Snapshot of the COVID Crisis Impact on Working Families

By and ·March 30, 2020
Barnard College, Columbia University and Sanford School of Public Policy, Duke University

Snapshot of the COVID Crisis Impact on Working Families

The Issue:

The speed with which economic conditions turned as a result of the coronavirus pandemic — changing drastically from one week to the next — makes it difficult to capture the impact of the shock in a timely manner. We use real-time data on hourly service workers and find that the coronavirus crisis has already led to drastic reductions in work hours, income and family well-being.


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Unemployment Insurance Fixes to Address the Coronavirus Fallout

By and ·March 22, 2020
Dartmouth College and Wellesley College

The Issue:

The Unemployment Insurance (UI) system is potentially a vitally important way to provide a financial lifeline in the current COVID-19 pandemic – but this potential can only be realized with considerable additional funding and modifications of the current system.

The Facts:

  • Existing state trust funds are insufficient to cover the massive surge in anticipated benefits. Trust fund reserve balances as percentages of total wages paid in a state are currently at roughly the same levels as 2008 at a time when the total number of weeks of unemployment insurance surged; 35 state funds became insolvent during that recession. 
  • The traditional UI policy response in the presence of an economic downturn is to extend the length of time over which benefits can be received. Yet this is not the ideal policy solution if one’s goal is to get additional money, beyond the typical weekly payout from UI, into people’s hands quickly. 
  • Increasing the fraction of earnings that are replaced by UI and increasing the maximum benefit amount available would immediately double the level of benefits that a UI recipient would collect. We estimate that raising the replacement rate to 100 percent from 50 percent and doubling the maximum benefit level would cost less than the $250 billion figure being circulated in the Senate Coronavirus stimulus package under negotiation. 
  • Workers who lost their jobs need to be actively searching for new employment to qualify for UI. This requirement clearly doesn’t make sense in an era of social distancing. Removing the one week waiting period before benefits can be paid is also relevant.

What this Means:

The combination of direct cash payments to households and expanded unemployment insurance benefits make a strong one-two punch designed to get cash into the hands of households quickly. It will enable families to weather the storm and prepare the economy so that it can rebound as quickly as possible once we can commingle safely, and social distancing restrictions are removed. The ability to execute these proposals quickly through the tax system for the checks and through the existing UI system for the unemployment benefits is a significant advantage. Our current world is one of tremendous uncertainty, but these forms of economic stimulus and safety net support have the potential to provide meaningful and productive assistance.

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Challenges of Equitable Rapid Response Cash Payments

By ·March 20, 2020
Duke University Sanford School of Public Policy

The Issue:

There is a rapidly growing consensus about sending people cash directly to help them cope with the economic fallout of the coronavirus pandemic. For the United States to effectively use cash disbursements in this crisis, it will require finding the appropriate infrastructure to ensure that the payments are rapid, widespread and equitable — and are able to get to those who are in most desperate need, who are often the hardest to reach.

The Facts:

  • Senate Majority Leader Mitch McConnell (R., Ky.) introduced legislation March 19, calling for taxpayers to receive up to $1,200, with married couples eligible to receive as much as $2,400 with an additional $500 for every child. 
  • A letter from six Senators proposes that, beginning almost immediately, checks are sent through the mail to taxpayers, seniors on Social Security would receive payment from the Social Security Administration, veterans would receive payment from the Veterans Administration. Supplemental Security Income recipients and recipients receiving other types of public benefits such as food stamps would similarly receive these transfers through their existing electronic benefit transfer (EBT) cards. 
  • Some basic estimates demonstrate the challenges of the implementation of cash transfers for low-income individuals and families who might bear especially high risks. 
  • Reaching low-income people through the tax system can be difficult. Many families do not file taxes even when it is in their best interest — when doing so would award them a cash refund. Only 1 in 5 who are eligible for the earned income tax credit — the largest tax refund available — actually file and receive the benefit (on average about $2,476 during 2019). 
  • Disbursement through the U.S. postal system would be an alternative. However, low income individuals and families are also highly mobile, with recent data suggesting that up to 20 percent move to a different residential address in one year, and many have no reliable addresses.
  • An alternative to mailing checks is to have direct deposits to bank accounts but this too could miss the approximately 6.5 percent of the population who is unbanked — where no one in the household had a checking or savings account. Low-income, less educated, minority-headed, and unemployed households have unbanked rates well above the national average. 
  • Efforts to find people through existing EBT cards are admirable but many income eligible families are not connected to or receiving these types of public benefits. For instance, only 85 percent of individuals who qualified for Supplemental Nutrition Assistance Program (SNAP, formerly known as food stamps) received benefits in 2016.

What this Means:

The economic shock of COVID-19 is not going to be even handed: low skilled, low income, and income-poor families with children are all going to be hit harder than everyone else. Cash transfers could help these people during this very challenging time, especially those who have little or no savings and who are already in precarious economic circumstances. But it is important that these transfers reach everyone, including the most vulnerable. Accordingly, this program needs to carefully consider disbursement issues and view cash infusions as one of many strategies to boost the overall economy; otherwise such short term income boosts alone could potentially worsen inequality in the context of COVID-19.

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Policy Responses to the Economic Consequences of Coronavirus

By and ·March 17, 2020
Harvard Kennedy School, and The Fletcher School, Tufts University

The Issue:

Interruptions to regular business activity through people sheltering at home, limiting both the supply of workers and the demand for goods and services, coupled with panic in financial markets, almost certainly portend a recession. What policies can best soften the economic challenges presented by the coronavirus?

