The novel coronavirus has posed the US government with a dreadful conundrum- save the economy or save lives? It’s a chicken and egg situation. The social distancing and the resultant economic slowdown, spiking unemployment and poverty will endanger people. Without these measures, lives will be lost due to disease and co-morbidities. This begs the question: how is the US equipped to deal with a pandemic breakout? Is there coronavirus preparedness?
The government has made the obvious choice to save lives on priority. A researched model from Imperial College London is the basis of this decision. It suggests that without stringent measures COVID-19 can potentially kill 2.2 mn Americans.
Experts from UCLA estimate that the tightening government restrictions will cause 2 mn job losses and raise the national unemployment rate to more than 5%. This is if social distancing measures are not needed well into the year.
Emerging Unemployment Crisis In The United States: What Coronavirus Is Doing To The US Economy
The world remembers the 2008 Global Financial Crisis that began in the United States. That crisis began with the banking sector due to bad mortgages. The Coronavirus effects on the economic slowdown are from many economic sectors simultaneously, like travel, tourism, restaurants, movie theatres etc. shutting down.
Here are some of the sectors shutting down and the ripple effects they will have across the economy:
- Detroit automakers are temporarily shuttering production to try to contain the spread of coronavirus. Millions of workers and parts suppliers not to mention sales professionals will be affected.
- New York, New Jersey, Pennsylvania, and Connecticut are temporarily closing all indoor shopping malls, amusement parks, and bowling alleys. These entertainment centers employ thousands of employees earning hourly wages.
- The capital markets are in jeopardy with fluctuations in all the indices. The Federal Reserve has slashed interest rates to zero.
- Many eateries and restaurants have been forced to shut down.
- The real estate sector is seeing trickle-down effects as people save funds for emergencies (and buying houses is not one). Similarly, the tech devices companies will also see effects soon.
- Delayed shipments from China jeopardize many consumer goods companies.
- By contrast, supermarkets and food processing industries might see a brief revenue spike. It is however unlikely to last as people will stop having cash to spend over time.
There has been a huge jump in the number of claims filed for unemployment insurance, reflecting the increasing number of layoffs.
- Rhode Island alone has 17,779 claims for unemployment insurance over just 8 days.
- Oregon has had a jump from 800 on March 16 to nearly 19000 on March 18.
- Texas saw more than 16,000 people filing for unemployment insurance between March 10 and 16.
- Hawaii’s state labor department website crashed due to over 3000 claims being filed on a single day, March 18.
- 30,000+ claims have been filed in Connecticut since 13th March.
Typically the number of claims filed on an average in a week number about 4000 in normal times.
The full extent of the pandemic is yet to make itself clear.
Preparedness Of The States To Meet The Financial Requirements Of UI
An important concern is whether the states have adequate funds to pay out the unemployment insurance benefits. This is reflected in the solvency of the states’ trust funds. What does this mean?
Solvency refers to the ability of an entity, the State Unemployment Insurance Trust Fund in this case, to meet its long-term financial liabilities. To understand whether the states’ funds are solvent, we look not at the dollar amount but at the ratio of the fund balance to the wages paid out that year, called Reserve Ratio.
Consider this graph sourced from the US Department Of Labor which ranks the states on the State Trust Fund Solvency. It is worrisome to see States like California, Texas and New York in the red. They host some of the largest employers.
Only 31 out of the 50 states have funds that are at or above the recommended amounts for solvency. One reason why so many states are underprepared may be that there are no federal requirements for any minimum amount of funds that should be maintained in a state’s trust fund.
If states use up all of their funds on UI payments, they can pay out pending claims by borrowing from the Federal government through the Title XII program. They will have to pay interest on these borrowings, which they may finance through private sector borrowing instruments or through tax revenue deductions by the Treasury Department.
The aid package being planned will not be meant to finance UI alone. If the global production stoppages continue for months, it is unclear how unemployment insurance payments will be extended beyond the usual 26 week period. Not all states will qualify for the extension of an additional 26 weeks.
Can The Proposed Aid Package Spur Coronavirus Preparedness?
Lawmakers are weighing a $1 trillion assistance package to small businesses, to keep them afloat during the coronavirus outbreak. The aid will likely have preconditions as measures to force bailed out companies to keep workers on their payrolls. These may include limits on executive compensation, and prohibitions on stock buybacks which have risen to unprecedented levels in recent times.
Many states have submitted requests to the U.S. Small Business Administration for the extension of SBA Economic Injury Disaster Loans to small businesses. They are facing the brunt of the slowdown.
The President has signed into legislation The Families First Coronavirus Response Act
which gives $1 billion to the states so they can meet the administrative costs of processing unemployment insurance. This will briefly rescue those 23 states with very low UI funds even before COVID-19 hit. Read all about the new law here.
Are You Eligible For UI Benefits If You Lost Your Job Due To Coronavirus?
To help the newly unemployed, the U.S. Department Of Labor has announced unemployment benefits to those who lost their jobs temporarily. However, having understood the state of emergency, the authorities have eased the eligibility criteria. Know the updated rules of UI benefits before filing a claim.
Most states have passed executive orders exempting people from the work search requirements. The waiting period of a week to receive the first payment has also been waived. Even part-timers and the self-employed are now eligible, as are those forced to remain away from work due to illness or caregiving duties.
Despite the eased rules, those who haven’t met the minimum number of hours of work, or those who haven’t worked in a specific state long enough may find their application rejected. Those ineligible for UI but eligible for Disability Insurance or Family Leave should certainly apply for those.
What Is The Likely Future And How Much Coronavirus Preparedness Do We Need?
More easing of UI norms will be needed along with longer payment periods to support the larger numbers of unemployed citizens.
So far, the government safety net to help the unemployed does not appear sufficient to handle the surge in the claim numbers. Labor websites have been crashing across the states and phone lines have been jammed. The departments find themselves woefully understaffed as some states have recalled retirees and temporarily hired staffers to handle the new claims.
Many employees are under quarantine leading to calls going unanswered.
The Families First Coronavirus response Act is a good start but a more robust response is needed for coronavirus preparedness. It only provides relief to employers with less than 500 employees, and their employees, not addressing bigger employers or groups like students and gig workers who move around a lot.