A New Recession Policy
The federal government's current fiscal blueprint during recessions is ineffective and favors the wealthy. A strategy of stimulus checks, unemployment insurance, and federal transfers to states and municipalities should replace it.
After months of record-shattering job losses, real unemployment rates above 10 percent, and general economic chaos, one thing has become exceptionally clear: the government’s response to recessions is too slow and too inefficient.
It seems like every negotiation for stimulus and relief gets held up in Congress for an obscene amount of time. The procedure, pomp, and circumstance of our legislature hold back necessary actions for months; layoffs, however, never seem to get stuck in committee. All that bureaucracy also tends to water down relief measures. For example, the new round of stimulus checks started as a $2,000 payment, fell to $1,400, and was almost eliminated for many middle-class households. This ridiculous infighting shows how the federal government needs a better system to counter recessions. We need federal action that is quick, substantial, and free from backroom dealing.
What we need is a more robust system of automatic stabilizers, economic policies that take effect without new legislation: programs that run on auto-pilot. We also need to perform “preventative maintenance” on some existing programs.
The first part of this new suite of programs would be direct payments to households. These “stimulus check” initiatives have been utilized three times—during the 2001 recession, the Great Recession, and the current pandemic recession. As most Americans learned this past year, these direct checks are critical for people who are suffering financially. For people who have lost their jobs (through no fault of their own), extra income ensures they can pay their bills. Stimulus checks are especially beneficial for people who may not have lost their jobs but have seen cuts in their hours or pay. These workers are usually barred from receiving full unemployment insurance benefits. The stimulus checks passed in 2020 have, without a doubt, helped millions of Americans keep the lights on and put food on the table.
From a macroeconomic perspective, stimulus checks are also effective. Research shows that these checks spur consumer spending, the bedrock of our economy. Putting more money in the hands of American workers leads to them buying more goods and services—stimulating economic growth and pushing the economy back towards recovery. Stimulus checks also allow Americans to pay down debts. Not only does this side effect help families who struggle with student loans, credit cards, and other debts, but it also helps the economy in the long term. When families have less of a debt burden, they can afford to spend more of their income instead of handing it off to banks and creditors. Again, this process means more consumer spending and a faster-growing economy.
The economic efficacy of stimulus checks means that they should become a standard part of our anti-recession policy. Consequently, we should avoid going through the hassle of congressional debate and make the stimulus checks automatic. Whenever a recession is declared, the federal government should immediately move to send out $2,000 to every American adult and $1,000 per dependent (subject to reasonable income thresholds like the ones used during the pandemic). For every nine months that the economy stays in recession, Americans would receive another round of checks. Unlike the stimulus checks of 2020, college students and other young adults who qualify as dependents would be eligible for the full $2,000. The values of the stimulus checks and income thresholds would also need to be pegged to inflation so that the checks aren’t devalued over time. As for deciding when a recession starts, that task will be left to the National Bureau of Economic Research. NBER is already responsible for dating recessions, so this is not a new task for them. Their calculations are widely respected in all corners of government and business. Additionally, it is a private, non-profit organization run primarily by premier economic researchers. Elected officials would not be able to manipulate the dating of recessions for political reasons.
By automatically sending out stimulus checks as soon as a recession is declared, we can guarantee a fast response from the federal government. This speed will ensure Americans are taken care of as soon as possible, and early action will stop the economy from crashing further—meaning there will be less ground to cover to get back to growth. The checks will cost between $300 to $500 billion for every round, which is in line with previous stimulus programs. Given the extreme acceptance and popularity of stimulus checks over the past year, incorporating them into our regular recession policy is a no-brainer.
Unemployment insurance is the next focus of these reforms. All throughout this pandemic, Congress has repeatedly extended the duration of unemployment insurance benefits (usually capped at 26 weeks). The reasoning is simple: there aren’t enough jobs for everyone to get back to work. It doesn’t really make sense to cut off unemployment benefits when there are no jobs to go back to. Unfortunately, Congress keeps extending the duration for a few weeks at a time. This recession just keeps going, so kicking the can down the road a few weeks is inefficient. This haphazard extension every month or so also leads to a gap in coverage. For example, during December’s fight over $2,000 checks, Trump delayed signing the pending relief bill. The stalling meant that Congress’ previous unemployment insurance extension expired, and it couldn’t be reinstated until Trump signed the new bill. Because he waited for a few days, millions of workers lost benefits for a few weeks. This nonsensical back-and-forth could be avoided easily: make the extensions automatic.
As soon as a recession is declared, unemployment insurance benefits would be extended indefinitely. No unemployed workers, either new or existing, will see their benefits cut off during the recession, and people who have exhausted their benefits before would be able to reapply. These changes would ensure no one is kicked off their insurance at a time when jobs aren’t available; it also guarantees people access to income so they can survive the downturn. Unemployment transfers can also provide a stimulative effect. This program, just like the checks, puts money in the hands of consumers.This stimulus also justifies giving unemployment insurance to people who already exhausted their benefits; eventually, the benefits circle back to improving the economy as a whole.
After the NBER determines the recession is over, the new expiration date for benefits will be set around six months (26 weeks) in the future. The date needs to be set after the end of the recession because, even though growth returns, there will still be fewer jobs available. Historically, it takes months before the number of jobs returns to pre-recession levels, so continuing benefits is important for workers. Other safety net programs that have duration limits should also be extended like unemployment insurance.
