"Yet Again, America Isn’t Ready for a Recession"
A column reprint from the last time the economy was headed towards recession
This column was originally published at the end of 2022. Like now, talk of recession was pervasive. At the time, inflation was jumping to high levels, a scary enough prospect on its own, but the real fear was that a recession would be necessary to bring price growth down. Those predictions proved wrong; the economy returned to normal levels of price growth without seeing a spike in unemployment. Crisis averted.
But as I wrote at the time, recessions happen. There have been 13 since World War II. The problem is less that a recession is coming—it’s like a bus, it’ll come eventually—and more that the U.S. was so unprepared for one. This is just as true today as it was two and half years ago.
Yet Again, America Isn’t Ready for a Recession
Published December 2022
Most economists believe that the US is headed for a recession, which could prove to be brutal. Is the country prepared? Judging from the system of unemployment insurance — a crucial support for the jobless and for the entire economy — the answer is a clear no.
America’s basic unemployment benefits were never very generous, and for the most part haven’t kept up with inflation. Over the past two years, only 11 states have increased their maximum payout along with consumer prices, which have risen about 15%. Another 21 haven’t changed it at all; Oklahoma cut it by 10% last year. And it’s not as if 2019 was a high-water mark. Much like on the eve of the pandemic, the system is far from recession-ready today: As of the second quarter of 2022, benefits as a share of workers’ income ranged from 49% in Iowa to just 27% in Arkansas.
Why such a meager safety net? Unemployment insurance suffers from some critical design flaws. For one, it’s financed with taxes on employers, who don’t receive the benefits and must pay more for each worker they lay off. Also, unlike federal programs such as Social Security, it delegates the administration to states.
When the program was created in 1935, these were seen as features, encouraging companies to keep people employed and allowing states to tailor tax rates and benefits to their local economies. In practice, they’re bugs: Employers try to prevent or delay workers from claiming benefits (there are even companies whose business model is to help employers reduce claims), and states competing to attract employers try to keep taxes and benefits low. Some states, such as North Carolina, openly embrace cutting benefits and reducing participation in their unemployment program. Others just let it erode.
Another issue is moral hazard: States have become accustomed to the federal government stepping in when there’s a recession. That’s what happened when the pandemic hit, to an unprecedented degree: Congress kicked in some $650 billion over 18 months to lengthen benefit periods, make more workers eligible and boost payments by $600 a week. Starting in the 1950s, Congress has financed an extension in the duration of benefits during every recession.
Legislators have long been aware of these design and incentive flaws. The 1973 recession was a major wake-up call: The program’s viability came into question after a period in which it had coasted on the wartime production economy, the post-war boom and a consistently broadening tax base. In the mid-1970s and again in the 1990s, Congress created multi-year commissions to craft comprehensive reforms. Their recommendations included changes to tax structure and regular benefit increases. None were adopted.
The Government Accountability Office has said for decades that unemployment insurance fails to meet its basic objectives — and recently put the program on its “high risk” list, noting that separate application programs in each state make the program a fraudster’s dream. If Texas figures out you applied for benefits using a few hundred stolen Social Security numbers, just head across the state border and try New Mexico.
Poorly designed, poorly maintained and at high risk for fraud — this is how the unemployment system looks with the country potentially on the brink of recession. Even a “soft landing” will be a rough ride for workers who lose their jobs.
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