Going into the weekend, congress is negotiating the terms of a new unemployment stimulus to replace the $600 a week payments to the unemployed that ends this week. While the democrats are keen at extending the current amount, republicans are wanting to lower the weekly amount citing that the high $600 weekly amount is discouraging workers to go back to work. Both sides are arguing about what they perceive as being fair. However, if you’re going to give one group of people free money, shouldn’t all people receive the same amount?
First, understand that the money is not free; its value is derived from millions of people going to work and producing goods and services. The money being received by the unemployed is coming from the creation of new currency by the federal reserve. As new currency is created it is devaluing the currency that already exists. While it might not be noticeable, at least at first, it is a back door tax on everyone that is working for a paycheck or has savings. This becomes ever more of a backdoor tax when the currency is being created out of thin air during a time where production in the economy is slowing due to the high unemployment. There is now more currency chasing fewer products. The backdoor tax will start to become very apparent as prices for food begins to rise substantially in the coming months.
Second, lets take a look at the low wage workers who continue to work. Every person working at a restaurant, or a store at the mall, is waking up to go work and provide a product or service for paying customers knowing that a large amount of people are getting $2,400 to $3,000 a month to stay home and watch Netflix. These are the people who get the worst end of the deal, the people who are making less than $3,000 a month to do real work, who know that if only they were unemployed they can make the same amount. Even some people who make $5,000 a month at a job they grossly dislike might prefer a 50% loss of income to sit at home and do nothing. In this sense I do agree with the republicans that the $600 a week is too high of an amount as it not only discourages the unemployed from going back to work, but offers many who are employed an incentive to become unemployed.
If such a significant amount is going to be paid out to unemployed workers – enough to live off of – then everyone who is of working age should receive the same amount. This would offset the backdoor tax on people who have savings and eliminate the advantage of staying unemployed for people who currently do not have a job.
Imagine two people, John and Paul, who prior to Covid-19 both had the same type of job working at a company paying them $2,400 a month. It wasn’t a great job, but a job nonetheless that gave both of them the opportunity to learn valuable skills that they would eventually be able to parlay into a better job. John was hard working and realized that performing well at the job could pay dividends in the future in the form of good recommendations and promotions within the company. Paul did the bare minimum required of him and was only ever concerned about receiving his paycheck.
When Covid-19 hit and the shutdowns began the company had to cut back costs and let some people go. Management met and decided to keep the hard working John on board while letting go of Paul who was seen as a drag to company moral. With the current unemployment stimulus, John is being punished by being the harder worker as his former colleague Paul gets to stay home and make the same amount prior to being let go. However if everyone received the stimulus benefits, then John’s hard work would be rewarded in this situation.
As congress finalizes the new stimulus package for the unemployed, they should take into account the scenario of John and Paul described. Perhaps John was willing to look the other way for the last four months as Paul sat home and received the same income as him, but will he put up with another four months or more of it. The moral hazard of government intervention has already taken place in small ways, the longer this program goes on the greater the moral hazard will become. A simple way to offset this is to provide stimulus to everyone.