How Unemployment Benefits Stimulate Economy

A study by Moody's Analytics recently found that every dollar spent by the government on benefits for the unemployed produces an overall return of $1.61 for the economy. Guest host Lynn Neary talks with Moody economist Sophia Koropeckyj about what makes unemployment checks stimulate the economy, and why other types of government spending don't do nearly as much good.

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LYNN NEARY, host:

As we just heard, Democrats are arguing that extending unemployment benefits will not only help those who can't find a job; it's also a good way to stimulate the economy. That argument stems from research done by Moody's Analytics. Moody's chief economist testified about those findings before Congress last April.

Sophia Koropeckyj was part of a team at Moody's that looked into the question.

Ms. SOPHIA KOROPECKYJ (Economist, Moody's Economy.com): If Congress does extend the benefits, then it will have a large increase on consumer spending.

NEARY: The Moody team tested the economic impact of a number of government programs, including making the Bush tax cuts permanent. They found that unemployment benefits have the biggest bang for the buck. For every dollar spent on unemployment, the economy gets back $1.61. The return on tax cuts is much smaller.

Ms. KOROPECKYJ: We only get a 32-cent impact for the loss to the treasury of the tax revenues.

NEARY: That's because people who benefit from tax cuts tend to be wealthier. So they might save the extra money. On the other hand, Koropeckyj says, those getting extended unemployment benefits have no choice but to spend.

Ms. KOROPECKYJ: They've likely depleted their savings, and this is really all the income that they have. And they have kids to feed, they have rent to pay, and there's a very, very high probability they're going to spend that entire amount that they get.

NEARY: And where do they spend it? In stores.

Ms. KOROPECKYJ: That initial infusion into the economy of the unemployment insurance benefits then reverberates through the economy, flows through the economy in a variety of ways, and so that, you know, $1 of benefits is magnified.

NEARY: In other words, the grocery store owner has the money to pay employees. Those employees might need to buy a new dishwasher. The owner of the appliance store might want a new car and so on.

That, says Koropeckyj, is how unemployment insurance boosts, rather than drains, the economy.

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