Quick Thought on the Targeting of a Stimulus

March 16, 2020

The idea of a cash payment to all adults, in the neighborhood of $1,000, is gaining lots of support as a reaction to the crisis. This may not be an especially effective way to help people.

The reason is that, unlike in past recessions, it will not lead to much of boost in spending, and therefore have little impact on economic activity and employment. In past recessions, the reason most people did not spend is because they didn’t have money. If you gave them more money, they would likely spend most of it, creating demand in the economy, shoring up employment, and in that way having a second round spending effect from the workers who get or stay employed.

In this case, the main reason that spending is being cut back is because people are scared to spend. They don’t want to go out to restaurants, movies, or travel. Giving them $1,000 will not change this fact.

For people who are losing their jobs because they are in the most affected industries, the $1,000 will lead to a boost in spending, but it is likely to provide them little help if they lose their  jobs. For someone earning $20 an hour (a bit more than the median wage), this is enough to replace 50 hours of pay. These workers will need considerably more money if they are to get through a period of six or nine months before the economy starts to get back to normal.

Many of these workers will get unemployment benefits, but these benefits are typically just 40-55 percent of wages, meaning that laid off workers will see a substantial cut in income. Furthermore, many workers do not qualify for unemployment benefits, either because they do not have a long enough work history or because they were contract workers, like Uber drivers, not formal employees.

These laid off workers are the ones who will need the most help in a downturn. If we can’t find ways to keep them employed, for example as Denmark has done, we should look to ramp up benefits, say by 50 percent, and find ways to cover those not currently covered. One possibility would be to base unemployment benefits for contract workers on the 1099 tax forms that they got from their employers.

In any case, it makes sense to direct the money to people directly hit by the crisis. It will not provide much of a boost to the economy to send checks to people who have not seen their income fall as a result of the crisis.

btw, for those wondering how we are doing now helping the unemployed, last month there were 5.8 million people counted as unemployed. Fewer than 1.8 million people were receiving benefits. We are not doing a very good job of getting money to the unemployed.

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