How much does Ohio lose when it turns down federal funds?
Ohio Gov. Mike DeWine. Photo courtesy The Ohio Channel.
A story that has been roiling over the past weeks is Gov. Mike DeWine’s decision to cancel the federal pandemic unemployment program. This decision came months before the federal expiration date on Sept. 6.
News coverage of the decision focuses on $300 checks the governor’s decision is making unavailable to unemployed Ohioans. $300 does not sound like a lot, but when considering that over half a million Ohioans may be impacted by this decision, the numbers start to add up.
A fact sheet released by the Century Foundation in May estimated benefit reduction in Ohio could cost the state $3.7 billion in federal funds. This amounts to half a percentage point of Ohio’s 2020 GDP.
The logic behind reduction of unemployment benefits is straightforward. Reducing benefits will reduce the cost for those who are currently not working to take jobs, which means more people will enter the labor force. If the labor force grows, the economy grows.
The economic picture is a little more complex than this, though. Services such as child care exist in formal and informal markets. So an unemployed mother may be spending time caring for a child at home but then with reduced benefits find herself having to place a child in formal child care.
This means the formal economy grows (child placed in formal child care, GDP goes up), while new value is not actually created. In the long-term, this could even hurt the economy as low-quality child care centers can be worse for child development than home care, resulting in worse education and wage outcomes for children down the road.
The other side of the coin is even more straightforward: $3.7 billion of federal funds not in Ohio’s economy means… $3.7 billion not in Ohio’s economy. Unemployment benefits that come from the federal government are used to purchase goods and services within the state of Ohio. Reducing Ohio’s economy by half a percentage point will mean billions of dollars aren’t being used to stimulate our state economy and thus will have countervailing impacts that will reduce job growth in the state.
In short, less money in the state means less consumer spending which means less ability for firms to make new hires.
Maybe in the past year and a half we have become accustomed to massive state intervention in the economy, but this decision should not be short of mind-blowing for someone who is following state policy and interested in Ohio’s economy. While the news coverage of this decision by the governor often reduces it to a squabble between “some” workers who are losing benefits and employers who want cheaper labor, there is a larger story here.
With the stroke of a pen, the governor was able to reduce the state’s gross domestic product by half a percentage point. Yes, the actions taken last year likely had a larger impact. After all, Ohio’s economy shrunk by nearly three percentage points from 2019 to 2020. But those interventions were made to reduce loss of life. The alleged benefits of turning down nearly four billion dollars in federal funds depend on a much muddier economic argument.
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