The Time To Act Is Now

mar. 13, 2020

A few days ago I posted an article in which I argued that even modest disruptions caused by self-isolation could have large-scale economic consequences. The disease transmission mechanism in that scenario was the widespread financial fragility of ordinary middle-class households, many of whom are ill-equipped to sustain temporary income shocks.

Now, just a few days later, we are living in a totally different world. Modest disruptions are a thing of the past. We're all home-schoolers now. In future history books, the year 2020 will be the year that has the asterisk next to it. Trivia junkies hanging out in sports bars in 2146 will be asked "In what year last century was their no NCAA champion." (Let's hope there aren't multiple correct answers to that question a century from now.)

Given the magnitude of the economic shutdown underway, the question now becomes, are we doing enough to stop the disease from spreading? I'm an economist, so I'm not talking about coronavirus, I'm talking about the impending recession.

The answer is No. Currently proposed measures are not nearly enough. Moreover, just like delays in responding to coronavirus caused it to spread more widely than it should have, delays in providing an economic stimulus will only make economic matters worse.

None of the measures currently being discussed act with enough immediacy to support household liquidity in the very short run. As a result, they do not do enough to bolster consumer confidence in the longer run.

Instead, here is a simple proposal: do not touch payroll taxes, do not touch paid leave, do not touch any of that. Instead, send a check for $2500 to every household in the United States. Do it quickly. As in right now.

Furthermore, make it means-tested in an ex post sense. A simple way to do this would be to introduce a claw-back at tax time that was scaled to household income. In other words, perhaps make it an outright gift to every household below the median income, make everyone above the median but below the 75th percentile pay back $500 in extra taxes next April, and so on. (The IRS has your Social Security Number--this wouldn't be that hard.)

Why is this reasonable? Here are some things to consider.

This would have a big impact on household liquidity for lower- and middle-income households. The median household makes around $65,000 per year, or around $1250 per week. So this is two weeks of extra income for the median household. A lot more for lower-income families. Or to put it a little differently, this is two month's median rent with a little bit left over: the median rent in the US was around $1,000 per month in 2017. That will help the cabin fever a lot.
Second, although $2500 is a big number for a lot of households, this proposal would not be that expensive by historical standards. Suppose the $2500 was an outright gift to every household below the median and we had complete clawback above the median. Then it would cost about $150 billion, roughly equal to the Economic Stimulus Act of 2008 signed by President George W. Bush in the wake of global financial crisis. One can easily imagine more complex clawback schedules that lower the net cost of the package even further.
This is quick. It sounds nice to encourage the Small Business Administration to lend money to small businesses at low interest rates to help keep them solvent, but these kind of schemes tend to come with a lot of bureaucratic and administrative overhead. The confusion and red-tape associated with them blunts their effectiveness. The best way to help small businesses is to put cash in the pockets of the people who work in them, many of whom are the business owners themselves.

I'm not the only one saying this. Jason Furman, a former CEA chief in the Obama Administration, offered a similar proposal a week ago in an Op-Ed piece in the WSJ. Every week we wait, the future gets a little darker. Just like authorities needed to act fast to stop the spread of coronavirus, the US administration needs to act fast to stop the severity of the impending recession.