In the throes of the coronavirus pandemic, US policymakers came together across both sides of the aisle and provided the American people with nearly $1 trillion in direct cash payments to help them make it through the emergency. Along with the expanded Child Tax Credit, these payments dramatically reduced poverty, stabilizing families and our economy during a time of unprecedented turbulence.

The lesson is clear: cash assistance should be a first line of defense to fight recessions. Congress should learn from this success, and act now to put in place the policy architecture needed to weather the next economic storm. By planning ahead, we have the opportunity to avoid damaging delays and political gridlock when Americans need help most. 

In a new report, we at the New School propose a new nationwide direct cash payments program that would automatically kick in when economic indicators point to a recession, and phase out when the national unemployment rate begins to decline. Building on the lessons of the covid economic payments, our proposal represents a more targeted and efficient approach that directs relief to the working-class families— disproportionately people of color—who both need it most and spend it right away, providing a strong economic stimulus. 

Five Policy Principles for an Automatic Direct Payments Program

Our proposal is undergirded by five policy principles:

  1. Timeliness. The cash payments should be triggered early enough to minimize the recession’s effects on unemployment. We advocate using the benchmark put forth by economist Claudia Sahm: When the three-month moving average of the national unemployment rate rises by 0.5 percent or more relative to its low during the previous 12 months, the government should begin to distribute payments to households. 

  2. Size. The transfers must be right-sized to help as many American families as possible and support our macroeconomy, without wasting dollars on those not in need or causing the economy to overheat. We suggest an average annual payment of about $3,500 for families making less than $78,000 a year (the median household income), with additional funds for families with children, and higher payments for families living on lower incomes. The total cost for payments of this magnitude would approximate the same level as the Covid payments, roughly 2 percent of GDP. 

  3. Stability. Cash payments have the strongest psychological and economic effects when they are regular and predictable. Frequent payments help families meet their everyday needs:  Research out of Columbia University found that the monthly Child Tax Credit payments significantly reduced food insecurity among low-income families with children.  The distribution system also must be reliable, and Americans should be able to clearly understand when the payments will turn on and off. We propose monthly payments that continue until the three-month moving average of the national unemployment rate begins to decrease, signaling the start of a labor market expansion.

  4. Targeted and anti-racist. Any cash-based automatic stabilizer program should be anti-racist in its design, management, and implementation. This means taking into account who stands to benefit, with priority given to those who have been historically marginalized by public policy. The high correlation of people of color and poverty means that cash-based automatic stabilizers that are targeted by income will reach people of color who are disproportionately in need of support. An automatic program eliminates discretion in policy administration, which can facilitate racially discriminatory actions. Our targeted proposal would provide a family of four with an income of $33,000 (at the 25th percentile of household income) with $15,300, about double the level of funds they received through the pandemic Economic Impact Payments and child tax credit. 

  5. Additive. Cash-based automatic stabilizers should supplement and enhance other government programs that help struggling families in difficult moments like food stamps, unemployment insurance, or Social Security payments.

Our Proposal Would Deliver Equitable Relief to Families

Policy simulations examining how our proposal would have performed in the last three recessions, suggest that it would boost income for the average American family between 3.2 and 4 percent and between 6.6 and 8 percent for the average Black family. A Black family in the bottom tenth of the income distribution ($15,616 annual income) would see their incomes rise by 60 percent on average. 

Now Is the Time to Ensure an Effective Response to the Next Recession

By passing automatic stabilizers now, we can avoid unnecessary political jockeying when the next crisis hits and make sure that the cash programs can reach the people who are hit hardest by an economic downturn.

 

Support for this blog was provided by the Robert Wood Johnson Foundation. The views expressed here do not necessarily reflect the views of the Robert Wood Johnson Foundation.

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