California Becomes the First State to Tap Federal Funds to Pay Unemployment

Unemployment is going to be a monster problem for the U.S. economy for years to come as layoffs due to the pandemic start to ripple through the economy.

Short term, the problem for states will be paying out the massive number of new unemployment claims. You can’t budget for 30 percent unemployment and that’s what most states will have by the summer. In California, the state has tapped into a federal fund to assist states in paying unemployment benefits to the tune of $348 million. That promises to the first installment in what may end up costing $10 billion.

Fox News:

California, whose economy would be the world’s fifth largest if it was an independent nation, has been hard hit by the coronavirus pandemic – especially when it comes to people’s personal finances. About 3.7 million people have filed unemployment claims in the state since mid-March.

There is also mounting pressure on Gov. Gavin Newsom to relax the state’s stay-at-home orders and reopen parts of the economy. Protests last week occurred from Huntington Beach to Sacramento against Newsom’s caution to reopen, and some counties in the state are defying the orders and allowing certain business to reopen.

The moves underscore Newsom’s challenge as the state enters its seventh week under stay-at-home orders, with only businesses deemed essential allowed to operate. Gyms, bars, shopping malls, restaurant dining rooms and sports arenas all remain shuttered.

This is the first wave of unemployment. What may turn this recession into a depression depends on how quickly people actually feel comfortable venturing out. If people stay home even after the orders are lifted and don’t go to malls and stores, the economy will sputter to a halt. That appears to be happening in Texas, although it’s far too early to tell.

The next wave of unemployment will come when businesses that hung on during the lockdown are able to reopen, but can’t make it because there are fewer customers willing to venture outside. That wave will be smaller, but more significant to the long-term health of the American economy. This is the entrepreneur class disappearing in the pandemic and without them, recovery will be longer and slower.

And all of this borrowing by Washington and the states is going to make credit a little tighter, making the creation of new businesses even harder.

As strong as the economy was before the pandemic hit, the cessation of most business activity has devastated both Main Street and Wall Street. Washington will inject more money into the economy either in direct stimulus by giving money to people to spend, or in loans to states, but it won’t change the fact that the American economy — and the world economy — will be a long time recovering.