The Fed keeps wandering, markets keep falling and winter is coming: economic forecasters fear an impending recession.
In the US, Federal Reserve Chairman Jay Powell made it clear this month that his policy focus is on fighting inflation, with Fed officials pointing out that the unemployment rate is falling could reach 5% before the bank backs down on rate hikes. That would mean more than 1.5 million Americans would lose their jobs.
As the UK debacle shows, it’s never a good idea for any country’s lawmakers to do so be contradictory with its central bank. In the US, however, Biden’s White House and Congress failed to adequately prepare for a recession triggered by the Fed’s anti-inflationary stance. In particular, the unemployment insurance (AV) system remains glaringly flawed, designed to keep people who lose their jobs from falling into poverty — and further dragging down the economy.
During the pandemic-driven recession of 2020, unemployment insurance was a key tool that softened the blow of public health restrictions and led to one of the fastest employment recovery in modern history. But the experience also reminded us what should be corrected. Consider…
Cheating was serious.
US auditors suspect more than $45.6 billion in UI payments went to scammers using stolen social security numbers and other techniques to claim benefits during the pandemic, and then disappear. A big reason why the system is so prone to bad actors is that it is state-managed. Even investigating past crimes requires a special effort from the White House to collect data from each state. Many states have underfunded their UI bureaucracy, with some states struggling to adapt computer systems to match use outdated programming languages.
States cut support.
The federal government effectively funds states when they deploy UI, but that creates worrying incentives. State trust funds are the primary source of funding for UI, but once they run out, the federal government supplies the states cheap loans. The idea is for states to top up their trust funds when times are good, but often the opposite happens: lawmakers reduce eligibility for UI and the length of time it’s available to reduce the amount they need to save. We saw that after the financial crisis and it is true already happened after the pandemic. It will bring less support to future unemployed and also contribute to it confusing patchwork system of UI across the country. For example, workers in Alabama have a maximum of 14 weeks of UI available, while in Georgia it is 26 weeks.
Gigworkers need support.
UI is designed for workers employed by other people, but 10% of US workers are self-employed or self-employed. During the pandemic, Congress passed legislation that temporarily extended benefits to these workers, but it encountered significant administrative difficulties as state employment agencies were unwilling to meet the challenge of claiming income from tax forms used by these workers check over.
UI should be an automatic stabilizer.
During economic crises, US lawmakers have Extended and improved UI payments. But these decisions are usually ill-timed and often stalled by political gamble. That makes funding less effective in reaching the people who need it and slows economic recovery. It would be more efficient to automatically make more generous UI payments when economic data, such as a three-month average unemployment rate, shows that the job market is in an unusually tough spot.
How to fix the UI.
There are good ideas to fix all these problems, starting with better funding: The US has not increased the amount of a worker’s salary, the first $7,000, that can be taxed to fund unemployment since 1983. When the program began in 1933, the taxable wage was approximately $50,000 in today’s dollars. Increasing the taxable amount and reducing the tax rate could result in sufficient funds to manage the program more effectively and avoid waste and fraud.
Two Democratic Senators, Ron Wyden of Oregon and Michael Bennet of Colorado, did proposed legislation which corrects most of these deficiencies and underlies the current patchwork system with a base of basic standards. It has received the support of 21 other senators, but none of them are Republicans. The bill is unlikely to pass without at least nine or ten Republican votes, again suggesting that our creaky UI system won’t change much before the next recession. It is possible that the measure would have gone through the reconciliation process that allows certain laws to be passed by a simple majority, but the measures were not included in the anti-inflation law that went into effect in August.
And while the Wyden-Bennet bill includes sensible user interface improvements, it falls short of the sweeping changes that would bring the system into the 21st century. Something like a state-administered program that relies on tax data to automatically grant eligible recipients unemployment insurance benefits, which may be administered by the Social Security Administration, rather than creating more than 50 redundant bureaucracies across the country.