A Record Benefits Cliff is Coming Thanks To Democrats’ American Rescue Plan

Authored by Matt Weidinger via RealClear Policv (emphasis ours),

In the face of growing labor shortages, 25 states are ending federal pandemic unemployment benefits in the coming weeks. Their Republican governors argue those benefits make unemployment pay better than working, keeping workers on the sidelines of the economy. But the staggered expiration of benefits in those states over the next four weeks is just a foreshadowing of the far larger benefits cliff ahead on Labor Day. That’s when federal benefits for as many as nine million recipients will abruptly end, marking the largest benefits cliff in American history. The cliff will result directly from Democrats’ March 2021 American Rescue Plan and will disproportionately affect recipients in blue states.

The federal response to the pandemic has included unprecedented extended and expanded unemployment benefits already scheduled to total over $700 billion. While current $300-per-week bonuses have gotten outsized attention because they pay some workers more to remain unemployed, most recipients collect benefits due to two other federal pandemic programs. One extends unemployment checks to over 18 months for those exhausting state benefits. The other offers federal checks to millions who never qualified for benefits before. That latter program has seen astonishing levels of fraud and now supports more people than any other unemployment program. Except where states end them sooner, these federal benefits are scheduled to end the weekend before Labor Day.

How many people will hit the Labor Day cliff and see their federal unemployment benefits, which currently average around $600 per week, come to an abrupt end? It’s hard to know for sure because some current recipients will return to work and give up those benefits before then. But as the chart below displays, there were recently 9.2 million recipients in states where federal pandemic benefits will end on September 4, including over 8 million in states led by Democratic governors:

Federal benefit recipients potentially affected by coming state shutoffs and the Labor Day cliff

Those 9.2 million potentially losing benefits on Labor Day are over four times the number who may lose benefits due to state shutoffs across the next four weeks. That potential Labor Day cliff is also six times bigger than the cliff when federal benefits paid after the Great Recession expired in December 2013 and 1.3 million recipients saw their benefits end.

The hard cutoff of benefits in a single week will result from a little-noticed policy change included in Democrats’ American Rescue Plan. That legislation deleted the “benefit phaseout rule” included in the bipartisan December 2020 extension law and replaced it with the coming hard cutoff on Labor Day. Such “soft phaseouts” allow those already receiving benefits to continue collecting them for a few weeks after the eligibility door has closed to new recipients. That spreads out the end of benefits, softening the blow of a program’s expiration on individuals and the local economy.

Why would policymakers trade soft phaseouts for hard cutoffs? One reason can be increased costs. But the original December 26^th expiration date for these benefits reflects the likely real reason for the reversion to hard cutoffs. In the inverted thinking of some Washington policymakers, that sort of joyless timing — threatening to abruptly end temporary benefits for millions, especially the day after Christmas — creates pressure on Congress to further extend them.

The states opting out of federal benefits are now foiling that calculus. Temporary federal programs typically pay more benefits in high-unemployment states, but at least some benefits in all other states, broadening support for extensions. But the 39 Republican senators representing the 25 states now rejecting federal benefits have little cause to support another extension of benefits, both because those benefits are contributing to labor shortages and because they would be payable only in other states, especially blue ones. They and other conservatives will have the votes to block another national extension. President Biden dealt a further blow to another extension when he recently said of the $300 federal bonus “that makes sense it expires” on Labor Day. 

The lawmakers who crafted the American Rescue Plan may have expected even more individuals to hit the Labor Day cliff since they couldn’t anticipate the unprecedented early shutoff of benefits in 25 states. But even with that early shutoff, record numbers will see their federal benefits abruptly end on Labor Day, with little chance of another extension. Democratic lawmakers will inevitably blame Republicans for opposing more benefits. But the real reason for the record Labor Day cliff will be Democrats’ American Rescue Plan, which applied the craven — and this time likely incorrect — Washington logic that bigger and harsher cutoffs increase the chances that “temporary” benefits continue to flow.

Matt Weidinger is the Rowe Fellow in poverty studies at the American Enterprise Institute.