Sheila Bair, former FDIC Chair.
Adam Jeffery | CNBC
For his critics, President Trump has an annoying habit of being right sometimes. Case in point is the long awaited pandemic aid law.
We were all grateful when he signed it on Sunday. It had been delayed for months by political gambling and jockeying. However, his criticism of the relatively low cash payments on this bill – $ 600 per adult and per dependent child for those earning up to $ 75,000 per year – was accurate.
Most middle- and low-income Americans have suffered financially from this pandemic in one way or another, and their suffering has deepened in recent months as Congress wavered. Most will continue to suffer from the economic plight of Covid-19, which will last much of 2021.
Those $ 600 payments – only half the amount Congress approved in the CARES bill last March – will soon be exhausted. The Senate should approve the House’s legislation to increase it to $ 2,000. If not, the Biden administration should make this their first job next year.
The idea of unconditional financial aid has been around for some time. With this pandemic, it’s finally due. Experiments dating back to the Nixon administration show that low-income families lower the poverty rate, improve family health, and improve children’s test scores.
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In the past, such payments have been countered with obnoxious arguments that such “freebies” are wasted on cigarettes and alcohol, or that they put work off. The research available shows that they are used to meet the basic cost of living with little impact on the recipients’ employment.
This also applies to how American households spent the first payment round approved in March. According to a study by the American Research Institute, the majority of this funding was spent on living expenses.
For households with a combined income of less than $ 75,000, nearly 80% said they spend most of that on things like groceries, utilities, and rent. About 54% of wealthier families – those making more than $ 150,000 – also used most of the money to meet basic household needs. Some families said they put most of it into savings: 9% of lower-income households versus around 30% of wealthier families.
Critics of payments argue that money used for saving rather than consumption does not provide economic stimulus. This is true when the goal is solely to stimulate the economy.
However, given the pervasive economic devastation from Covid-19 and the overall declining financial condition of middle and low income families in America prior to the pandemic, we should also worry about propping up their precarious financial condition. A recent CNBC poll found that 61% of Americans will have used up their savings by the end of this year.
Another benefit of the unconditional cash support: It can be distributed quickly, making it particularly suitable for sudden economic shocks. Thanks to yeoman’s work by the Treasury Department, the vast majority of eligible families receive the second round of cash payments within three weeks.
Compare this to government unemployment benefit schemes collapsing under the weight of millions of claims. It takes time to accept and process applications and to verify eligibility. According to a recent Pew study, only three states currently meet the federal guideline that at least 87% of applicants receive their funding within three weeks. Residues have become the norm. 14 states, including New York and California, meet this standard less than 50% of the time.
The unconditional cash support also has significant collateral benefits. When families spend the money on goods and services, businesses as well as state and local governments benefit from higher sales tax revenues. Such support is also arguably more efficient in allocating resources than complex programs that limit help to specific purposes. Families know their own needs better than anyone else, and optimal economic distribution of these resources can be better achieved by spending accordingly.
Americans seem to be “getting” the benefits of cash payments, even if Washington politicians have been slow to prevail. According to a survey, two in three Americans support a second round of payments. A similar proportion considers the checks in the current business cycle to be too small.
Given the proven inability of our elected officials to respond promptly when Americans are in need, the Biden administration should not only seek a new round of payments, but also put in place a permanent system that automatically distributes funds when our economy experiences a major shock.