The novel coronavirus has been a boon to a handful of very specific businesses, including those producing disinfectant wipes, canned goods, and telecommunication apps. But, as social distancing and self-quarantining become the norm, the economy is taking a deep hit, as restaurants, hotels, airlines, theaters, and a host of other industries find themselves suddenly without customers, and workers are being left without tips, or furloughed, or simply laid off. The stock market’s continuing tumbles—exacerbated by the president’s performance—is prompting fears of a looming recession. Bloomberg News’ recession predictor now places the odds at 53%.
I have to think the politics of sending checks to people have got to be pretty good.”
Economists and lawmakers are debating various techniques for preparing to lessen the blow of a downturn, but one is swiftly gaining traction: lump-sum cash payouts to every citizen. It’s been touted by leading macroeconomists, and by an Obama economic advisor, who are pitching it as the optimum way to infuse life into a slowing economy by encouraging spending, which traditionally drops during recessions because of declining incomes. It would also give out-of-work workers a way to pay their bills (though cities are starting to offer policy fixes like moratoriums on evictions to help these issues as well).
Though the logistical details are up for debate, proponents say it’s more effective in stimulating spending than lowering interest rates or offering payroll tax cuts, which is the White House’s current favorite option. But it needs to be done fast.
“It’s a pretty solid anti-recessionary measure to use,” says Josh Bivens, director of research at the Economic Policy Institute, a nonpartisan think tank. “I think it’s even particularly well-suited to the potential recession we have on the horizon.”
What’s the case for cash?
The Great Recession, in the late 2000s, saw a bubble slowly deflating as soon as house prices started to fall in 2006, which gradually dampened spending. Today’s has happened much quicker and is more pronounced, and so the economy will need a dynamic shock in the form of more money.
What’s also different this time around is how “laser targeted” the effects may be at lower-wage workers, because those people don’t always have paid sick leave or health insurance. Usually, recessions more broadly target manufacturing and construction, Bivens says, a segment that boasts higher wages and therefore a bit of a spending buffer. Lower-wage employees simply do not have cash to spend once their paychecks stop arriving.
All this requires a solution that can be rolled out efficiently and pinpointed to help those earning less. Right now, the Trump administration is proposing payroll tax cuts, essentially letting you take home more of each pay check. Obama implemented these as part of the Recovery Act in 2011 and 2012, in an effort to compromise with Republican lawmakers, and they proved less effective in helping lower-income workers. They’re dispersed slowly, month to month, and are insufficient (or even nonexistent) for workers whose wages are already low or who don’t make any money because they’re out of work. No salary means no taxes, which means no payroll tax cut relief. Payroll taxes also fund welfare programs like Social Security and Medicare, which are vital during a pandemic, so cutting that funding can be problematic.
The Federal Reserve can also help in a recession by altering monetary policy, like lowering interest rates (which it did recently) to to help increase borrowing to create more liquidity. “I partly want the Fed to cut interest rates to spur fiscal policy makers,” Bivens says. But “the actual effect of lower interest rates in this particular kind of recession are going to be pretty modest and not super well targeted at people who are going to be feeling the most distress.”
Lump cash sums, on the other hand, ensure consistent payouts, and this kind of fiscal intervention is more effective than broader monetary policy. It’s also just more straightforward for regular folks to understand than complex monetary policy, so people feel like they’re being helped directly.
What would it look like?
Jason Furman, a former economic advisor to Obama, spurred the most recent discussions about this policy with a Wall Street Journal op-ed piece on March 5, calling for the government to send households $1,000 per adult citizen or taxpaying resident, and $500 per child. What seems like an arbitrary number is loosely based on historical precedent: in 2008, the Bush administration sent out tax rebate checks of up to $600 for adults and $300 for children. Today’s number is a reflection of a bigger economy, which needs a bigger stimulus. Bevins adds that it’s about 1% of the GDP, which some experts think will be the approximate size of the shock. The total cost would be about $350 billion.
