Expiration of federal aid may be drag on spending, recovery

As President Obama and congressional leaders continued to negotiate an agreement to raise the federal government's debt ceiling, economists were expressing worry over the extraordinary amount of personal income Americans are getting directly from the government.

Nearly $2 of every $10 that went into Americans' wallets last year were payments such as jobless benefits, food stamps, Social Security and disability, according to an analysis by Moody's Analytics, a macroeconomic consulting firm. In states stung hard by the downturn, like Arizona, Florida, Michigan and Ohio, residents derived even more of their income from the government.

By the end of this year, however, many of those dollars are going to disappear, with the expiration of extended benefits intended to help people cope with the lingering effects of the recession. Moody's Analytics estimates $37 billion will be drained from the nation's pocketbooks this year.

In terms of economic impact, that's slightly less than the spending cuts Congress enacted to keep the government financed through September, averting a shutdown.

Unless hiring picks up sharply to compensate, economists fear that the lost income will further crimp consumer spending and act as a drag on recovery. Among the other supports that are slipping away are federal aid to the states, the Federal Reserve's program to pump money into the economy and the payroll-tax cut, set to expire at the end of the year.

"If we don't get more job growth and gains in wages and salaries, then consumers just aren't going to have the firepower to spend, and the economy is going to weaken," said Mark Zandi, chief economist of Moody's Analytics.

Job growth has remained elusive. There are 4.6 unemployed workers for every opening, according to the Labor Department, and Friday's unemployment report showed employers added an anemic 18,000 jobs in June.

Throughout the recession and its aftermath, government benefits have helped keep money in people's wallets and in turn circulating among businesses. Total government payments rose from $1.7 trillion in 2007 to $2.3 trillion in 2010, an increase of about 35 percent.

While some of that growth was in Social Security and disability benefits as the population aged, the majority resulted from payments to people continuing to suffer from the recession, Zandi said. Unemployment benefits, including emergency and extended benefits, are more than three times their prerecession level, he said. The nearly 20 percent of personal income now provided by the government is close to a record high.

Approved by Congress last December, the final extension to jobless benefits — for a maximum of 99 weeks for each unemployed person — is scheduled to conclude at the end of this year. A few states, like Wisconsin and Arizona, already have cut off weeks 80 through 99 for their residents. Meanwhile, more of the long-term unemployed are bumping up against the 99-week limit.

Big impact on spending

Consumers account for an estimated 60 percent to 70 percent of the country's economic activity, but two years into the official recovery, businesses still are complaining that people simply aren't spending enough.

"Regardless of why people have less money to spend, it affects all retailers in all industries," said Michael Siemienas, spokesman for SuperValu, which operates several grocery chains. Siemienas said the number of SuperValu's customers using electronic benefit transfers to pay bills has grown over the past year.

Because benefit payments tend to get spent right away to cover basic needs like food and rent, they provide a direct boost to consumer spending. In a study for the Labor Department, Wayne Vroman, economist at the Urban Institute, estimated that every $1 paid in jobless benefits generated as much as $2 in the economy.

For many of the nearly 7.5 million people collecting unemployment benefits, those payments are keeping them afloat. Laura Metz, 42, was laid off from a clerical job paying $15.30 an hour at a home health-care provider near her home in Commerce, Mich., nearly 15 months ago. She has been collecting $362 a week in unemployment insurance and about $50 a month in food stamps.

That covers the basics. But Metz stopped making her mortgage payments last year on the modest home she shares with her 19-year-old son. A program that allowed her to make a lower monthly payment has expired, and she is waiting to see if the lender will modify her loan. She can no longer make her student-loan payments for her bachelor's degree or master's in business administration, and she has downgraded her Internet and cable service and cut back on car trips and snacks.

Metz, who has been applying for administrative jobs, has been shocked at the dearth of opportunities. A decade ago, when she applied for clerical jobs, "as soon as I walked up, there was a sign saying 'we're hiring,' but it's not like that now," she said. "It's really, really difficult."

Some business groups argue that extending unemployment benefits has had harmful effects on employers and potential workers.

"It's having a chilling effect on hiring," said Wendy Block, director of health policy and human resources at the Michigan Chamber of Commerce. "At one point, our unemployment taxes were just a blip on the balance sheet, but when you're talking over $500 a head, this is significant." Last year, Michigan spent $6.2 billion in jobless benefits, according to the National Employment Law Center.

Debt negotiations

Obama and the eight top House and Senate leaders assembled in the White House on Sunday to fashion a deficit-reduction package for the next 10 years, after House Speaker John Boehner abandoned plans to negotiate a massive $4 trillion deal for reducing the debt.

Despite Boehner's preference for a smaller, $2 trillion plan for deficit reduction, White House aides said Sunday that Obama would press the lawmakers to accept the larger deal. Republicans object to its substantial tax increases, and Democrats dislike its cuts to programs for seniors and the poor.

Senate GOP leader Mitch McConnell of Kentucky left little doubt that the $4 trillion deal was dead.

Raising taxes amid 9.2 percent unemployment, he said, "is a terrible idea. It's a job killer."

Obama and congressional leaders will meet Monday.

Officials say the nation will begin to default on its debts Aug. 2 if no deal is reached to raise the borrowing limit from $14.3 trillion.

Additional information from

The Associated Press