Extending unemployment insurance to gig workers, freelancers, and independent contractors is also important. Prior to the pandemic, this growing section of our workforce was left without any jobless benefits—a huge oversight in our safety net. Congress did scrape together a temporary initiative for these alternative workers, the Pandemic Unemployment Assistance program, but there needs to be a permanent system for providing jobless aid to these Americans. Funded through the same type of payroll tax levied on traditional employment, this new insurance program could be tapped by workers during recessions or when they have documented instances of available gigs drying up.
These reforms need to be paired with large-scale investment in unemployment insurance infrastructure. Throughout 2020, the entire country has seen backlogs and delays in unemployment payments. Only four states reliably sent out benefits on time (meaning within 21 days of workers filing a claim). The pandemic has laid bare just how underfunded and ill-maintained our unemployment insurance systems are nationwide. The federal and state governments need to make serious upgrades in the next few years. Having the technology and manpower necessary to efficiently process claims is critical; otherwise, workers will be left waiting a month or more before getting any help. Filing and then receiving insurance benefits should always be quick, easy, and secure.
Even if you dislike the idea of more public sector employment, preventing workers from getting fired should be a priority.
The third pillar of reforms focuses on aid to state and local governments. This issue has been bouncing around in Congress for a while now—and for good reason. States and municipalities are important segments of our economy, and they become even more important during a recession. State and local spending accounts for over one-tenth of all our GDP, and almost 20 million people worked for these governments before the pandemic. If mishandled, a recession in the private economy can start, in essence, a second recession. When people start losing their jobs and incomes, state and local governments see their tax receipts shrink. It’s harder to collect sales and income taxes when there's less sales and income. While governments can hold out for a little while, a prolonged recession forces them to slash their budgets. Right off the bat, that means a big cut to GDP. Budget cuts also force them to layoff scores of public sector employees—teachers, firefighters, civil servants, police officers, and more. These layoffs mean another spike in unemployment and even more people cutting back on consumer spending. Essentially, private recessions lead to second-order, public recessions.
To avoid these second recessions, the federal government, which has superior fiscal powers, needs to transfer funds to states and municipalities. This type of aid has been done before and can be a great benefit to our economy. Historically, state and local governments hire more workers during recessions, which means fewer unemployed people and more households with income to put back into the economy. Even if you dislike the idea of more public sector employment, preventing workers from getting fired should be a priority.
We cannot let deficit hawks stop us from improving recession policy. If the past year has taught us anything, it’s that our existing safety net and fiscal responses are woefully incompetent.
Even though aid to state and local government is important, we have seen Congress delay any such assistance for almost a year now. To bypass Washington gridlock, state and local aid should be automatic. After a recession is declared, all eyes would be on the Bureau of Economic Analysis’ GDP estimates. This agency is responsible for calculating GDP, and it releases estimates quarterly. After two quarterly GDP calculations are released, then state and local aid would be dispersed in an amount proportional to the downturn in the economy. Based on the BEA’s schedule, this process would take between four to seven months. Waiting until after the second quarter allows the aid to be truly proportional to the recession. If a recession started in March and the aid was based off of the first quarter GDP, the aid would only reflect a few weeks of recession. All of the downturn that occurred after the first few weeks would not be covered, making the aid worthless. Even if the delay is closer to seven months, we would still avoid mass layoffs and spending cuts. Since the aid is automatic and predictable in size, short-term debt could pad out any budget gaps and then immediately be repaid—and this process would only be required in extreme circumstances. For those especially concerned about “bailing out mismanaged states,” there could be a provision in the law that restricts the use of these funds to paying wages and salaries. This restriction would bar states and localities from using the aid to pay off debts and bill backlogs and focus it all on keeping people in their jobs.
Combined, these reforms would make the federal response to recessions much more effective and expedient. They would bypass partisan gridlock and procedural delays and automatically provide relief to millions of Americans. Stimulus checks would provide a boost to consumer spending, keeping businesses afloat and heping private employees stay in their jobs. State and local government aid would keep public sector employees in their jobs and avoid more drops in GDP. Improved unemployment insurance would protect those who lose their jobs and keep money moving in the economy despite job losses. These reforms would keep people whole during economic crises and make recessions shorter. The automatic nature of these policies would mean people get help quicker and the downturns are countered early. Consumer and producer confidence would stay higher. From individual households to the national economy, these reforms would improve the federal response at every level.
Some of these ideas, especially investment in unemployment infrastructure and stimulus checks, are likely to be taken up by Congress in the coming years. The biggest threat will be the politicians and pundits calling for austerity: cutting government spending and reducing deficits. However, we cannot let deficit hawks stop us from improving recession policy. If the past year has taught us anything, it’s that our existing safety net and fiscal responses are woefully incompetent. To counter future economic recessions, we need to go bigger—not smaller. Not only does this response help families in the short-term, it improves the long-term economy by avoiding the damage of deep recessions. Coincidentally, better recession responses lead to better economies and larger tax receipts, which decrease deficits. There is simply no reason why the wealthiest and most powerful country in the history of the world should put up with a second-rate fiscal response. It’s time for a better recession policy.
Kevin Sciackitano is a second-year Economics major in the College of Arts and Sciences. He serves as Deputy Editor for Economics at the Agora.
Image courtesy Stefan Fussan, Creative Commons