Matt Rourke  /  AP
Yvette Ward who has been unemployed for two years displays a sign during a "Vigil for the Unemployed" at the Arch Street Methodist Church in Philadelphia.
msnbc.com news services
updated 12/1/2010 2:38:53 PM ET 2010-12-01T19:38:53

Two million jobless Americans won't be the only ones to feel the loss of unemployment benefits, although they will likely feel it most acutely. The overall economy could suffer too if Congress doesn't act to extend benefits that expired at midnight Tuesday.

Unemployment benefits help boost the economy because the jobless tend to spend every dollar they get, pumping cash into businesses. A cut-off of aid for millions of people jobless for more than six months could squeeze the 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.

Story: Millions may lose jobless benefits as holidays loom

Hours before beefed-up benefits were set to expire late Tuesday, Democrats sought to extend them for another year. But they were blocked by Republican Senator Scott Brown, who said Democrats should have taken time to work out a compromise.

"It's not the way to do business in the United States Senate, and if it is it needs to change," Brown said.

With the unemployment rate stuck at around 9.6 percent, the two parties have been sharply divided over how to cover the cost of weekly checks that help jobless people stay afloat.

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The federal benefits start phasing out Wednesday, although Congress could retroactively vote to extend them in the next two weeks.

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.

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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 & Company figures that, in particular, discount retailers like 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.

When lawmakers extended the benefits, they were responding to a jobs crisis: Unemployment was on its way to double digits for the first time since the 1981-82 recession. The long-term unemployed — those out of work for more than six months — hit a record-high 6.8 million in May this year. Those people represented 46 percent of all unemployed Americans. That's the highest such proportion on record dating to 1948.

2 million by Christmas
At its peak in the first week of this year, just over 12 million people were receiving unemployment benefits — the most on records dating to 1986. The Labor Department estimates that if Congress lets the aid run out, nearly 2 million people will lose their benefits by Christmas.

Without an extension of aid, the number of impoverished Americans would rise, economists say. The income from unemployment checks kept 3.3 million people from falling into poverty in 2009, according to government estimates. The Census Bureau defines poverty as annual income of roughly $22,000 for a family of four.

Still, some economists worry that renewing jobless aid would discourage some unemployed people from seeking work. A study this year by the Federal Reserve Bank of San Francisco lent some support to that notion. But it downplayed the impact as "quite small."

For most recipients, the average $300 weekly unemployment check doesn't go very far: It covers just half of basic household expenses, according to the National Employment Law Project.

In Glenview, Ill., Robert Horvath is barely hanging on. He says his jobless aid — $385 a week — doesn't amount to even 15 percent of his former income as a commercial loan officer. Out of work nearly six months, he's paying $1,300 a month to keep his health insurance. He's burning through his savings and is trying to hold onto his home of 25 years.

Thirty-three economists have signed a statement circulated by the Economic Policy Institute calling for benefits to be extended for 12 more months. Signatories included Alan Blinder, a former vice chairman of the Federal Reserve, and five winners of the Nobel Prize in economics, including Joseph Stiglitz and Robert Solow.

Republican lawmakers have opposed an extension of the jobless aid if it would enlarge the government's $1.3 trillion budget deficit. They insist that the cost — around $5 billion a month — be offset with budget cuts elsewhere. Those cuts would reduce the economic impact of extending the jobless benefits. Some in Congress want to pair an extension of unemployment aid with a deal to also extend the Bush-era tax cuts.

President Barack Obama and Republican leaders in Congress vowed Tuesday to seek a compromise on their sharply different views about tax cuts before year's end.

"The American people did not vote for gridlock," Obama said following the session. "They did not vote for unyielding partisanship. They're demanding cooperation and they're demanding progress and they'll hold all of us, and I mean all of us, accountable"

There was no consensus on whether to keep Bush era tax cuts in place for the middle class and wealthy alike. But the eight bipartisan congressional leaders and the president agreed to break through their differences by appointing a working group to negotiate a tax cut agreement.

The Associated Press contributed to this report.

Video: Unemployment benefits expire today

  1. Closed captioning of: Unemployment benefits expire today

    >>> as it stands now, 800,000 people will lose their benefits by the end of the week or next week and another 1.2 million by the end of this month. just over an hour ago, more than 100 jobless workers gathered in washington to call on congress to act quickly. house speaker nancy pelosi appeared with them.

    >> this has to be done. it's the right thing to do. it creates jobs. we're all committed to getting it done. thank you for making it easier for us.

    >> kelly o'donnell joins us live. you've got about 42 senate republicans who are now vowing to halt all legislation backed by democrats, including the extension of benefits. they have this letter they've signed. you also have democrats who oppose the extension of these benefits as well.

    >> well, one of the issues is extending unemployment benefits means adding to the deficit. and that is a particularly tough issue right now. there's an urgency that you just laid out with workers who will see their checks disappear. now, certainly if congress acts, they can do so retroactively, so they can fill in whatever gap might take place if benefits do expire, if the next set of checks don't go out. if they choose to act, and one of the things that is happening here, unemployment benefits are being used as leverage to get other things done. republicans want to see action on the bush-era tax cuts, making sure those do not expire. you know the dividing line. the president and the white house say it's okay to extend them for middle-class americans but not on the high end because it would add too much to the deficit. republicans say don't raise the rates for anyone. they seem to have more leverage at the moment because in the senate, they can't get anything done without the support of republicans because of where the numbers are. so harry reid got a letter signed by all of the republicans saying until you deal with this, we won't help you on anything else. and some of the things that republicans have been most concerned about is the criticism that democrats have been spending these remaining days of this session worrying about other things that they don't think -- republicans don't think are as urgent. it's about priorities, who will win out, what's most urgent, and trying to use this time when everybody is dividing and kind of going to their own corners to try to create some leverage to get something done. at the moment, people who are waiting for those checks are in the balance. tamron?

    >> all right. kelly o'donnell, thank

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