Put Economic Relief on Autopilot for Individuals and Communities, Not Just the Economy as a Whole

Claudia Sahm, in her recent op-ed in the New York Times, proposes replacing one-time economic stimulus initiatives like the $1,200 payments in the CARES Act with an automatic stabilizer triggered by increases in the unemployment rate. An automatic stimulus payment would bypass the uncertainty of the legislative process in Congress–a process that worked relatively well in March, with the passage of the CARES Act, but faltered over the summer and fall as the pandemic worsened. There is, of course, a significant legislative lift in getting an automatic stabilizer in place, so we should fight for the right kind of stabilizer: one that targets its benefits to the individuals and communities most at risk in ordinary times and extraordinary crises like the one we’re in now.

Sahm’s op-ed echoes her contribution to Recession Ready: Fiscal Policies to Stabilize the American Economy (Brookings Institution, 2019). In that piece Sahm makes a persuasive case for both the effectiveness and efficiency of automatic stabilizers, so I won’t repeat those arguments here. Instead, I want to focus on her trigger: a 0.5 percentage point increase in the three-month average national unemployment rate relative to its low in the previous 12 months. Had the “Sahm Rule” been in place at the start of the pandemic, stimulus payments would have begun in Apr 2020, when the three-month average unemployment rate reached 7.6%, a whopping 4.1 percentage points above the low of 3.5% in the previous 12 months. Whether they would still be in place under the rule articulated in her 2019 essay is unclear–the latest data available from Dec 2020 reports an unemployment rate of 6.7%, below the unemployment rate trigger (at least on a monthly basis). Perhaps the triggers on both ends should reference labor force participation as well, which is currently 2 percentage points below the rate in Feb 2020 and likely reflects discouraged workers and caregivers who have had to leave the labor force during the pandemic.

While the rates used to trigger and end the automatic stimulus payments may need some adjustment in light of our experience with a pandemic-induced employment crisis, I’m more concerned about how the use of any national trigger interacts with existing economic inequities. Sahm is a macroeconomists, so her proposal reflects her concern with the economy as a whole, and for that purpose the national unemployment rate may be sufficient for triggering a response that provides a macro stimulus. But from a policy perspective, a national unemployment trigger risks perpetuating entrenched inequalities by operating as if unemployment falls on all demographic groups and locations evenly.

In fact, the unemployment rate for African-Americans met the criteria for the Sahm Rule in Dec 2019–a month before news of a new virus first emerged–when their unemployment rate hit 6.2%, a three-month average 0.6 percentage points above the previous 12-month low in Aug 2019. With the national unemployment rate as the trigger, African-Americans would have had to wait 4 months for White unemployment to catch up to theirs before any stimulus payments would have been activated.

A national unemployment trigger also obscures geographic differences in labor market conditions. While the average national unemployment rate was a rosy 3.7% for the nation as a whole in 2019, state unemployment rates ranged from a low of 2.4% in North Dakota and Vermont to a highs of 5.4 % in Mississippi, 5.5% in Washington, DC, and 6.1% in Alaska. The variance in state unemployment rates widened in 2020 as the economic crises deepened.

If we’re going to fight for an automatic stabilizer, why not fight for a more sensitive instrument that identifies groups and areas in need of economic stimulus well before the country falls into a national crisis? Instead of using unemployment rates as the trigger, why not individual income? A basic income phased out at higher income levels, as the economic stimulus payments were (eligibility for the full benefit was capped at $75,000 for individuals and $150,000 for couples), provides the same kind of automatic stimulus for individuals and communities as Sahm proposes for the national economy, but it does so in a more nuanced and proactive way than a stimulus that requires a national trigger.

Prior to the pandemic-induced economic crisis, basic income had already been gaining ground as a policy proposal, partly due to Andrew Yang’s presidential campaign but also due to decades of international research on the power of conditional and unconditional cash transfers to promote economic security and to more recent proposals for various forms of child benefits to address child poverty and inequality. Concerns about labor disincentives of unconditional cash transfers were quickly discarded when the economy fell into crisis in March and stimulating consumer spending became one of the tools we reached for to try to stem the crisis. But many Americans were already in economic crisis in 2019, prior to the pandemic: the 34 million Americans with incomes below the poverty threshold, the 37% of Americans who could not handle an unexpected $400 expense, and the nearly 30% of families headed by single women that faced food insecurity. If we’re going to fight for an automatic economic stimulus, shouldn’t it be for a basic income that addresses the economic crises that are always there, hidden below the surface of the national economy?