How Unemployment Extensions Benefit the Economy

National Unemployment Rate Rises To 9.8 Percent
National Unemployment Rate Rises To 9.8 Percent. Scott Olson/Getty Images

Unemployment extensions cost U.S. taxpayers billions of dollars. So what do Americans get in return?

A stronger economy, according to the Congressional Budget Office.

See more: How Long Can We Afford to Keep Paying Out Unemployment Benefits?

Every dollar spent in unemployment extensions for the jobless between 2010 and 2015 is projected to boost economic output by at least 70 cents and as much as $1.90, according to government analysts.

So how do unemployment extensions increase the nation's gross domestic product?

The Benefit of Unemployment Extensions

"Households receiving unemployment benefits tend to spend the additional benefits quickly, making this option both timely and cost-effective in spurring economic activity and employment," Susan Yang, of the Congressional Budget Office's Macroeconomic Analysis Division, explained in a 2010 report.

See more: A Brief History of Unemployment Compensation and Partisanship

In other words, when Joe gets his unemployment check he spends a certain amount of the money on necessities such as groceries, gasoline and utilities. The recipients of Joe's money in turn spend the money on other goods and services.

Economists who calculate the gross domestic product actually consider all of those transactions.

Unemployment Extensions Called Most Effective Option

The Congressional Budget Office estimated that unemployment extensions would have a more dramatic impact on boosting the sluggish economy through 2015 than would across-the-board tax breaks.

"Policies that could be implemented relatively quickly or targeted toward people whose consumption tends to be restricted by their income, such as reducing payroll taxes for firms that increase payroll or increasing aid to the unemployed, would have the largest effects on output and employment per dollar of budgetary cost in 2010 and 2011," Yang wrote.

"By contrast, policies that would temporarily increase the aftertax income of people with relatively high income, such as an across-the-board reduction in income taxes or an increase in the exemption amount for the AMT [Alternative Minimum Tax], would have smaller effects because such tax cuts would probably not affect the recipients' spending significantly," Yang wrote.

One Problem With Unemployment Extensions

The problem with unemployment extensions is that they cost lots of money - money that the government in most cases must borrow.

The extension passed by Congress and signed by President Barack Obama on July 22, 2010, cost $34 billion and added to the $13.3 trillion national debt.

Opponents of the Unemployment Compensation Extension Act of 2010 said they believed adding to the federal deficit and $13.3 trillion national debt was irresponsible.

A week later, the Congressional Budget Office warned that month that the growing debt could result in a fiscal crisis.

"Over the past few years, U.S. government debt held by the public has grown rapidly - to the point that, compared with the total output of the economy, it is now higher than it has ever been except during the period around World War II," the Congressional Budget Office said on July 27, 2010.

The national debt grew from 36 percent of the gross domestic product at the end of the 2007 fiscal year to a projected 62 percent at the end of fiscal 2010.

"Despite the potential economic benefits (of unemployment extensions) in the short run, such actions would add to the already large projected budget deficits," the Congressional Budget Office warned in late 2010.

"Unless offsetting actions were taken to reverse the accumulation of additional government debt, future incomes would tend to be lower than they otherwise would have been."