Debt Talks Don’t Need an Ambitious Solution

July 11th, 2011 at 7:25 am David Frum | 46 Comments |

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If the debt talks produce only (i) an increase in the debt ceiling and (ii) a framework for cutting federal spending over the medium term – well, there are worse ways to resolve the crisis.

The beginning of wisdom about the debt-ceiling crisis is to recognize how artificial and unnecessary it is. The US has no special urgency to reduce the budget deficit this month as opposed to 9 months from now. It’s not the lenders who are forcing this crisis. It’s the borrowers.

From the point of view of the economic cycle (as opposed to the political cycle), today’s big budget deficit is useful rather than troublesome: the deficit stimulates the economy, not least by putting purchasing power into the hands of unemployed people who otherwise would see their incomes drop to near nothing. (The New York Times reminds us that about one-fifth of personal income in the United States now takes the form of government payments. In states hard hit by recession, the proportion is even higher.)

Any qualms financial markets may feel about today’s deficit can be adequately addressed by putting in place today the mechanism for cutting spending tomorrow. But the mechanism does not need to start chopping for a little while longer.

There’s a lot to be said too in favor of a more modest rather than a more ambitious deal.

It’s not a good idea to try to reform Medicare on a 10-day deadline. Ditto the tax code. Ditto the defense establishment.

Those reforms need to be done right, backed by a broad consensus in US society. Which takes time. Which – happily – the US federal government has. It’s the unemployed who face a ticking clock. Let’s address their troubles first.

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46 Comments so far ↓

  • SteveThompson

    The Congressional Budget Office calculates that, under their best-case scenario, interest payments could rise to 4 percent of GDP (or one-sixth of total federal revenues) by 2035. Interest payments, which absorb federal resources that could otherwise be used to pay for government services, currently amount to more than 1 percent of GDP. Under their worse case scenario, interest payments on the debt will amount to 9 percent of GDP or one-third of federal revenues as shown here:
    http://viableopposition.blogspot.com/2011/01/interesting-look-at-interest-on-us-debt.html

    Let’s hope Washington cuts the political posturing and solves the problem that they’ve created for all of us.

    • foosion

      interest payments could rise to 4 percent of GDP (or one-sixth of total federal revenues) by 2035.

      A possible problem 25 years from now does not demand immediate attention at the cost of today’s crises – high unemployment and slow growth.

      You should have some faith in the markets. Ten year treasuries under 3% shows that the deficit isn’t our major problem.

  • ottovbvs

    In other words David Frum is essentially conceding that the Republicans are going to have to raise the debt ceiling on the promise of good intentions for dealing with the deficit once the economy has recovered from it’s present weak state. The priority at the moment is to get the economy back to approaching full capacity. I presume this is based on a realisation of the peril the Republican party will be in if it creates a huge financial and economic crisis over what is increasingly perceived as a refusal to even discuss closing tax loopholes a partial solution to the deficit problem.

  • tommybones

    The frustrating part of this entire “debate” is the lack of pushback to the constant nonsensical whining from the GOP about raising taxes on the wealthy being a “job-killer.” It’s complete bunk and they say it over and over again with not a peep of pushback.

  • Holmes

    Republican pundits have lost their voice — or more accurately, their audience — within Republican Congressional circles, which accounts for DF’s tone of weary desperation.

    So who are House Republicans listening to? Why hedge-fund managers and free-market zealots, of course. Check out the link below:

    http://tpmmuckraker.talkingpointsmemo.com/2011/07/mystery_solved_ryans_dinner_dates_ided.php?ref=fpa

  • ottovbvs

    which accounts for DF’s tone of weary desperation.

    You may be right about Frum but somehow I don’t think the US financial industry or business generally (except for a few hedge fund shorters) want to see the US default. Interestingly this is a far cry from Frum’s claims of only a few days ago about Obama’s weakness as a negotiator, as if this process was in any way all revolving around one person. He maybe the figurehead but strategy is going to be devised by Lew, Geithner, Daly et al and clearly Reid and Pelosi have more or less turned it over to the admin.

  • foosion

    Excellent column. It’s a tragedy that our political leaders, media and people generally don’t understand what DF is saying here.

  • rbottoms

    Just like a battered wife, black eye and bruises on her arms begging her friends understand he’s a good father and how he doesn’t mean to kick her ass.

