With an unemployment rate of 12.4%, California’s economy has avoided a total meltdown largely through the use of unemployment benefits. These benefits help people stay in their homes, pay their bills, and keep small businesses afloat – all of which leads to the preservation of jobs for those who still have them.

Because the state purposely collects too little in unemployment taxes from employers during the boom years, the state has to borrow money from the federal government during a downturn to pay the benefits. That’s not a bad thing – it’s sound economic policy to borrow and spend your way out of a recession, and pay down the debt when prosperity has returned.

However, the way the rules have been set up to enable the state to borrow from the feds to pay the benefits means that the bill is coming due sooner than it ought to, as reported in today’s SacBee:

The recession and the Legislature’s decision years ago to raise benefits have drained the state unemployment insurance fund, which now has a estimated $10.3 billion deficit….

the U.S. government is scheduled to bill the state about $362 million in interest next year. The Legislature would have to find the money somewhere to pay it; it wouldn’t be allowed to dip into the unemployment fund, she said.

There’s more. Starting in 2012, if the loan balance isn’t repaid in full, higher federal unemployment-benefit taxes are scheduled to hit employers in California (Employers pay both federal and state unemployment taxes).

The best solution is for the federal government to roll over the loans for another few years. Economic recovery is anemic at best, and we’re likely to still have high unemployment in 2012. Cutting benefits should be totally off the table – it would guarantee more foreclosures, more layoffs, and a worsening of the overall economic picture – and even the Cal Chamber acknowledges in the article that benefit cuts alone won’t fix the problem, that higher taxes on employers will be needed (which they don’t want).

Predictably, some argue that we should either cut or stop paying the benefits entirely, in order to force the unemployed to get a job – because of course there are SO many jobs in California out there for people to take, even at minimum wage.

Even if there were a huge number of low-wage jobs available, and there aren’t, the effect of cutting benefits and shoving people into those jobs would be massively deflationary. The middle-class would be eviscerated, families would see a permanent reduction in their ability to spend money and maintain security, and the economy would lurch even deeper into a two-tier system with a small handful of wealthy folks and a mass of everyone else struggling to get by. No wonder the right-wingers want this to happen.

With teabaggers controlling the US House of Representatives, it may be difficult to manage an extension of the federal loan repayment deadlines. The Federal Reserve could use some of its QE2 money to help, or the White House could use some unspent TARP funds. Ha, just kidding, of course neither option is going to happen.

So watch for unemployment insurance to become a major battleground in the 2011 legislative session. Progressives ought to start gearing up now to prepare for the fight, because we cannot afford to lose it.