Cutoff of jobless aid would lower economic growth

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WASHINGTON (AP) — If Congress lets unemployment benefits expire this week, the jobless won’t be the only ones to feel the pain: The overall economy would suffer, too.

Unemployment benefits help drive the economy because the jobless tend to spend every dollar they get, pumping cash into businesses. A cutoff of aid for millions of people jobless for more than six months could squeeze a fragile economy, analysts say. Among the consequences they envision over the next year:

• Annual economic growth could fall by one half to nearly 1 percentage point.

• Up to 1 million more people could lose their jobs.

• Hundreds of thousands would fall into poverty.

“Look for homelessness to rise and food lines to get longer as we approach Christmas if the situation can’t be resolved,” says Diane Swonk, chief economist at Mesirow Financial.

The issue is expected to be taken up in the lame-duck session of Congress that resumed Monday. Among other unfinished business, lawmakers are likely to vote on whether to extend the Bush-era tax cuts that are set to expire at year’s end. President Obama met with Republican leaders Tuesday.

The average weekly payment for the roughly 8.5 million people receiving unemployment benefits is $302.90. But it ranges widely — from a low of $118.82 in Puerto Rico to a high of $419.53 in Hawaii. Each state sets the amount through a formula meant to replace a portion of a jobless person’s old income.

That money ripples through the economy into supermarkets, gasoline stations, utilities, convenience stores. That allows those businesses to hire more people, who, in turn, spend more money.

The Congressional Budget Office says every $1 spent on unemployment benefits generates up to $1.90 in economic growth. The program is the most effective government policy for generating growth among 11 options the CBO has analyzed.

Mark Zandi, chief economist at Moody’s Analytics, puts the bang-for-a-buck figure at $1.61, and a recent Labor Department study estimates it at $2.

Analyst Mark Miller of William Blair & Co. figures that, in particular, discount retailers such as Dollar General and Family Dollar will see their revenue pinched by a couple of percentage points next year if extended jobless benefits expire.

“If you’ve been unemployed for six months, you’ve gone through your savings,” says Heidi Shierholz, economist at the Economic Policy Institute. “You have no choice but to spend (jobless benefits) immediately.”

By contrast, money given to higher-income families — say, through tax cuts — tends to deliver less economic benefit because those taxpayers typically save a big chunk of their windfall.

In July 2008, Congress extended jobless benefits to up to 99 weeks: 26 weeks of regular benefits from the states, plus up to 73 weeks in federal aid in states with high unemployment rates. The extended federal benefits will start phasing out on Wednesday if Congress doesn’t act.

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