Cash Me Out

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It’s been said that there are no atheists in foxholes, and more recently, no fiscal conservatives in a recession. In the same spirit, calls for the Federal government to send money are coming from some unlikely quarters.

There are obvious reasons to proceed.

  • Sending individuals money encourages consumer spending, which supports the employment of those producing and distributing the goods and services which are purchased. This boost to spending alleviates the negative impact of workers’ reduced spending resulting from layoffs and business shut-downs;
  • The families of workers who are forced to skip paychecks would suffer losses of food, clothing, and shelter, absent cash assistance from the Federal government;
  • An economic slow-down will generate business bankruptcies and investment reductions that will detract from future economic growth and well-being.

Before consorting with strange bedfellows, it is best to get prior agreement on unorthodox practices

Remedies that have been proposed include expanding the Earned Income Tax Credit, cutting the payroll tax, and sending individuals money directly. Aid to business firms or to state and local governments is a separate can of worms, important but not discussed here.

When it comes to giving individuals cash, the two values in principal tension are the desires to stimulate the economy, and to provide relief to families in greatest difficulty. In one sense, these could be seen to be complementary, but in another, they are not.

They are complementary in the sense that families in the greatest economic distress are also the most likely to spend any Federal aid. The higher one’s income, the less this crisis is likely to detract from one’s routine spending. So what could be seen as fair also happens to yield the biggest ‘bang for the buck.’

This is a little too easy a judgment, however. The reality is that any Federal aid program will be constrained to some finite allocation of funds. We can think of reasons to forego any such limitation, but for political and economic reasons, a ceiling on aggregate aid is likely. That brings up the issue of targeting by means-testing, something that has become anathema on the left.

Means-testing may be conflated with a bias towards a small program with less cash forthcoming, in contrast to a universal program. To the contrary, a means-tested program can be huge, and a universal one can be small. Supplemental Nutrition Assistance Program (formerly, ‘food stamps’), for instance, is a large means-tested program. So is Medicaid. Total expenditure is a separate decision. There should be little doubt that the circumstances call for a new, very big, ongoing program.

Size matters, but for any given allocation of funds, means-testing can improve both the spending impact of aid during an economic downturn, and the fairness of the allocation of funds (meaning those of less means get more).

Size aside, another nostrum is that a universal program is more politically durable than a means-tested one. Typical examples are Social Security, as the universal case, and Aid to Families with Dependent Children (AFDC, or popularly, ‘welfare’) as means tested. This is not a good argument.

Here durability is not an immediate concern. The priority is to get through the crisis. That aside, Social Security in the first place is not universal. It requires somebody to have a record of labor earnings. Moreover, it is more than a universal program. It is social insurance, the political strength of which rests in great part on its contributory nature. To be eligible (or for one’s dependents to be eligible), one must have paid into the program directly, via the payroll tax. People can say, “Don’t you dare cut my Social Security; I paid for it!” And they did. Besides not quite being ‘universal,’ Social Security benefits are determined according to a progressive formula, itself a type of means-testing.

The unpopularity of AFDC rested to a great extent on its racialized and gendered connotations. It was viewed as an inducement to irresponsible behavior by poor, black women with illegitimate children.

Both Medicaid and SNAP are means-tested and have proven politically robust. Medicaid in particular grew by leaps and bounds during the presidency of Ronald Reagan. It is also true that Social Security has been under assault since the 1990s, its so-called universal status notwithstanding.

Where does this leave us as far as sending folks money goes? We should keep in mind that in isolation, no program can live up to an idealized scheme. It is always a question of tenable alternatives. We could readily acknowledge that in the current crisis, most any program is better than none. But we ought to do better than “better than nothing.”

Sending everybody (or every adult) a fixed payment, these days, often described as a Universal Basic Income (UBI) grant, is a poor allocation of resources. Those of greater means will spend relatively less of their aid. So the flat payment is inefficient. At the same time, those with lower income have greater need for aid, so a flat payment is arguably unfair as well.

My friend Dean Baker disposes of the “send everybody a check” idea, though a close reading reveals that he says the idea provides both too much and too little. Too much to those who would not spend the money, and too little to those in greater need, who would spend their assistance. In other words, it lacks the impact and efficiency of a targeted program.

Sending everybody a check appeals because it sounds simple and could readily gain political approval. Yes, but that’s because it is less progressive than alternatives. It’s easier to do because it isn’t as good. A concession to conservative politics may sometimes be necessary, but it’s still a concession.

A payroll tax cut is an even less fair or efficient allocation, since there is more relief, the higher one’s salary. Moreover, it provides nothing for those unable to work, those who have been laid off, or retirees whose working lives are over, many of whom have low or zero income.

Bumping up the Earned Income Tax Credit (EITC) brings up similar gaps as a payroll tax cut. Apparently the temporary payments supported by the Republicans resemble an EITC: the benefit starts at zero for those with no income and increases as income does over some range. Then it phases out over some higher range.

For any fixed amount of funds, there is no getting around the superiority of a negative income tax (NIT) scheme. It would provide a fixed payment that decreases as income increases. Benefits could be as high as you like.

It is true that such a scheme would not easily gain political approval, but that’s because it is better – more progressive – not because it is complex. On the complexity front, there is one extra parameter to stipulate – the rate at which the benefit declines as income increases. That’s it. Individuals would have to apply for it and report income and, if you like, dependents.

Remember, the right way to evaluate an option is in light of alternatives. Sending everybody a check sounds simple. It is not, either administratively or politically. For one thing, there is no unified list of “everybody.” And who is everybody? The incarcerated? The undocumented? Ex-offenders? The homeless?

We have existing pipelines that can be used for assistance. The IRS knows who files income tax and pays payroll tax. A problem is that many low-income persons need not file an income tax return. They are invisible to the IRS. The undocumented and the homeless are invisible to the authorities entirely. The states’ Unemployment Insurance systems stand ready to pay workers. But these sources also neglect many in greatest need, who would spend every nickel of their assistance.

Administration is not the only basis upon which to judge a proposal. Administration can be enhanced with a relatively modest expenditure of funds, compared to the size of any significant program. The IRS needs to be scaled up anyway. Moreover, all alternative schemes would have administrative costs.

The difficulty of immediately implementing an NIT scheme suggests the option of providing a fixed payment for a limited period of time, until the NIT could be stood up. The point is that a progressive distribution, as soon as it can be achieved, is both more equitable and more effective.

Every aid program is proposed and evaluated considering some total expenditure. There is a continuous back and forth between adjustments in proposals and their cost estimates. Whether anybody likes it or not, that’s just the reality of how these laws are written. There is competition for every public dollar among Members of Congress. Other worthy causes are crying out for resources.

From the standpoint of fighting the coming recession and providing the greatest possible relief to the working class, the negative income tax is the best option. Assistance should be large and quickly forthcoming, and nostrums about the public debt should be left by the wayside. The permanent well-being of tens of millions of families depends directly and significantly on the relief that is provided over the next six months.

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