State Budget Cuts Push Unemployment Higher

Written by SK Ashby

The private sector is still shedding jobs but initial claims for unemployment totaled over 2.1 million last week, in part, because of state and local budget cuts that don't have to happen.

Economists say a second round of private sector layoffs combined with state budget cuts will keep unemployment very high for a long time to come.

Though claims have declined steadily since hitting a record 6.867 million in late March, they have not registered below 2 million since mid-March. The astonishingly high level of claims has persisted even as non-essential businesses are starting to reopen after shuttering in mid-March to control the spread of COVID-19, an indication it could take a while for the economy to dig out of the coronavirus-induced slump.

"I am concerned that we are seeing a second round of private sector layoffs that, coupled with a rising number of public sector cutbacks is driving up the number of people unemployed," said Joel Naroff, chief economist at Naroff Economics in Holland, Pennsylvania. "If that is the case, given the pace of reopening, we could be in for an extended period of extraordinary high unemployment. And that means the recovery will be slower and will take a lot longer."

The fact that unemployment will remain higher for a longer period of time than it should, and the fact that a recovery is going to take longer than it should, are the result of deliberate choices made by the Trump White House and Senate Republicans.

House Democrats have already passed another stimulus bill that would provide money to cities and states so they could avoid mass layoffs, but Republicans led by Trump have said they won't provide more money to states that have allegedly been "mismanaged" in some unspecified ways. And while they probably believe this primarily hurts Democratically-controlled states and governors, it won't end there. Conservative states are going to feel the pinch, too, but it will take a little longer.

Republicans have also vowed not to extend increased unemployment benefits which means at some point in the next two months there's going to be another wave of defaults and evictions as economies reopen but there are still no jobs and household budgets collapse. The stimulus bill passed by House Democrats also includes another round of direct stimulus checks for Americans which could be used to avoid that at least in the short-term.

The Trump White House is still holding out hope for a miraculous, V-shaped recovery that will begin immediately, but some states are more than a month into the stages of reopening and there's no sign that's going to happen.

Even if the Trump regime does not actually, sincerely believe that's going to happen, it is what they've said in public so the refusal to pass more stimulus is at least partially about personal pride and hubris. Passing more stimulus would mean their predictions were wrong and Trump's reelection strategy depends on people thinking things are better than they really are.

It's ironic, but not funny, because their strategy will actually make things worse than they have to be.

There are times when Federal Reserve Chairman Jerome Powell makes me wonder if he really knows what he's doing, but to his credit he did appear in front of Congress earlier this month where he bluntly said they need to pass more stimulus to avoid a longer economic downturn.