Republicans came out in support of direct payments to Americans to blunt the economic impact of the coronavirus pandemic.But their support appears to be more because they do not want to expand the social safety net by guaranteeing more paid sick leave or extending unemployment benefits.Mauro F. Guillén is the Dr. Felix Zandman Professor of International Management at the Wharton School of the University of Pennsylvania.This is an opinion column. The thoughts expressed are those of the author.Visit Business Insider’s homepage for more stories.
Congress and White House have finally struck a deal for a $2 trillion economic stimulus potpourri of measures ranging from direct payments to Americans and more comprehensive unemployment benefits to a bailout fund for the worst-affected companies and industries.Most Senate Republicans would have preferred a tax cut for families over the proposed $1,200 payment to each adult American below a certain income (plus $500 for every child), and they certainly don’t want the money to go towards enlarging existing government programs that would help the Americans in greatest need during this trying time.The GOP prefers checks over shoring up the social safety netIf the goal is to ensure that incomes, and hence consumption, remain steady, why don’t Republicans go for an intervention that is targeted and demonstrably more efficient such as paid sick leave or extended unemployment benefits well beyond the 13-week extension of unemployment benefits included in the bill, which may not be enough given how deep this recession is likely to be? The answer is simple: Because it would make government and the social safety net bigger than they want it to be.The Senate Republicans’ $1,200 plan comes across as a strategic calculation. President Trump may not be looking beyond the November election, but Senate Republicans certainly are. They do not want to bail the economy out in a way that undermines their long-term agenda.Helping workers who get sick or providing for those who lose their jobs is not part of it. Giving away a lump sum to nearly all Americans is, in their view, an option more congruent with their new image as the party of the people.
Moreover, the $1,200 program is a “hard budget line,” in the sense that once you know how many people are eligible you know how much it’s going to cost. By contrast, the cost of paid sick leave or unemployment benefits is harder to predict and it can skyrocket if the pandemic spreads uncontrollably and the economy tanks.The $1,200 program is as populist an economic measure as it can be. Sen. Lindsey Graham was actually correct when he argued last week that one check does not amount to income. A payment sent to each American is a giveaway, not a targeted policy intervention, as Sen. Richard Shelby noted.Downsides of direct checksAnd giving $1,200 to each American below a certain income threshold may backfire in some ways.In 2018 Alaska residents received a $1,600 as the annual dividend from the Alaska Permanent Fund, which controls the state’s bounty from natural resource extraction. Research shows that Alaskans spent more on goods and services for immediate consumption in the month when they received the payment.Meanwhile, average birthweight increased in the case of low-income mothers, and obesity among three-year-olds came down. In the four weeks after the distribution of the checks, incidents related to substance abuse increased by 10 percent but property crimes decreased by 8%.
The payouts also reduced poverty but increased inequality, most likely because wealthier households reinvest the dividend while poorer ones spent it.The history of universal payments does not show clear benefits from such programs. In his 1962 book, Capitalism and Freedom, Milton Friedman proposed a “negative income tax” that would work as supplemental pay from the government for people under a certain income level.The Johnson Administration found the idea fascinating, and decided to run a pilot program in New Jersey to evaluate the balance of benefits and costs. The results raised more questions than answers. Even President Nixon, alarmed by the unrest of late 1960s, proposed a universal income bill that eventually floundered in an endless back and forth between the two legislative houses. A full-scale program was never proposed.University of California at Berkeley economists Hilary Hoynes and Jesse Rothstein present a bleak assessment of the future of universal basic income schemes. After reviewing pilot programs and policy proposals in Canada, Finland, Switzerland, and the United States, they conclude that “replacing existing anti-poverty programs with a universal basic income would be highly regressive, unless substantial additional funds were put in.”Spending the funds for the $1,200 direct payment program would cost on an enhanced national scheme for paid sick leave and vastly expanded unemployment insurance for all Americans who lose their jobs is the best policy.
Paid sick leave provide workers with the peace of mind that they will have some income if they come under the effects of the virus. It would also help businesses by being able to send home sick employees and replace them with temporary workers, if needed.Similarly, extended unemployment benefits ensure that those who lose their jobs would have a minimum of income available to them for a longer period of time until the economy recovers. Given these factors, Congress should expand the social safety net as a way to tackle the coming economic recession.Mauro F. Guillén is the Dr. Felix Zandman Professor of International Management at the Wharton School of the University of Pennsylvania. His forthcoming book is “2030: How Today’s Biggest Trends Will Collide and Reshape the Future of Everything” (St. Martin’s Press, August 2020)
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