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Failure to Continue Jobless Benefits Would Undo Budget Deal's Economic Boost

The Murray-Ryan budget deal provides a stimulative boost to the economy — albeit a modest one.  But here’s the rub:  the economic drag caused by lawmakers’ failure to include an extension of federal emergency jobless benefits in the deal would likely negate that stimulus.

Economist Joel Prakken of Macroeconomic Advisers says that the deal would boost economic growth by “maybe 1/4 percentage point” compared to the sequestration cuts scheduled under current law.  The deal follows the sound principle under current circumstances of raising deficits in the near term to boost the economic recovery but reducing them by an even larger amount later, when the economy is expected to be stronger.

The problem is, the Congressional Budget Office (CBO) estimates that Emergency Unemployment Compensation (EUC) has a very similar impact — boosting the economy by up to 0.3 percent by the end of 2014 and adding up to 300,000 jobs.  Not extending EUC would remove that potential boost from the economy.

The budget deal and extending EUC have similar economic effects because their budgetary effects are roughly the same size:

  • CBO estimates that the budget deal’s increases in discretionary spending would raise federal spending by $26 billion in fiscal year 2014 and $22 billion in fiscal year 2015, while its deficit-reduction provisions would cut spending by roughly $3 billion in each fiscal year.  Netting these effects and assuming that about a quarter of spending for fiscal year 2015 (which starts October 1, 2014) occurs in calendar year 2014, the budget deal would produce a net increase in spending of about $28 billion by the end of calendar year 2014.
  • CBO estimates that extending EUC would cost about $26 billion in calendar year 2014.

CBO and other analysts generally regard spending on unemployment insurance as providing more “bang for the buck” than most other stimulus measures.  So, the economic drag in 2014 from a failure to extend EUC is likely to be at least as large as the economic boost from the budget deal.