In late March, 3.3 million Americans filed for unemployment.
It was a jarring statistic that reflects the fear and uncertainty many households are experiencing. Some pundits on both the left and right see it as a policy failure. They think the U.S. government should have done what the U.K., Canada, and some European countries are doing; that is, avoiding lay-offs by simply taking over the payrolls of the majority of companies. This, they argue, would spare many Americans from losing their jobs and, when the economy restarts, it will ensure businesses can reopen quickly without having to hire new workers or rehire previous ones.
But nationalizing payrolls would be a mistake. Providing payments to workers through the unemployment program is a better way to reach people in need. First, the unemployment program already exists and is easy to scale up. Because the CARES act — the coronavirus relief bill — increases payments on top of existing state unemployment benefits, some filers will get more than they did while working. Also, the program was easily scaled up to include people who were traditionally excluded, including gig workers and people who’ve left their jobs because of caretaking responsibilities. Ramping up unemployment benefits also reaches more people than taking over payrolls does because it does not shut out workers who’ve already lost their jobs.
Furthermore, taking over the private sector payroll is inefficient and unnecessary. Some businesses are still operating and are able to pay their workers. Other businesses are hiring some of the recently unemployed. Each country taking over payroll has various conditions regarding who gets government money. The U.K. program is paying furloughed workers and Canada is targeting firms who’ve lost at least 30 percent of revenue. Nordic countries are more inclusive. But this blunt approach reaches many firms that don’t need the support, and it doesn’t reach everyone like already laid off workers and those who need to care for sick relatives or their children.
Given the scope of the crisis and the low interest rates, it is tempting to argue that now is not the time to quibble about spending. But this crisis may go on for several months and require additional support. All this spending is financed by the government selling bonds (mostly short-term bills). The virus may end, but the debt will remain for years to come. Rates are low, or even negative now, but there’s a good chance rates will be higher one day. Higher rates will make it more expensive to service today’s debt, which would make it harder to finance similar relief measures in the future should we need to do so. Extraordinary times may merit extraordinary policy measures, but they aren’t a license to be fiscally reckless.
The CARES act also offers the option to pay workers’ wages. If a small business takes out a loan and retains workers, it doesn’t have to pay it back. This is also preferable to explicit payroll takeover because it more accurately targets the most needy businesses and they can direct the funds to other expenses like rent.
There are certainly holes in the safety net. Unemployment won’t cover people who are afraid to work. And generally, furloughs are preferable to layoffs because they maintain connections between employees and employers. Unemployment insurance already pays furloughed workers--not all the recent unemployment claims are lay-offs. Easing the existing conditions on unemployment benefits for furloughed workers, or those with reduced hours, would encourage maintaining employment relationships and be easier and more efficient than taking over payrolls.
Fiscal policy is best thought of as insurance rather than stimulus. Viable insurance targets people who need it; it doesn’t pay everyone. Unemployment is scary, and claiming benefits has a negative connotation. But unemployment insurance is best suited for our needs today. It ensures public relief is better tailored to those who need it. The high number of claims is terrible and it will continue to grow, but it also represents the system working, the program’s expansion, and many people receiving the help they need.
Editor's Note: This piece originally appeared on The Manhattan Institute.