A widely-embraced and pending policy response to the coronavirus crisis is providing cash payments to all Americans. The Senate Republicans recently released a bill that would provide $1200 per person and $500 per child with a phase-in and phase-out based on income levels.
We posted a piece earlier this week about how the cash payments response does not meet the demands of the day. Our contributor, Alex Muresianu, is a proponent of the measure. So instead of posting two separate ideas, we decided to have an exchange to work through the pros and cons of the cash payments-to-all proposals.
Bryan: So when I hear the argument for cash payments, it’s almost always couched in terms of administrative simplicity and speed….just get the money out the door as quickly as possible. But what I don’t hear a lot about is what are the intended goals and expected outcomes. Given the fact that we are looking at a $300 billion single day expense, I think these kinds of parameters and metrics are crucial, even in an unprecedented crisis. So for starters, help me fill in the blanks on why the cash infusion is needed. Is it economic, humanitarian, a combo?
Alex: I would start by saying that the primary argument for these temporary cash payments is that they are intended as social insurance, rather than to stimulate aggregate demand. In other words, our goal is to ensure that people can continue to meet their living expenses, rather than cause an increasing in consumer spending to get us out of a recession immediately.
There are a few advantages to universal cash payments, as opposed to solely focusing on more targeted measures, in the short term. One, the administrative burden of means-testing is quite high, which would slow the ability to get checks out, and the benefits in terms of reduced overall cost aren’t that high—excluding earners over $100,000 from the program means excluding only 9 percent of the population.
Two, while a universal cash program would give some money to people who don’t need it, it’s also far more likely to reach the people that do need it. Many means-tested programs, from the Earned Income Tax Credit to TANF to TAA, have low uptake rates, which means that many of the people intended to benefit from the programs do not.
Three, the ability to tax the cash payment next year means that the government can get some of the benefits of means-testing in terms of a lower impact on the deficit, by taking a higher portion of the payment from higher-income taxpayers, without slowing down payments now. Effectively means-testing with next year’s income is also better, because it means people who might have made a good living in 2019 but lost their job or had to reduce their hours thanks to the pandemic would still benefit.
Bryan: We’re definitely in agreement that the goal right now should be social insurance. Given the fact that the primary form of mitigation for the time being is for people to stop participating in entire segments of the economy, anything other than a precipitous decline in GDP would represent a public health failure.
So the question becomes what’s the best way to attain that social insurance goal – specifically trying to make sure that Americans that are out of work or working less hours due to the coronavirus response can continue to meet their fixed costs.
We’ve seen a few early employment impact predictions and we’re starting to see some initial numbers on the unemployment insurance applications. They are historically massive.
But, and I don’t mean to minimize the tremendous toll that this crisis is taking, the highest unemployment projection I have seen is the 20% figure put out by Treasury Secretary Mnuchin. Others are putting it between 6.5 and 9 percent. So we are looking at somewhere between a 3 percent and 16.5 percent jump in unemployment – numbers that will certainly be in the millions. But the flip side of that is that in the worst case scenario, 80 percent of Americans are keeping their jobs.
So we’re not talking about 9 percent in overpayments by forgoing means testing. We are talking about 80 percent overpayments by providing cash to people that are staying on payrolls. Even if you account for more than that facing reduced hours and pay, it’s still going to be a substantial amount of funds going to gainfully employed Americans that will be staying at home and not spending that extra money to get those impacted sectors going again.
And that’s the rub. Because the $1200 per person check is unlikely to be sufficient to meet the needs of someone that is completely out of work (this somewhat-dated monthly costs breakdown finds that the average rent is $1300, average transportation costs are $750, and average grocery costs are $600). It also does not reflect the massive differences in costs of living between say Muskogee, Oklahoma and San Francisco where costs are more than twice has high.
While the design of the checks checks checks is superior in its simplicity, I’m afraid the outcome is going to leave us right back where we are now. Millions of Americans connected to the impacted sectors unable to meet their demands.
Given that we don’t have unlimited resources, I would rather skip that first step and start using the resources to bolster current safety nets that are able to target the impacted population, extend no-interest bridge loans to struggling businesses, and looking at less resource intensive initiatives similar to the forbearance announcements we saw at Fannie and Freddie and HUD.
Alex: My concern with focusing on unemployment insurance (although it might make sense to strengthen it as well) is that a lot of people will fall through the cracks.
One reason is existing problems with unemployment insurance. For example, in 2018, according to the Bureau of Labor Statistics, 74 percent of unemployed people who had worked in the past 12 months did not apply for unemployment insurance, largely because they did not believe they were eligible.
I also think the category of people who might not officially be unemployed but also in need is substantial. According to Global Workplace Analytics, a firm that studies remote work, 56 percent of workers have jobs that could at least partially be done remotely. Now, that doesn’t mean we’ll see 44 percent unemployment — people who work at hospitals, grocery stores, and other essential services that cannot be done remotely will not lose hours — not to mention that companies involved in delivery of goods ordered remotely like Domino’s and Amazon are hiring. At the same time, that 56 percent stat says those jobs can be done partially remotely. That indicates to me that reductions in hours could become very widespread over the next several weeks. Additionally, groups like freelancers with multiple income streams or self-employed people might be losing a lot of business without actually losing a job. Even though some of these groups would be eligible for some sort of support, they may not realize it (which is a pretty good assumption, given the low rate of unemployed workers who do apply under normal circumstances), and it may take a while to sort out how eligibility works under our current extraordinary circumstances.