  • KRH67

    Yes, serious change is scary and must be avoided at all costs until the absolute last minute. This is why I personally won’t stop my all twinkie diet until I have at least 3 heart attacks, at which point I’ll convene a committee to discuss my options.

    • ottovbvs

      Yes, serious change is scary and must be avoided at all costs until the absolute last minute.

      Republicans certainly seem to think it so having raised obstruction to an art form in the senate. Perhaps they’re on a twinkie diet?

      • KRH67

        Now see, I think of it as Republicans wanting to go from all twinkie to all broccoli diet, while Democrats want a less twinkie diet. Oh, and exercise more too.

        But the Republicans are saying that we exercise 3x a week already, and that should be enough, so we should probably just eat broccoli and things will work out. Democrats, meanwhile, think eating twinkies is fine, maybe eat a little less, but we should exercise 5x a week at least. Frum is saying just keep eating twinkies because heart attacks aren’t really a big deal anyways, and don’t exercise either because you might hurt your back, Dr Keynes said so.

        Analogies are fun!

        • balconesfault

          Twinkies? Where the hell do twinkies come in?

          America is staggering under what could turn into a long-term sustained unemployment rate around 10%, which is far and away the second biggest cause (after the spending on Middle Eastern Wars) of our current deficit.

          Get people back to work, and they won’t be drawing unemployment, won’t be relying on AFDC and Medicaid, will be staying in the workforce longer and drawing Social Security later, and will be paying taxes.

          Unfortunately, the GOP “solution” at this stage flies in the face of reason. The stock market increased 50% in value under Obama, energy prices are well lower than they were in the summer of 2008, Corporations are sitting on huge piles of cash, and the wealthiest 5% in America are at a record % of total wealth held.

          And yet the solution is to cut taxes on the wealthy, and cut government spending that keeps people employed.

          The GOP isn’t trying to switch us to a diet of broccoli. For America’s middle class, the GOP is trying to switch us to a diet of strychnine.

        • John

          yeah, i love analogies, but let’s agree on definitions. i think you’re saying that “Twinkies” = deficit spending, “Broccoli” = balanced budget spending and “Exercise” = tax revenue?

          If so, the current crisis can be summarized thus: a long Twinkie habit, dating back several decades (with a brief exception during Clinton’s second term) has lead to a rather serious weight problem. Both parties recognize the problem but both parties LOVE their Twinkies. Dems say we should cut back drastically on Twinkies, eat more Broccoli and stop with the excuses about missing our scheduled Exercise (lets define those excuses as Loopholes). Republicans say Exercise is not the problem and it doesn’t even matter that we said we would Exercise thrice weekly and we only exercise every other Saturday after all of our Loopholes. All we have to do is stop eating Twinkies! Constituents of both parties agree that Twinkies should be eliminated…that is, as long as they can keep eating their Twinkies.

  • beowulf

    “You should have some faith in the markets. Ten year treasuries under 3% shows that the deficit isn’t our major problem.”

    Agreed especially since the Federal Reserve has the power to control interest rates at any point of the yield curve (from 1942 to 1951, the Fed kept long term rates capped at 2.5%, and for most of that time, short term rates capped at 0.375%). Even if the Fed lets interest rates float, Congress could vote to extend current Fed rebate (to Tsy) interest paid on Fed-held debt to a Fed rebate of interest paid on all publicly held debt.

    The CBO projects $5 trillion in net interest paid out this decade (assumes avg int rate of 5%), Congress could wipe that out in an afternoon, the Fed could pay for rebate with higher transactions fees, a bank asset tax a la FDIC, issuance of Fed bonds or, we are talking about the Federal Reserve, just printing the money).

  • Frumplestiltskin

    Obama should make a national address, notify Americans that unless the Republican Congress raises the debt deal now, starting next month every military base shall furlough every soldier that they possibly can, and let go every non military personell at those bases, and that no more Social Security checks will go out. And then he can put up Cantor’s and Boehner’s telephone numbers (and directing people to go to their congressperson as well)
    And then Obama can tell the Republicans it will be only a clean bill, no cuts…not one penny.
    This will give Seniors a few weeks to blast the hell out of Congress, and Obama should also tell these asshole Republicans that the first military bases that will be closed will be in Republican districts
    And when Republicans scream that he can’t do it. He can tell them only they can prevent him from doing it by voting on a clean debt hike.
    It is time to kick the Republicans so hard in the nuts that they will be forever terrified to try anything of this traitorous shit again.
    And the best thing is, Obama can claim a Clean debt raise is a compromise since Republicans will not have to vote to raise taxes. He can also state that allow the next election to determine the nature and extent of the cuts.

