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In Next Recession, Don’t Let Uncle Sam Be Uncle Sucker Again


May 2, 2023

Following recent bank failures, expectations for a recession have revived. If unemployment rises significantly, Congress will likely re-open its stimulus policy playbook — including by extending unemployment benefits. Yet given an increased focus on containing federal spending, there could be constraints on how much Congress provides. How can policymakers best target future federal aid?

They should start by ensuring states keep up their end on extended unemployment benefits — so that Uncle Sam doesn’t become Uncle Sucker again.

Understanding what that means requires some background. There are typically three types of unemployment benefits paid in recessions: state Unemployment Insurance (UI), which offers up to 26 weeks of checks regardless of economic conditions; federal-state Extended Benefits (EB), which offer another 13 or 20 weeks of checks to people who have exhausted UI in states where unemployment is high; and federal emergency benefits, which temporarily paychecks to those exhausting UI in all states (and often even more checks in states where unemployment is elevated). 

States have historically split the cost of EB with the federal government, except during the Great Recession and early in the pandemic — when the federal government paid 100 percent of the cost. States naturally welcomed this arrangement. Alongside generous federal emergency benefits, it contributed to a record 73 weeks of federal unemployment checks during the Great Recession, and up to 99 weeks of all checks. During the pandemic, it contributed to a massive $700 billion in federal unemployment funds that poured into state economies.

But some states took it a step further and expanded the operation of the EB program — but only while federal taxpayers paid the full cost. Twelve states (California, Colorado, Delaware, Georgia, Illinois, Kentucky, Massachusetts, Michigan, Nevada, New York, Ohio, and Texas) and the District of Columbia adopted such policies, which inflated the number of EB checks paid there during the pandemic.

But there is a downside to operating EB only when the federal government is footing the entire bill: benefits could end while unemployment is still high. As the chart below shows, that’s what happened in the District of Columbia, Illinois, California, New York, and Nevada. EB expired in those places in September 2021 not because state unemployment rates fell below the 6.5 percent threshold that otherwise defines when the program operates, but simply because full federal funding expired.

States Where EB Ended in September 2021 at State Option, by Then-Current Total Unemployment Rate (TUR)

US Department of Labor

Despite historically high unemployment rates, those jurisdictions chose to end EB rather than pay half of its costs. Had they instead chosen to continue EB, elevated unemployment rates would have allowed checks to flow to the long-term unemployed for another two months in Illinois, three months in DC, and six months in California, New York, and Nevada. That contrasts with other high-unemployment states that opted to use state funds to continue EB after September 2021: Alaska (where EB continued for another three months), Connecticut (four months), New Mexico (five months), and New Jersey (seven months).

States certainly didn’t lack the funds to cover EB costs, as federal stimulus swelled their coffers. For example, California forecast a massive $75 billion budget surplus in May 2021, and paid $12 billion in “Golden State Stimulus” checks in September 2021. New York used its federal stimulus for $2 billion in unemployment checks to illegal aliens. Yet as full federal funding for EB and other pandemic benefits ended, New York Governor Kathy Hochul said “the state could not afford to extend the benefits on its own and would need the federal government to provide additional money.”

Federal lawmakers should take two lessons from this experience whenever they are called on to provide generous extended benefits.

First, don’t revive full federal funding of EB. States can and should support their share of program costs as they did before the past two recessions. There is no reason why taxpayers in other states must pay for all of EB when large blue states are unwilling to cover half of the costs for their own residents even when unemployment exceeds 7 percent.

Second, federal emergency benefits should be paid only after claimants have exhausted federal-state EB, or at least only in states where unemployment is elevated. This will guarantee that federal benefits flow after states have contributed first, or at the very least only where jobs are scarce.

Federal taxpayers will gain on both fronts as states are rightly expected to help support their own residents first and federal funds are targeted to where needs are greatest. That will ensure that supporting the long-term unemployed is once again a shared responsibility — and that states can’t treat Uncle Sam like Uncle Sucker again.

About the Author

Matt Weidinger