Additionally, I’m concerned about the administrative ability of the bureaucracy handling unemployment insurance. Unemployment claims rose 33 percent for the week ending on March 14th relative to the previous week. The fastest rise in unemployment claims throughout the Great Recession was 14 percent, and we’re expecting the increase this week to be even higher than 33 percent, likely with over a million applications. We’ve already seen some state unemployment offices struggle with handling the caseload.
I agree that we should be fixing the problems of our current unemployment insurance system to provide targeted relief to those who need it most. But those fixes will take time, and a direct cash payment that can be clawed back come tax time next year would give everyone who needs help an immediate boost, which might not be the case with improving unemployment insurance.
That said, bridge loans for small businesses seem like a good idea.
Bryan: We’ve gotten to an agreement on one thing!
To the extent that barriers to receiving unemployment insurance apply – those should obviously be eliminated. But the smallest subset of that DOL poll is that the unemployed person did not know how to apply (a portion of the 11.5 percent). Most people did not apply because they were not eligible – which would not be the case if it was tailored for the coronavirus response. I share your concerns about the caseload and the breakdowns in the state administered systems, but I trust those will be worked out in due time. The proposed checks are also weeks away.
Your point that the amount of people impacted will not be fully reflected in the official unemployment data is well taken and the extent of impacts on our public health and economy are still very much unknown. But let’s just say it reaches 33 percent, that would still mean that we are sending $2 to a gainfully employed person for every $1 that goes to someone impacted. Maybe that’s just where we split on whether that’s a tolerable tradeoff for the timing, but I think that $165 billion can be put to better use – especially given that the $1200 will not be sufficient to meet the needs of most of those that are impacted. The sooner we get to figuring the tailoring part out – the better. There’s a chance that DC never gets around to that and just keeps doing additional rounds of cash payments for all, adding to what is going to the massive costs that we will be feeling for a long time.
Given the legislative activity and statements coming from Congress, it’s a near certainty that the cash payments are happening. The Senate GOP proposal is $1200 per person with both a phase-in and a phase-out based on 2018 tax returns – along with $500 per child. Since we are going this route, we would agree that it should be done as effectively as possible – which includes some form of means testing. Do you think the Senate Republican proposal is the best way to accomplish that?
Alex: One small but important point on the unemployment utilization study is that, if I’m reading the Bureau of Labor Statistics correctly, that large group of people in the poll that did not apply for eligibility reasons did not apply because they didn’t think they were eligible, not that they weren’t eligible.
The Senate GOP bill is a move in the right direction, but its biggest problem is its phase-in provision for the value of the money distributed. In its current iteration (as of this writing), the full benefit of the payout would not be available to people below a certain income threshold, as Kyle Pomerleau of the center-right American Enterprise Institute explained here. Additionally, the nonpartisan Tax Foundation put together a useful explanation here. The phase-in means that, if someone does not earn more than a certain amount, they do not receive the maximum benefit.
In normal circumstances, these phase-ins (in which the benefits increase as income increases, up to a certain point) are intended to avoid disincentivizing work—in other words, an additional hour of wages comes with more benefits, not less. But a phase-in does not make sense in our current situation, for two main reasons. One, if this bill is intended to provide social insurance, our first priority is helping the people most in need (while the two of us might disagree on the best way to achieve it, that is our main goal). A phase-in, in which the poorest people do not get the full extent of the benefit, makes no sense as a way to achieve that goal. The second problem with the phase-in is that incentivizing work does not really make sense as a goal under pandemic conditions; if anything, we should be incentivizing people to stay home whenever possible.
The phase-out in the GOP bill for higher-income workers may make things more complicated, and I think a universal payment scheme would be easier and more effective to ensure everyone who needs help gets it, but the main problem with the bill is the phase-in for people at the bottom of the income ladder. Getting rid of the phase-in, as Sen. Mitt Romney (R-Ut.) has suggested, would be the biggest single improvement on the GOP bill.
Bryan: Given the eligibility categories were pretty clear cut and the other available options in the poll, I read it as the person looked into it and figured out that they were not eligible. Regardless, I think we both agree that any of those sorts of complexity barriers should be knocked down.
I completely agree with your point that the phase-in does not match our current circumstances. As to the phase-out, I could go either way. Pay and chase schemes are usually fraught, but it might be the best way to achieve the policy goals in this very extenuating circumstance.
Since we’ve been doing this back and forth, more details about the scale of the package have come to light. It’s enormous. Oddly, the $165 billion I referred to before seems like quibbling next to a potentially $2 trillion package. Add the ramp up in spending in automatic stabilizers and the drop in tax revenues, this year is definitely going to see the largest deficit on a nominal basis and looks likely to top the all-time-high 26 percent deficit-to-GDP we hit during WWII.
I’ve seen a lot of sentiments that the deficit does not matter right now…we are talking about mitigating real human suffering. No argument here. We need to do what needs to be done. However, just because the deficit does not matter right now, doesn’t mean that deficits won’t matter ever again (I don’t think we all became MMTers overnight?). The costs of this effort will be borne for a long time. So for the sake of the immediate response and for the long-term impacts, Congress should do their best to be targeted and prudent with the resources that they are delivering. To me, the mass distribution of $1200 checks does not meet that mark.
That said, I’ve learned a lot from you about the merits of the proposal and do feel much more comfortable with the concept than before we began. I really appreciate you doing this back and forth with me.
Alex: Yes, it’s important to remember that all policies come with trade-offs, and a universal cash payment system will come at a significant cost. It’s worth noting that a large component of the stimulus package is loans that will in all likelihood be paid off, so the total fiscal cost of that package will be smaller than $2 trillion, although still very high. I’m glad we have common ground on some fixes for programs like unemployment insurance and small business relief as well.
I would end with “stay safe out there, everyone,” but really, the best way to stay safe is to, well, not be “out.”
