The 99ers

By R.A. | LONDON

ON FRIDAY, I noted that one of the nice surprises in America's third quarter GDP numbers was the increase in personal consumption expenditures. Spending increased at a 2.6% annual pace in the third quarter, up from a 2.2% increase during the prior three months. Then on Monday, the Commerce Department followed up with disappointing news, noting that personal incomesfell 0.1% in September after rising 0.4% in August. It will be difficult to maintain spending increases if incomes aren't growing.

But the story behind the decline is an interesting one. The Bureau of Economic Analysis notes:

The September change in personal income reflects provisions of unemployment compensation legislation, which had boosted emergency government unemployment benefits (within current transfer receipts) in August. Excluding emergency government unemployment insurance benefits, which are discussed more fully below, personal income increased $8.7 billion, or 0.1 percent, in September, following an increase of $33.9 billion, or 0.3 percent, in August...

Personal current transfer receipts decreased $21.5 billion in September, in contrast to an increase of $35.1 billion in August. The September change reflected the effects of unemployment compensation legislation, which reduced emergency unemployment insurance benefits by $25.5 billion at an annual rate in September, after boosting benefits by $20.5 billion in August.

This recession, the longest and deepest of the postwar period, has generated an unusually high level of long-term unemployment. Nearly half of currently unemployed workers have been off the job for more than six months. Congress initially responded to the big rise in unemployment and long-term unemployment by steadily lengthening the duration of emergency unemployment benefits. In the hardest hit states, jobless workers can now collect unemployment benefits for up to 99 weeks. Democratic leaders have tried several times to create a new tier of benefits applying to those still out of work after the 99 week period, but they have been unable to put together the necessary votes. And so benefits max out at just under two years. You may note that the recession began nearly three years ago, and the worst part of the recession, coinciding with the onset of financial crisis, started just over two years ago.

And so what we're seeing is the first big bulge of jobless workers exhausting their benefits. Over the next few months, that bulge will become a wave. Things will become significantly worse next month when existing benefits expire. By April, nearly 4 million jobless Americans will have run out of benefits.

The Casey Mulligans of the world are likely ecstatic about this turn of events; the disappearance of a major disincentive to find new work has vanished, and so employment should rise rapidly between now and the spring. If all of the newly benefit-less workers find new jobs, the unemployment rate will drop a good two percentage points.

The problem, of course, is that firms are still very reluctant to hire amid weak demand. The ratio of jobless workers to job openings remains quite high. And in competition for scarce openings, firms are likely to favour short-term unemployed workers over long-term unemployed workers. If most of those falling off the rolls of benefit recipients can't find new jobs, then the demand impact of benefit exhaustion—the blow to consumption—will swamp the boost to the economy from the lucky few who are able to find work. The drag on personal consumption growth will slow recovery, making life hard for other jobseekers.

Congress may try to address unemployment benefit issues in the post-election lame duck session, but they'll have their hands full trying to extend the Bush tax cuts in order to prevent a large and sudden round of fiscal tightening. It would be nice if Washington could deliver a little more stimulus to an economy struggling to bring down jobless rates. But at a minimum legislators ought to prevent unnecessary fiscal blows. So far, political gridlock is taking its toll.