Direct Cash Payments in the Next Recession

Overview

Researchers 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, this proposal represents a more targeted and efficient approach that directs relief to the working-class families – disproportionately people of color – who both need it and spend it right away, providing a strong economic stimulus.

Policy Principles

1. Timeliness: the proposal advocates 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 proposal suggests 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: the proposal recommends 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: 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. This 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.

Implications for policy and practice

Policy simulations examining how this 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. By passing automatic stabilizers now, unnecessary political jockeying when the next crisis hits can be avoided and cash programs can reach the people who are hit hardest by an economic downturn.