A Pandemic Problem having an Elegant Solution Spoiled by Congress

The Covid-19 pandemic has exposed a need for solving problems that have never before been encountered.  The 1918 Influenza pandemic was a similar type of virus, and in the United States caused an estimated 675,000 deaths.  It eventually ran its course but for whatever reasons did not involve shutting down schools, public facilities, businesses and governments.  There is no official date for its end, but it appears it was no longer a news item by 1920.

This essay assumes the response to Covid-19 was correct and needful in order to save lives and shorten its duration.  Therefore, it was necessary to shut down commerce and industry that was non-essential.  That led to laying off from work millions of workers, causing an unemployment rate of 14.8% whereas the rate was 4.0% unemployed of a labor force of about 165 million participants the month before.  How long this was to last was uncertain.  The question then became, how can the government best contribute to business surviving the period of non-essential shutdowns and what would be the best current actions that would be necessary of facilitate a rapid restart of business at a hurried pace when the time was ripe.  In the meantime, the economy would flounder and gushers of debt would be added.

The answer deemed to require that replacement wages would be paid to all laid-off employees.  The United States has had a joint federal and state unemployment compensation program in place for about 100 years.  It is literally fifty-two different networks, fifty-one programs in the 50 states and the District and one in the federal government.  The federal system works the same way in all states, but each state has created and now operates its own systems and procedures.   Among the states, average benefits range from less than $200 per week to over $500.  Among the same states and the District, average weekly wages vary from less than $700 to more than $1,200.  As to the businesses, the definition of what businesses were essential, and what not, was made by each state.  Banks and the Federal Reserve System provided grants and loans in order to maintain essential business intact, and to non-essential business they would receive loans for the cost of surviving long enough to be able to restart.  To facilitate this expectation it would be necessary to maintain their workforces.  Thus, laid-off workers would receive replacement unemployment insurance compensation.  It would be paid through the state systems, and only the federal system would be different from what it was pre-pandemic; each state continuing its system in place.  The difference in pay for the each worker would come from the federal supplemental amount to reach the aimed-for “replacement” amount.

Congress designated the amount of enhanced federal unemployment compensation was to replace 100 percent of the mean U.S. wage when combined with mean state Unemployment Insurance benefits.   This very large amount of money was then divided by the number of persons employed and converted to a weekly amount of compensation and rounded to $600 per person.  This fixed the amount at $600 per week for each unemployed worker of federal compensation, plus the variable state amount.  Thus, no laid-off employee received less than about $800 per week.  The National Bureau of Economic Research Working Paper 27216 (NBER) confirmed the calculation in total would be correct.  However, the expectation that each laid-off beneficiary would receive a reasonably close amount to his actual wage was not going to work as Congress assumed.  It is in the nature of the solution that $600 plus state benefits could not be consistent among wide variation of actual wages.  This results from the fact that each person does not make the same amount of money.  Lowest paid workers might actually make only $175 per week and obtain replacement of $800 that might be composed of $600 of federal supplement and say in the particular state, $200 benefit (total $800).  This outcome for a $175 actual wage earner represents 457% of replacement ($800 divided by $175).  The median of a model of all replacement wages is 134% and one out of five eligible unemployed workers will receive benefits at least twice as large as their lost earnings.  Only the highest-paid workers obtained less than replacement compensation, and only the lowest-paid more.  The NBER provided Congress with a simple means of reducing the CARES Act replacement value to an amount that would be closer to the objective of the workers’ actual wage.  For example, by reducing supplemental compensation to $384 (64% of $600) many more workers would have above-replacement amounts of pay, but fewer numbers of people above 120% of actual wages. This change could be immediately implemented by each state by changing a single number, the federal supplemental compensation amount to $384 instead of $600.  The House of Representatives killed the change and the program has never been changed except when the original authorization expired, its reauthorization was at $300, replacing the original $600.

There are other reasons for reducing $600, such as its being flagrantly excessive for the intended purpose; even stupidly so.  An excessive amount increases the incentive for the worker to not return to work, for as long as she is getting paid more for not working.  Going back to the same pay is basically off the table with this worker.  It does not speed up the restart of the business; it slows it down, or perhaps causes failure.  As a real world example, within the last three weeks, the restaurant industry disclosed the industry has 930,000 job openings that are not getting taken up and the reason alleged is that workers are refusing to come back to work yet, if ever.  And, the biggest reason of all, the American taxpayer is not going to be pleased knowing that this fix would have saved $720 billion.

It seems it is Congress, only Congress that has essentially zero institutional knowledge about business among is members.

Publiustoo.com                                                                                 August 1, 2021