    Yes, and he can also end all foreign aid. IE no money to Israel. We will be in default remember, why would we send billions to Israel.

    The Republicans would fold like a cheap suit.

    Sometimes you have to outcrazy the crazies.

    • El Gipper

      Frumpee,

      Yeah, figures that you’d start with cuts to the military. Of course, when Republicans retort that existing tax revenues can cover interest on the debt, SS, armed forces supporting combat operations and other commitments, plus State Department, Dept. of Justice, courts, FAA, CDC, etc., then the public going to be left wondering why Obama targets the military instead of NPR, Planned Parenthood, and HUD?

      You know, an essential core activity of the federal government versus a non-essential activity that could be performed by state governments who thought the programs were worthwhile to fund.

      You have a tin ear, but I hope that Obama follows your advice so that the Republicans can pick up another 50 seats in the House, 15 in the Senate, plus the Presidency.

  • balconesfault

    tommybones: The frustrating part of this entire “debate” is the lack of pushback to the constant nonsensical whining from the GOP about raising taxes on the wealthy being a “job-killer.” It’s complete bunk and they say it over and over again with not a peep of pushback.

    What’s worst is the media echoes it unquestioningly. Yesterday on Face the Nation there was some flack spouting the line that every economist agrees that cutting entitlements right now or raising taxes at all will hurt job growth … when there are a lot of economists – Nobel Prize Winning economists – who are saying that taxes could be raised on the wealthy without affecting job growth or slowing the economy at all.

    So it’s not only a lack of pushback from the media … it’s that the media, largely consisting of people with 6 or 7 figure incomes themselves … are providing an echo chamber for this canard.

  • nuser

    ” It is a tragedy people don’t understand……………..”
    The real tragedy is Frum keeps changing his mind from one day to the next.

  • think4yourself

    Rahm Emmanuel used to say “never let a good crisis go to waste.”.

    David’s arguing we really don’t need to solve the deficit problem now. Sure, you could kick the can down the road a few months. But without a pressure point, a few months become a few years, become a few decades. Gramm-Rudman goes back to 1985. Yes, we could do a debt-ceiling deal now (still interesting to see if the President will cave and do a deal with cuts only, or will the GOP accept some revenue), but that doesn’t solve our structural problems.

    The big corporations and big banks are now making big profits because over the last 3 years they were ruthless at addressing their own imbalance between revenue and spending. The gov’t needs to do the same or we will be like Japan. Or Greece. Or have to consider 25% cuts across the board like Britian.

    I’d rather see a big deal than a small one. I’d rather that deal include small cuts to SS, Medicare, defense, etc. and have those cuts phase in sooner rather than later. I’d like to see revenue enhancements that rich and middle class support (this Kowtowing to the “Middle Class” is asinine). I don’t care if it is in the form of ending loopholes or raising rates, we should see an increase in revenues to the Federal Gov’t. Lastly, I would like to see a Balanced Budget Amendment (not a part of the debt ceiling deal). That Amendment should have caveat’s for certain real events such as some wars, cataclysmic natural disasters, etc. but they should be few and hard to access. I also think a Balanced Budget Amendment should have automatic triggers of both sharp spending cuts and big tax increases on all Americans if violated (pain for both parties). It also should include automatic, large salary cuts for elected officials.

    I don’t think any of that will happen. I’m sure we’ll kick the can down the road a few more months, years, decades and leave an even bigger mess for my two daughters, cause we didn’t have the stones to deal with the problem when it was easier.

    • ottovbvs

      Lastly, I would like to see a Balanced Budget Amendment (not a part of the debt ceiling deal). That Amendment should have caveat’s for certain real events such as some wars, cataclysmic natural disasters, etc. but they should be few and hard to access.

      A balanced budget amendment is a dumb idea and you’ve just described why it could never be made to work….caveats!

