Economic Stimulus Shock: Unemployment “Boost” Ending

By: Dr_Jeff_Lewis

Economics has been declared the “dismal science,” one in which there are very few opportunities to test the real world outcome of varying decisions made at a high level.  Today, the study of economics may be dismal for other reasons: the boost from unemployment benefits and other stimulus programs will soon run out.

When we think about stimulus, the near $800 billion program often comes to mind.  But the biggest stimulus program is that which touches the most budgets.  Several of the largest stimulus programs and subsidies are ending.

Unemployment Insurance

Unemployment insurance is approved by demand-side economists who suggest that automatic anti-cyclical government programs help boost demand when demand stifles.  With each job loss, states and the federal government have offered up 99 weeks of unemployment benefits, nearly two years of cash payments.

The extension, approved last December, will end this year.  Regular unemployment claims are met with 26 weeks of benefits.  However, due to the length of the recession, the program has been extended to 46 weeks through December, 2011.  Following those 46 weeks of benefits are four other unemployment extensions, scheduled to end on January 1, 2012, which tally up to a maximum of 53 weeks of unemployment.

Demand will surely fall as these benefits run out.  Unemployment benefits are typically spent immediately after receipt, as those who receive them cannot, by law, have another source of income.  The weakness of the American consumer was recently exposed in a piece by the Wall Street Journal.  The newspaper reported that more than 50% of Americans could not come up with $2,000 in 30 days should they need to pay for an immediate financial difficulty. 

FICA Stimulus

Alongside the expiration in unemployment benefits comes another source of demand: the reduced FICA tax rate for employees, which was dropped from 6.2% to 4.2% for one year.  In reducing the amount of taxes paid, the government can add some strength to the paystubs of the employed.  Economists note that a stream of small stimulus benefits is better than one-off stimulus checks, which are typically saved, not immediately spent. 

Food for Fed Thought?

The Federal Reserve has a dual mandate to increase aggregate demand and protect the US dollar’s value by minimizing inflation.  As we have all experienced, the CPI, the Fed’s measure of inflation, hasn’t kept up with surging energy and food prices, which are excluded from the calculus.

Investors should be left to wonder where the next stimulus will be sourced.  New extensions for unemployment benefits are a non-starter in election season politics, and Congress is concerned more with decreasing the cost of government than increasing its size.

This leaves us with one source that can skirt process of federal law: the Federal Reserve.  The bank has been more active in legislation and regulation since Congress fell into budget discussion deadlock.  It recently passed a policy which would cap debit card fees at 21 cents.   That decision is now law, without the vote of Congress.

So if Congress is stuck on debt discussion, and the presidential election makes new spending unpalatable, who will step in?  There hasn’t been a better case for QE3 than the removal of federal stimulus from the economy.  If “deflation risks” arise, you can bet your bottom dollar that the Fed will come in strong with QE3.

By Dr. Jeff Lewis

Dr. Jeffrey Lewis, in addition to running a busy medical practice, is the editor of Silver-Coin-Investor.com and Hard-Money-Newsletter-Review.com

Copyright © 2011 Dr. Jeff Lewis- All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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