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Not extending $600 unemployment benefit 'would be a catastrophe,' say former Fed Chairs Bernanke and Yellen

The U.S. economy needs "the spending that those unemployed workers can do," former Federal Reserve Chair Janet Yellen told lawmakers.
Image: Ben Bernanke and Janet Yellen
Ben Bernanke and Janet Yellen listen during a meeting of the Board of Governors of the Federal Reserve System to discuss the final version of the so-called "Volcker Rule" on Dec. 10, 2013 in Washington.Alex Wong / Getty Images file

With expanded unemployment insurance set to expire at the end of the month, two former chairs of the Federal Reserve urged lawmakers to renew the emergency benefits created in the early days of the coronavirus pandemic.

“I think, frankly, it would be a catastrophe not to extend unemployment insurance,” Janet Yellen told members of the House Select Subcommittee on the Coronavirus Crisis during a remote hearing on Friday. Currently, many out-of-work men and women are eligible for an additional $600 per week.

The additional benefits are a lifeline for those who are out of work, Yellen said, adding that, on a broader spectrum, “We need the spending that those unemployed workers can do."

Appearing before Congress for the first time since they left government, Yellen and her predecessor, Ben Bernanke, praised lawmakers for the size and speed of their initial reaction to the economic downturn; then, they offered a series of suggestions.

During the pandemic, Bernanke and Yellen have emerged as outspoken advocates for aggressive government response, by both the Federal Reserve and the U.S. Congress. In recent weeks, they have written op-eds, delivered speeches, and signed a letter to the leaders of the House and Senate. While current Fed Chair Jerome Powell has been reluctant to offer advice to lawmakers on fiscal policy, his predecessors have called for bold action.

Yellen said that, in addition to extending the pandemic benefits, lawmakers should make sure “complementary programs like food stamps” are “adequately funded,” and the federal government should invest more in public health.

Anticipating pushback from Republican members who have said extending jobless benefits would disincentivize the unemployed from looking for work, Bernanke and Yellen proposed tying unemployment insurance to the unemployment rate, “thereby creating an automatic stabilizer.” They also suggested benefits “could be based on the individual’s pre-unemployment wages.”

Yellen said that, given the state of the labor market, with millions of Americans out of work, “I think there is evidence this is not really stopping the economy from creating jobs and putting people back to work.”

During the Great Recession in 2008, Bernanke headed the Federal Reserve, and Yellen was the vice chair. In their comments Friday, they drew from that experience.

“One thing we learned after the financial crisis was that, because of balanced budget requirements at the state and local level, as states and localities saw big declines in their revenues, they also had to do serious cuts in their employment and capital investment,” Bernanke noted, adding that led to a slower economic recovery.

It was a warning to lawmakers of what many economists, including Bernanke and Yellen, see as a looming secondary crisis. There is growing concern that cities and states will have to make deep cuts to their budgets, which will lead to layoffs.

“To avoid the recessionary effects of major cuts by those governments, federal support should be substantial, and conditions on the aid should not be overly restrictive,” Yellen argued.

As senators debate another aid package, much of the disagreement centers on how large it should be. In their comments, Bernanke and Yellen sought to downplay concern over its size and funding, citing low interest rates.

“There is a big appetite for debt,” Bernanke said. “Right now, I think the priority ought to be doing what needs to be done.”

In his opening remarks, the chairman of the subcommittee, Rep. James Clyburn (D-S.C.), noted “this economic crisis has been especially damaging to communities of color.” It has also disproportionately affected lower-income Americans, who are more likely to spend than to save.

Many lawmakers asked the former Fed chairs to weigh in on the controversy surrounding the reopening of schools. Bernanke, who noted he is not a doctor, but his wife is a teacher, said local districts are going to have to make some tough decisions. Yellen acknowledged the difficulties of making existing facilities as safe as possible.

“I think Congress needs to think about funding the expenses that are involved,” she said.