  • Frumplestiltskin

    think4yourself, we are having a National election next year. There is nothing to prevent it from being an election to resolve how entitlement and tax reform can be brought about. Given that the Republicans control the house and have far fewer seats up in the Senate at the very least they will have a major place at the table after elections. And if they win the White House they can cut to their hearts content (of course that doesn’t mean that later Congresses and White Houses will just rescind those cuts)
    And we don’t need a balanced budget amendment. We had surpluses under Clinton. How did they do it then? First papa Bush and then Clinton raised taxes, then more revenue was created, the long term markets saw this and said this was good, and the economy grew to the point we had surpluses.
    These are things the far right said could never happen. They still pretend it never did happen.

  • Raskolnik

    While I agree that the BBA as currently promulgated is about as sound as “trickle-down” economic theory, at the same time I can’t help but think that balancing the budget is a worthy goal. Deficit spending is not always an immediate problem, it has acquired a certain urgency because of the debt limit and because of the threat that interest rates will rise dramatically. But there would be no debt if there hadn’t been sustained deficit spending.

    I agree with the commenters who note that this is not the time for draconian measures, unemployment is still too high (for one thing) and the real danger is deflation. That said, paying down our debt and establishing a policy of at least making a genuine effort to balance revenues with expenses sounds like the only way to go, in the long term. So no, a “Balanced Budget Amendment” might not be the best idea, however is it feasible that our budget-making process could be reformed in a way so as to give the PAYGO provisions (or some hypothetical new provisions) some actual teeth?

    “And we don’t need a balanced budget amendment. We had surpluses under Clinton.”

    Frumple: Clinton reduced the debt by 0.2% in his second term, much better than allowing it to balloon as it did under G.W. Bush, but hardly fixing the underlying structural problem with our level of debt. It is true that we had budget surpluses year-to-year, however those were soon squandered by Bush II in his infamous tax cuts & we’ve been living with the results ever since. Bottom line, though, is that even if Clinton’s short term policy was marginally more responsible than his successor’s, overall the level of debt decreased only minimally under Clinton.

    http://en.wikipedia.org/wiki/National_debt_by_U.S._presidential_terms#Federal_spending.2C_federal_debt.2C_and_GDP

    • ottovbvs

      at the same time I can’t help but think that balancing the budget is a worthy goal. Deficit spending is not always an immediate problem,

      It may be a worthy goal in the abstract sense but in economic terms a modest deficit makes more sense. You’re paying for today’s assets or costs in tomorrow’s dollars. The US has run a deficit averaging 2-3% of GDP since the war and we’re currently enjoying the utility of a lot of stuff (like the Interstate system purchased and paid for in 50′s dolllars). It’s too high at present but the return of the economy to full capacity, some modest tax increases (letting all the Bush cuts expire get you 70% of the way there), and some modest expenditure cuts would return us to the postwar average. There’s nothing whatever wrong with modest deficits. While debt rose modestly on Clinton’s watch and indeed on every president’s watch since the war it never got out of hand. The real guilty parties in debt growth, as that huge chart that keeps getting flashed up clearly shows, were Reagan and Bush who tripled and doubled the debt respectively.

      • think4yourself

        I think too much is made of the economic value of debt and too little is made of the cost of credit including the non-financial costs. By profession, I provide commercial finance (equipment leasing) and have for over 20 years so I do understand reasons for debt (especially to smooth cash flows for large projects). However, we live in a society that pays for current expenses with money borrowed from the future. That will always become unsustainable. More importantly, given our political system, politicians get rewarded by spending money for their district. If it ain’t your money it’s too easy to spend.

        Every day I look at people with credit card debt that they are paying minimums on. That is what the Federal gov’t is doing. At some point (as what happened 3 years ago), we hit a bump on the road. Because we were not prudent before, it magnifies the problem. This is not a partisan problem. Both GOP and Dems happily spend more than we take in revenues.

        Otto prefers the leverage debt gives for economic growth. I prefer the security that comes from not having debt. If we had zero debt, would our conversations with China be different? If we carried no debt, would it be easier to wean countries like Israel and Pakistan off the teat of American aid (we pay our own bills you should too)? If we set an example at Federal, State, Local and personal level that the only reasons for debt is to balance cash flows for large multi-year projects (homes and cars for individuals) or for the purposes of proper business investment?

        This is not an economic efficiency argument. It’s an economic strength argument.

