The United States Needs Direct Cash Payments During This Crisis – And The Next

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Updates from the US economy

The writer, co-founder of Facebook, co-founded the Economic Security Project and is a senior advisor at the Roosevelt Institute

It has been a bleak summer in Washington. In the midst of a pandemic, millions of Americans have seen their unemployment benefits dramatically reduced by congressional inaction, pushing many into financial insecurity or poverty. Small businesses, still grappling with a huge drop in business, are also wondering if critical emergency funds will ever arrive on time.

There is a way forward. Democrats and Republicans already largely agree on the need for a new round of stimulus checks, similar to the funds deployed in the spring. Congress should authorize these payments, make them recurring until the end of this crisis and, most importantly, put them on autopilot to be triggered in the next recession. If that doesn’t happen now, the next president, be it Donald Trump or Joe Biden, should put it high on his agenda.

Economists have long defended the role of “automatic stabilizers”. When an economy stagnates, these fiscal policies take effect immediately, without any approval from Congress, and provide counter-cyclical economic stimulus. Last month 156 independent economists called on Congress to implement such a program, using direct cash payments.

These have already become staple policy for Republicans in times of crisis. Three times in the past 20 years, Republican presidents, with bipartisan support, have authorized stimulus payments during recessions – in 2001, 2008 and again this year. Democratic lawmakers have backed them every time, while urging their implementation alongside stronger unemployment insurance and support for state and local governments.

Congress should build on this bipartisan agreement, pass immediate relief checks now, and define direct cash payments as a permanent policy triggered whenever unemployment rises rapidly. All of the past six recessions have started with a sudden rise in the unemployment rate by half a percentage point, according to Claudia Sahm of the Washington Center for Equitable Growth. She suggests that as soon as unemployment rises by half a point, the government should send direct cash payments. These would continue until the unemployment rate falls to a level no more than 2 percentage points above the start of payments.

Many lawmakers who support this idea, such as Senators Kamala Harris and Ed Markey, want the payments to arrive on a monthly basis. They see that a one-time check is not enough when unemployment is rising rapidly. Payments should also target families in the lower half of the income spectrum, who spend the money the fastest, thereby boosting the economy.

How much would such a program cost? The size of payments can be compared to gross domestic product, with proposals ranging from an annual ceiling of 0.7% of GDP to several multiples thereof. I propose a level of 3 percent of GDP, equivalent to about $ 600 billion – about a quarter of total spending so far in this crisis. These are robust expenses, and that is exactly the point. We want large and efficient cash flows to struggling households in times of contraction to stimulate spending and cushion the downturn.

The experience of the last 20 years shows that direct cash payments work. From the 2001 and 2008 payments, the researchers concluded that they helped families avoid eviction and short-term hunger, and gave a significant boost to household spending.

They also help struggling families when the unemployment insurance system is overwhelmed – as happened in this year’s crisis, when a record number of Americans applied for unemployment checks. On average, it took over 50 days for a quarter of applicants to receive an eligibility decision. In contrast, direct cash transfers evolve very quickly, as most recipients receive the money by direct deposit.

Equally important, putting direct cash payments on autopilot means avoiding the inevitably long delays it takes to agree on the necessary stimulus policies during a recession. (Five months have passed between Lehman’s collapse in 2008 and the approval of a stimulus package.) Since every recession is different, there will always be decisive political negotiations. But having direct cash on autopilot at least allows discussion of other emergency measures and avoids leaving millions of dollars embarrassed.

It’s time for Congress to help millions of Americans struggling today and create a trusted framework to support them in the next emergency.

Letter in response to this article:

India leads the way with social protection / De Sanjay G Reddy, Associate Professor of Economics, The New School for Social Research, New York, NY, USA

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