For Immediate Release
Chicago, IL – May 7, 2010 – Zacks.com Analyst Blog features: Wal-Mart (WMT), Kroger (KR), Bank of America (BAC), Fannie Mae (FNM) and Freddie Mac (FRE).
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Here are highlights from Thursday’s Analyst Blog:
Initial Claims Yo-Yo Down Again
Providing extended benefits when the economy is in a deep slump is good economics, and the non-partisan CBO scores it as among the most effective stimulus measures on a job saved or created per dollar spent basis. The reason is that with out the extended benefits, people would have no income at all, and by the time they have been out of work for six months, they have probably already depleted most of their savings. With no income, they have no demand.
Fewer shoppers is not good for Wal-Mart (WMT) or Kroger’s (KR), nor is it good for the makers of the goods that they buy. While benefits vary somewhat by state, generally unemployment benefits are about 60% of what people were making prior to losing their jobs, up to around $400 per week. That reduction in income should provide plenty of incentive for people to want to get back to work.
There is some danger that if we continue to extend claims indefinitely that we would essentially be creating a new welfare system, with all the disincentive and dependency issues that the old welfare system provided. Those concerns are, at this point, more theoretical than real, given the very low number of job openings.
However, as the recovery progresses it will become more and more of a concern. The simulative benefit of extended claims will become less important, and the potential disincentives will potentially become larger. We don’t want to turn the extended benefit program into a back-door welfare system.
In the long run, welfare really doesn’t add to the welfare of even the people getting it, particularly if they are on it for a long time (generations, in many cases, under the system that prevailed before the Clinton Welfare reform). In the short-term though, there are millions of people who need help, and by helping them, we end up helping ourselves through having a stronger overall economy. There will become a time when extended benefits need to be eliminated, but with the overall unemployment rate still at 9.7% and the under-employment rate at 16.9%, this is not yet the time to do so.
Extended benefits obviously have a major humanitarian benefit, but they also are an important support for the overall economy when overall aggregate demand is far below potential. Without them, it would not just be the unemployed people and their families that felt the pain, but also any bank that they owed money to. Their neighbors — as the unemployed person’s house goes into foreclosure and further lowers the housing values on their street — would also be affected, as would the big banks like Bank of America (BAC) which made and serviced the mortgage.
Since the taxpayers own 80% of both Fannie Mae (FNM) and Freddie Mac (FRE) which probably own or guarantee the mortgage, they would get hurt as well. As they say in the quick oil-change commercials, pay them now or pay them later.
Without the extra demand that the extended benefits provide, more people would be unemployed, leading to a downward spiral. The purpose of stimulus spending, of which extended benefits are an important component, is to help break that downward cycle and replace it with a positive cycle, not to provide an endless open ended support for total demand.
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