        I do believe the time is now. You’ll never get politicians to cut when money is flowing easily. Yes, times are very tough. But 90% of the people are employed and while I wouldn’t add costs to the people who have lost their jobs, I would start making cuts effective now and raise revenue now as well. A family of 4 making $50K should pay some Federal income tax for the priviledge of living in the United States. It’ a great country and we ought to support it.

  • pnumi2

    “You should have some faith in the markets. Ten year treasuries under 3% shows that the deficit isn’t our major problem.”

    No, it shows that Bernanke’s QE 1 & 2 has thrown a temporary pontoon bridge over our troubled waters, which the Republicans now want to cut holes into so they can go fishing for tax cuts.

    • ottovbvs

      No, it shows that Bernanke’s QE 1 & 2 has thrown a temporary pontoon bridge over our troubled

      Not really. QE 2 ended in June and and 10 year bill yields have moved up slightly but are still at historic lows.

      • pnumi2

        Oh, otto

        Do you really think that the Fed has to spend QE as fast as they print it? I once saw a 40′s movie, with Cary Grant(?) and he had to spend 1,000,000 in 24 hours and he couldn’t do it.

        Maybe their computers froze. All those decimal places.

  • balconesfault

    The problem with the whole “balanced budget” thing is that the last time we had one – the GOP pushed through a massive tax specifically because there were surpluses being generated that were starting to pay down the national debt.

    In short – the current GOP has no legitimacy on the deficit reduction argument. Every GOP Congressman who voted for Bush’s Medicare bill that had no counterbalancing cost-control or revenue enhancement mechanism should just be banned from ever being allowed to talk about how entitlements are too high.

    They are not serious people on this issue … they don’t deserve to be treated as serious people on this issue. The voters who re-elected them multiple times since Bush’s Medicare bill passed have demonstrated that they really don’t care about deficits.

  • El Gipper

    Balconesfault,

    GOP pushed through a tax cut last time there were surpluses because they were correctly afraid of the Democrats pushing through new entitlement programs instead of paying down the debt. Of course, in the depths of the biggest deficits of all time, we saw the Democrats create a new entitlement, PPACA, and increasing tax revenues that cannot be used to pay for the existing structural deficits.

    But focus on deficits misses the underlying argument. The main event is the percentage of GDP spent by the federal government. That is what this fight is really about. Democrats are happy to see it approach 30% while Republicans want to see it at 19%. It’s probably going to wind up being where Simpson-Bowles suggested tax revenues should be — 21%.

    If Obama agrees to the Simpson-Bowles tax revenue recommendations, and accepts the repeal of PPACA, then I think Boehner can walk out a champion and get Republican votes to support it in the House. That’s because Simpson-Bowles tax rates are better than the Clinton tax rates that resume in 2013. That still doesn’t solve the long-term Medicare and SS cost problems, but it’s a decent interim solution.

    • think4yourself

      El Gip – I couldn’t disagree more.

      First the Bush argument for lowering taxes was to jump start the economy, not squeeze the expense side.
      Second, squeezing the expense side by reducing revenues has NEVER worked (see the real Gipper circa 1982).
      Third, as for the Dems pushing through new entitlement programs as I recall, unfunded Medicare Part D was a GWB initiative, passed with both Dem and GOP help (and dissenters on both sides).

      Lastly “If Obama agrees to the Simpson-Bowles tax revenue recommendations, and accepts the repeal of PPACA” – Ain’t never going to happen. Obama will accept Simpson-Bowles, but not ending ACA (what you smoking this bill is Obama’s place in history). Dems believe (the CBO supports) that ACA lowers deficits.

      • El Gipper

        think4yourself,

        The Starve the Beast Stratgey might finally work, only because you have to be willing to play hardball with the debt ceiling in order to actually starve the beast. Ultimately, revenues determine what you can spend. Obama and the Dems are discovering this to their chagrin.

        • think4yourself

          El Gipper “Ultimately, revenues determine what you can spend. Obama and the Dems are discovering this to their chagrin.”

          If you had read my other post on this article you’d know how much I wish that revenues control spending. I am absolutely for a balanced budget. But, I don’t see any GOP person offering a real solution. Not Ryan, not Cantor, and not any GOP Presidential candidate. Please tell me what programs you would eliminate, what programs you would reduce and how much would be left that would come to that magic number of deficit neutral (which is where we need to be if we can no longer borrow).

