Congress May Curtail Long Term Unemployment Benefits Later This Year

Congress adjourned for the July 4th holiday without extending long-term unemployment benefits that have been in place since 2008. 1  They may yet pass an extension after returning to the measure on July 12, but this could be the last time.

The immediate cause of the delay in passage is that Democrats are concentrated on getting landmark financial reform legislation passed, a task complicated by the death of Sen. Robert Byrd.  Democrats still control both houses of Congress and with two huge policy initiatives behind them – health care and financial reform – it’s fair to think that they can somehow nail down the unemployment insurance extension.

But the political winds are likely to shift in November.  The party in power usually loses congressional seats in a mid-term election, and with the recession continuing through the first half of this presidential term, Republicans are well positioned to pick up seats. 2  However, given the difficulty Democrats are having in passing the extension of unemployment benefits with a majority of over 58% in both houses, it’s hard to imagine further extensions passing in their current form after the elections even if Democrats maintain a slimmer majority in both houses.

What this means for investors is another source of turbulence.  It’s not clear whether curtailing benefits will ultimately hurt or help the big picture.  Curtailing benefits would remove needed cash from the economy and cause many individuals and families to slip deeper into distress, some into welfare programs.  It’s also possible that it could prompt some results that eventually contribute to stability, pushing: 1) laid off workers who have been holding out for a job like their last to return to work for a lower-tier position; 2) households where both spouses worked but one was laid off to permanently adjust to a single income lifestyle; and 3) unemployed workers with the resources to retire to leave the workforce.  But any process where positive results like these come to fruition would likely be protracted.

So expect the coming months to include a political process sorting out the future of unemployment benefits, and an economic process where the real-life consequences play out.  In short, a lot of unknowns.

  1. House passes unemployment benefits extension, CNNMoney.com, July 1, 2010, http://money.cnn.com/2010/07/01/news/economy/unemployment_benefits_extension/index.htm?hpt=T2. []
  2. See Generic Congressional Ballot, Rasmussen Reports, June 28, 2010, http://www.rasmussenreports.com/public_content/politics/mood_of_america/generic_congressional_ballot. []

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