In the eve of the COVID-19 crisis, the U.S. economy was expanding at the fastest rate ever recorded by the National Bureau of Economic Research. Unemployment was at a 50-year low, and the inflation rate was well under the Federal Reserve’s target. However, despite poverty rates improving in 2019, millions of families across the country were far from experiencing the prosperity that such economic growth would suggest. The number of uninsured Americans drastically increased from years prior, only 40% of adults reported being able to cover a thousand-dollar emergency expense from their savings, and more than half a million people remained homeless. While America itself was becoming richer, a vast number of Americans were not.
With the outbreak of the pandemic, the first months of 2020 saw one of the worst economic recessions in the history of the United States. The economy shrunk 5% in the first quarter, only to plummet by a record-breaking 31.4% in the second quarter — a number rivaling the Great Depression. As a result, the financial situation of ordinary Americans worsened significantly. Despite an increase in GDP a year since the crisis began, studies suggest that as many as 4 in 10 adults still experienced a loss of income compared to pre-pandemic times. Moreover, roughly 30.2 million adults were not able to fully pay their bills in January 2021, and 14% of households had a member who did not receive necessary healthcare because they could not afford treatment.
To bring relief to the millions of families still affected by the economic crisis, President Joe Biden signed the American Rescue Plan Act in March 2021. This bill delivered the third and biggest recovery check since the outbreak, granting qualifying individuals up to $1,400 in transfer payments from the government. This alone is expected to provide significant aid to a large portion of Americans, allowing at least 22.6 million adults to cover their expenses for at least four and a half months without the need to accumulate additional debt.
The legislation also expanded many important tax credits, including the Child Tax Credit, the Earned Income Tax Credit, and the Dependent Care Credit. This combination of transfer policies is estimated to reduce the projected poverty rate for 2021 by more than one third, and will have a particularly uplifting effect on the African-American and Hispanic communities. Most impressively, child poverty is expected to be cut by more than half throughout this year.
However, these policies are only temporary. As the country prepares for an eventual return to “normalcy,” the government needs to learn from the lessons provided by the recent crisis to design permanent mechanisms that protect families from financial strain, even during times of macroeconomic stability. The relief packages, which helped Americans with their basic expenses and prevented thousands of evictions, should be evidence enough that a guaranteed income is far overdue in the United States.
The idea of helping individuals through guaranteed cash transfers has taken many forms, but they all revolve around creating a “capitalist system where income does not start at zero.” Universal basic income, for example, is a proposed program that aims to give all adults a regular fixed amount of cash every month, no questions asked. Its proponents argue that these transfers would go a long way at reducing overall poverty, relieving victims of job loss while they find employment and legitimizing non-paid work like taking care of children and community service. It could also, in theory, provide a safety net for people to follow artistic passions or start a business without the risk of losing everything if such endeavors fail.
Research into the effects of universal basic income has only begun gaining traction in recent years, but the experimental evidence so far seems encouraging. A pilot trial of universal basic income in Finland found that a guaranteed income was linked to improved mental health and higher levels of life satisfaction. The monthly $110 payments that Brazil established in March 2020 diminished the country’s poverty to a 40-year low. Similar results have also been observed in the United States. The Stockton Economic Empowerment Demonstration, a guaranteed income pilot program in California, has been giving $500 dollars per month to 125 residents of Stockton since 2019. A year after the program launched, recipients reported higher levels of emotional health and were able to cover significant gaps in healthcare. They also experienced a higher increase in full-time employment than non-recipients, as the cushion provided by guaranteed income gave them the opportunity to prepare for and effectively transition from part-time jobs to full time jobs.
Universal basic income garnered tremendous support in the United States thanks in large part to Andrew Yang, who in his 2020 presidential campaign proposed granting all adults aged 18 to 64 a monthly “Freedom Dividend” of $1000 regardless of personal income. Those in favor of making transfer payments income-blind claim that simple lump-sum payments would make the program much cheaper by reducing administrative costs.
Yet others have argued that, in order to make a guaranteed income efficient, the transfers should be targeted only to those who are economically disenfranchised — a policy often referred to as minimum guaranteed income. Some economists, for example, have found that households earning more than $78,000 spent a very small fraction of the payments they received from the second stimulus package compared to low-income families. Moreover, evidence suggests that increasing the relief that reached underprivileged households while reducing that of higher-earners would have allowed for the same stimulus effect at a much lower cost.
While it might be some time until the United States adopts a guaranteed income program, there are reasons to remain optimistic. In March 2021, Senate Majority Leader Chuck Schumer began pushing toward making the expanded Child Tax Credit from the American Rescue Plan Act permanent. The temporary expansion, which increased the credit per child by more than $1,000 depending on the child’s age, was also made fully refundable for the 2021 fiscal year. This means that if the credit amount exceeded taxes owed, families could receive the difference through monthly payments starting in July 2021 — essentially creating a “guaranteed child allowance” for low and middle-income households.
The high nominal cost of this one-time policy has sparked concern that extending it beyond this fiscal year would be too expensive, but research has shown that these expansions in transfers are self-financing to a significant extent. By leading to lower crime, better health and better outcomes for children in the long-term, cash transfers practically “pay for themselves” by reducing future government spending in areas like incarceration and healthcare. While making this extended child tax credit permanent is still far from a true guaranteed income, it would be an important first step.
We often joke that the government’s solution to any given problem is to simply throw money at the issue and call it a day. However, when it comes to extreme poverty, homelessness, and lack of social mobility, investing directly in the American people is the best course of action. A guaranteed income program would reduce the unjust financial burdens of our most disenfranchised and give people power over their own futures. And while the on-paper cost of large transfer payments seems large, the aggregate benefits of reducing poverty at its root will pay for itself in the long run. Whether such a system should end up being universal or targeted is still up for debate, but it is clear that guaranteed income is the most effective way the government can uphold its promise to give every single person — regardless of their economic background, race, or residence — an equal shot at pursuing happiness.
Image by Annie Spratt is licensed under the Unsplash License.