An important element of Furman’s policy is the “automatic” distribution, an element emphasized by Claudia Sahm, director of macroeconomic policy at Washington Center for Equitable Growth. Sahm, who formerly worked on the Federal Reserve Board of Governors, has written about the policy extensively. She argues that payouts should be hooked to a specific economic metrics, and automatically “triggered” when that number is reached.
The total cost would be about $350 billion.
Sahm and Furman argue that the trigger metric should be based on an indicator (known as the “Sahm Rule”) that prescribes the onset of a recession when the three-month unemployment rate rises half a percent over the last year’s low. If the recession continues into 2021, another round of payments would also continue when the metric is reached again.
Sahm’s argument is based on prevention rather than cure, in that it provides defense for a more sweeping recession before it’s too late. Negotiations in Congress should begin now, so that checks could be sent out as soon as possible. Congress, of course, is not exactly known for its expediency. But, given the upcoming election, and the desire for the president and incumbent legislators to win again, Bivens thinks it’s a no-brainer for Congress to pass this stimulus. “The Trump White House ignores many norms about politics, but you can’t ignore a recession if you want to be reelected,” he says. “I have to think the politics of sending checks to people have got to be pretty good.”
Does this sound familiar?
If the cash giveaway concept is producing an odd feeling of déjà-vu, perhaps it just sounds similar to the core of Andrew Yang’s presidential campaign: universal basic income. Yang’s signature policy was to deploy $1,000 a month, no questions asked, as a supplementary income (but in lieu of government benefits) for all adults, on a permanent basis. But, with a recession on the horizon, Yang has taken to Twitter to start a trending topic: #UBIStimulus, tweaking his signature policy into temporary measure to boost the economy.
Lower interest rates do nothing for the wage worker losing shifts and tips, for the mom stuck at home looking after her child because the school closed, for the restaurant or theatre losing business because people are staying in. The only stimulus that would work is #UBIStimulus.
— Andrew Yang???? (@AndrewYang) March 10, 2020
On the state level, some candidates running for election in November have officially laid out proposals for a UBI stimulus, including Mike Broihier, vying to take Mitch McConnell’s Senate seat. “We are now reaching a tipping point where working families in Kentucky are being pushed to make a very difficult decision,” Brohier tells Fast Company. “Either go to work and risk infection, or stay at home and lose a paycheck.” A brewing downturn is particularly troubling in a state where 18.3% of people already live below the poverty line. Broihier says he’s called on McConnell to pass an emergency UBI stimulus bill, simply to help “people living paycheck to paycheck” make their bills on time.
“If people want to call it a temporary, mini UBI, that seems fine to me,” Bevins says, and adds it should be complemented with other measures that would help lower-income workers, such as government coverage of Medicaid expenses. Alexandria Ocasio-Cortez also referred to the cash stimulus proposal as UBI in a Thursday tweet, in which she listed “dramatic action” steps that should be passed, including paid leave, debt relief, and guaranteed healthcare. The House Democrats’ emergency bill, including paid sick leave, unemployment assistance, and nutrition aid, currently is waiting for approval by the Senate, though Republican leader Mitch McConnell and the White House seemed to indicate the idea would not pass.
This is not the time for half measures.
We need to take dramatic action now to stave off the worst public health & economic affects.
That includes making moves on paid leave, debt relief, waiving work req’s, guaranteeing healthcare, UBI, detention relief(pretrial, elderly, imm)
— Alexandria Ocasio-Cortez (@AOC) March 12, 2020
The threat of recession is real and already “in the pipeline,” Bevin warns, and cash incentives are the tried-and-tested measure to spark spending. For him, the energy injected into the economy far outweighs any risk of over-responding or heightening the national debt, mistakes which many say lowered the effectiveness of Obama’s stimulus plan in 2009. “We should go too big rather than too small,” he says. “For sure.”