Economy Shows Resilience , Jobless Rate Falls as Dollar Rises. AP. May 2, 2008

2. Cauchon, Dennis. Hiring Leaps in Public Sector. USA Today. May 1, 2008

3. Dorn, Stan; Garrett, Bowen; Holahan, John; Wiliams, Aimee. Medicaid, SCHIP and Economic Downturn: Policy Changes and Policy Responses. Urban Institute Center for Health Policy and the Kaiser Commission for Medicaid and the Uninsured. April 2008

4. Economic Stimulus Package of 2008 HR 5140

5. Evans v. Teamsters Local Union No. 31, 2008 SCC 20 May 1

6. Federal Reserve Governor F.S. Mishkin, Outlook and Risks for the U.S. Economy, at the National Association for Business Economics Washington Policy Conference, March 4, 2008

7. Jobs and Growth Tax Relief Reconciliation Act (JGTRRA)

8. Matzke, Martha; Chimerine, Lawrence ; Black, Theodore; Coffey, Lester. Unemployment Insurance as an Automatic Stabilizer: Evidence of Effectiveness Over Three Decades, Coffey Communications, LLC, for U.S. Department of Labor. Unemployment Insurance Occasional Paper 99-8. July 1999

9. McNichol, Elizabeth; Lav, Iris. 22 States Face Total Budget Shortfall of at Least $39 Billion in 2009; 8 Others Expect Budget Problems, Center on Budget and Policy Priorities (CBPP), Revised April 15, 2008

10. National Governor’s Association. Letter Calling for an Extension of Unemployment Benefits of May 1, 2008

11. Rangel, Charles. Downturn in the Economy Clearly Justifies Extending Unemployment Benefits Now. Ways and Means Committee. April 8, 2008

12. US Department of Labor Employment and Training Administration. Summary Tables of Unemployment Insurance Trust Funds 3^rd Quarter 2005