  • Raskolnik

    Ah, now I see El Gipper’s point. If we default, then as our GDP plunges asymptotically toward 0, the percentage of GDP going to the federal government as taxes will also decrease exponentially, so we won’t have to worry about any death panels deciding who gets to live and who gets to die in the ensuing apocalyptic wasteland.

    Very smart!

  • El Gipper

    Raskolnik,

    “GDP plunges asymptotically toward zero”? Why wouldn’t it just hit zero?

    I actually want to see the debt ceiling reached just to prove what a load of crap all this chicken-little Armageddon crap nonsense spewed from liberals truly is. If you think that eliminating the Depts. of Education, Agriculture, Commerce, Labor, HUD, and HHS is going to send GDP to zero then you have drinken too much of the left-wing kool-aid. You’ll choke when the financial markets open on August 3rd without a care in the world about all the starving parasites who cannot suck any more aid out of the federal teats.

  • pnumi2

    El Gipper

    So your justification for the GOP pushing through tax cuts the last time there were surpluses is because they were correctly afraid of the Democrats pushing through new entitlement programs instead of paying down the debt.”

    So anytime one group that is hostile to or opposes another group anticipates an action that has not yet occurred, the first group is entitled to make a preemptive strike.

    How Age of Enlightenment is that?

    You don’t think that’s what Japan did to us at Pearl Harbor, do you?

  • El Gipper

    pnumi2,

    I’m not justifying it, I’m just explaining it, and the passage of PPACA proves my point that Republicans had a justifiable fear of Democrat profligacy. However, in 2001 the Republicans were not a serious small-government party that wished to tackle spending cuts. I would not advocate tax cuts without spending cuts, but Karl Rove had other ideas. The Tea Party is the anti-Rove antidote.

    • pnumi2

      El G

      “The Tea Party is the anti-Rove antidote.”

      If this true it is only because the tea party is a deadlier, faster acting bane.

  • pnumi2

    El Gipper

    Finally we agree on something.

    “I actually want to see the debt ceiling reached just to prove what a load of crap all this chicken-little Armageddon crap nonsense spewed from liberals truly is.”

    I could not agree with you more if we were Siamese twins.

    Where we probably part ways is in the fact that until the markets open on August 3rd, most American voters will be using 2 or 3 Depends a day (do you know what they are yet?) and hold the GOP responsible for that and when the markets open without a care, Obama will get credit for the save.

    The ‘debt ceiling crisis’ will be the Democrats silk purse and the Republican’s sows ear.

    Let’s get together again.

    • indy

      I think we need an adult diaper called ‘The Calamity’.

      • pnumi2

        Calamity! That’s a word I don’t hear too often. I have a feeling I’ll be hearing it more after August 2nd.

        The Calamity. For Calamity John Boehner.

  • Raskolnik

    El Gipper,

    Wow I can’t believe I actually have to say this, but here goes: you are an idiot and I was making fun of you.

    GDP would plunge, not because of eliminating HHS or HUD or any Cabinet department, but because of the effect of default on the financial markets. Do you understand what a “default” is? A “default” is when you can’t make the payments on the money that you owe someone, and it always accompanies both steep penalties and a steep increase in the rate of interest on future debt. Lord Almighty please give me patience, it’s like talking to a third grader.

    Wait… are you a third grader?

    Also, THE ACA REDUCES THE DEFICIT. Not sure how many times people are going to have to tell you this, that’s three by my count (but I’m not keeping close track). I know you responded to it once, but your response was so stupid that I’ve forgotten it already. So, if you don’t mind, please explain to us again how repealing the ACA will increase revenue.

    Also I am not a “liberal.”

  • raylove79

    So you are saying borrow more now? How will the economy ever recover if we dont cut now? We are in way above our heads. You say our lenders are fine with this then why is China dumping US treasuries at their highest rate ever? Why is it that only our own central bank that can print money has become our number 1 creditor. What happens when we print so much money that it becomes worthless because we wouldnt stop borrowing? I smell Hyper inflation right around the corner if our debt does not get taken care of. Then what will those people receiving unemployment do when they have to use their whole check to buy a couple items of food? Will they be better off or worse?

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