Policies

Economic Crisis Response

Economic Crisis Response

Automatic stabilizers are mechanisms built into government budgets, without any vote from legislators, that increase spending or decrease taxes when the economy experiences widespread distress or prolonged significant downturns. 

The design of automatic stabilizers uniquely positions them as a mechanism that can save the federal government a significant amount of time when responding to an economic crisis. Automatic stabilizers can “turn on” when economic conditions reach certain predetermined metrics and provide immediate support to the economy fluidly. They do not require an act of Congress or other federal decisions to be made; the programs simply start to support the economy more as conditions deteriorate while the government determines a long term solution.

An ideal candidate for an automatic stabilizer built upon the economic lessons learned of the coronavirus pandemic in the United States would be direct economic relief. Economic impact payments disbursed by the federal government in 2020 and 2021 were widely popular and efficient measures which assisted Americans with covering their basic economic needs in a time when more than half were unable to afford an unexpected $500 expense.

In fact, there is a strong case to be made that an economic crisis response plan which included automatic stimulus payments would have been a more effective policy than enhanced unemployment benefits which can be delayed or even waived based on individual states ability to process payments during a peak of unexpected demand.

Due to the added financial $300 boost to unemployment insurance, passed in the CARES Act of 2020, unemployed citizens were oftentimes earning more than their employed counterparts. While the effects of this disparity are disputed in the specific instance of the CARES Act, in theory, this difference may provide some with a disincentive to find paid work until after their benefits expire.

Unemployment insurance is also a primarily reactive way to address an economic downturn. Those who benefit from the policy must navigate state bureaucracies to prove they’ve lost work, then wait for an application to be processed along with other applicants while continuing to cover basic living expenses without an income. 

In some cases, unemployment applicants who qualified for unemployment insurance never received assistance of any kind, as applications became bottlenecked by state bureaucracies attempting to navigate unprecedented levels of unemployment applications.

Automatic stimulus would minimize or eliminate the problems associated with enhanced unemployment insurance.

By delivering direct economic relief regardless of employment status throughout the pandemic, stimulus checks had a neutral effect at worst on incentivizing paid work. In fact, a Humanity Forward/Social Policy Institute study of the Child Tax Credit may indicate that direct economic relief policies may broadly incentivize work, though the policy specifically benefits parents and may not be indicative of the American workforce broadly.

Recent data from the U.S. Census Bureau also indicates that stimulus checks disbursed in 2020 and 2021 have had a significant effect on the rate of small business formation in the United States. 

Small business formation in the United States increased by 24 percent in 2020. The start of this unprecedented spike in small business creation — totaling 4.4 million new firms in one year — coincided with the disbursement of the first federal stimulus in 2020, lending credence to the notion that a lack of cash is a factor in lower rates of new business formation.

While this trend is not entirely conclusive, the timing and scale of the small business formation rebound is unlikely to have been a coincidence.

Stimulus checks also have fewer bureaucratic hurdles than unemployment insurance to overcome in providing economic aid. By disbursing cash directly and based on existing Internal Revenue Service (IRS) data on file for each recipient, instead of evaluating unemployment applications, payments were able to reach citizens faster and at lower administrative costs.

The use of IRS data is imperfect, as it can exclude non-filers whose income is not high enough to necessitate filing taxes, as well as other special cases. However, there are existing remedial measures in place through the IRS to ensure access to funds.

Establishing these automatic stimulus payments can enable Congress to reduce unnecessary hardship for Americans and boost consumer spending, while also freeing up policymakers to focus their energy on addressing other factors hindering the economic recovery.

Humanity Forward works with members of Congress on both sides of the aisle to develop smart, efficient economic crisis response legislation. These policies are designed to mitigate future economic downturns and  protect American workers. By working with members and partner organizations to demonstrate the impacts of pro-work, auto-stabilized economic relief, Humanity Forward is laying the groundwork for future legislation which may better protect the American economy from future periods of economic uncertainty.