The Facts:

  • The precipitous nature of a crisis like coronavirus demands an immediate response. In the face of a potentially precipitous decline in economic activity it is necessary to act quickly, not least to stem a vicious cycle whereby a downturn generates panic, which exacerbates the downturn.
  • One response proposed by the Trump Administration is a suspension of the payment of payroll taxes. This has shortcomings with respect to the immediacy of the effect and its distributional nature. The amount of stimulus from a payroll tax will vary widely across different income groups. Also, those who are unemployed would get no benefit, nor would many gig workers, nor retirees who do not receive a paycheck. While extending unemployment insurance benefits and relaxing work requirements for social safety net programs would help to reach people who are not employed or lose their jobs, these measures also represent a slow-release stimulus.
  • Direct cash payments would be better at softening the economic impacts for the most vulnerable Americans. This policy would be costly, amid persistent concerns about a burgeoning national debt, but borrowing costs for the government have plummeted — with interest rates dropping as a result of concerns about the coronavirus. And a failure to act aggressively at this time could have consequences that represent a much larger economic (and human) cost. 
  • Support businesses with paid sick leave. Payments to businesses for paid sick leave would go far in both easing the economic burden and mitigating the spread of disease.
  • Increase the federal matching rate for Medicaid. This reduces the financial burden for states, which generally have to balance their budgets, so that they can avoid making fiscally constrained decisions. The increased funding could help promote people to obtain medical care that they might have otherwise avoided because of financial considerations.
  • Bail out hard hit industries, such as the airline industry, cruise industry, tourism industry, and the energy industry (which has been hit by a collapse in demand but also by a glut of oil being released on the market by Saudi Arabia and Russia). But government funding to industries sometimes gets funneled in unintended ways, for example banks paying out dividends to shareholders with bailout money after the global financial crisis. Therefore, it is reasonable to include conditions on these bailouts, like limiting (or forbidding) dividend payments and maintaining reasonable levels of employment.
  • Automatic Stabilizers, like unemployment insurance and Supplemental Nutrition Assistance Program (SNAP, formerly known as food stamps) help mitigate downturns; but the administration has been cutting these programs. 
  • The Federal Reserve has taken multiple measures to loosen monetary policy, shore up financial markets, and to support banks.

What this Means:

As politicians and government officials around the world struggle to manage the crisis, immediate economic relief will be vital in slowing the spread of disease and cushioning the economic blow. Addressing this crisis demands immediate fiscal stimulus in addition to renewed focus on international cooperation on health. It has also exposed vulnerabilities in U.S. labor markets associated with worsening inequality, which may well dictate the efficacy of a response. Economic proposals need to take into account health risks posed by the virus while also addressing the size and distribution of the economic and financial burdens it will impose.

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Lessons From the 1918 Flu Pandemic

By and ·March 17, 2020
Wellesley College

The Issue:

Much remains unknown and uncertain about the nature of the COVID-19 (coronavirus) pandemic, its trajectory, and the effectiveness of different strategies to slow its progression. But relevant lessons can be drawn from the 1918 influenza pandemic, which was the most severe pandemic in recent history. The death toll of the Spanish flu was not uniform. Factors such as poverty, pollution, and public action played significant roles in determining how deadly the outbreak was for specific places and populations.

The Facts:

  • One-third of the world’s population is believed to have been infected with the 1918 flu; an estimated 50 million people died, including 675,000 Americans
  • The impact of the Spanish flu was greater on those with lower socioeconomic status in the United States. The increase in mortality due to influenza and pneumonia, the two causes of death associated with the flu, was much larger for blacks than whites during the Spanish flu (see chart). 
  • Both earlier enactment and longer duration of social distance measures, like closing schools and prohibiting large public gatherings, were associated with lower overall mortality in 43 of the largest U.S. cities between September 1918 and February 1919.
  • Numerous cities had two peaks in their mortality rates during the fall of 1918, with the first often occurring while social distancing measures were in place and the second occurring after the social distancing measures were relaxed. 
  • Poor air quality exacerbated mortality from the 1918 flu: cities that used coal in their electricity generation experienced greater mortality from the flu pandemic than cities that relied more on sources that generated less pollution, such as hydroelectricity. 
  • The 1918 flu had long-term, intergenerational consequences through its effect on the in utero environment of those who were born in 1919. In utero exposure to the 1918 flu was detrimental to educational attainment and socioeconomic status in adulthood. The fact that there is evidence to suggest a long-term impact of the 1918 flu does not, of course, imply that there will be comparable effects of COVID-19. It is plausible, though, that the consequences of this pandemic will reach, in some form, well beyond the year 2020.

What this Means:

What can a public health crisis a century ago teach us about our current circumstances? Socioeconomic status matters. Those who have the fewest resources to cope with a public health crisis may be the ones who are most affected. We need to address their needs. The environment matters. Pollution was a contributing factor to mortality 100 years ago. We overlook current environmental issues at our peril. Protecting our children matters. Disadvantages during formative periods of their lives have the potential to have long-lasting implications. Finally, public policy matters. Attacking a public health problem aggressively is important in limiting its damage. We need to take the current coronavirus threat seriously and react forcefully to forestall potentially meaningful loss of life.

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What is the Fed Doing to Stabilize Financial Markets?

By ·March 15, 2020
Williams College

The Issue:

The coronavirus pandemic has contributed to asset market volatility and threats to the smooth functioning of financial markets. The Federal Reserve has taken emergency measures to loosen monetary policy and to stabilize the market for U.S. Treasury securities. What prompted the Fed to take these steps? How will they help alleviate the effects on financial markets of the pandemic?  Does this represent a bailout of banks, as some have alleged?

The Facts:

  • The pandemic has abruptly raised the odds of a slowdown for the U.S. economy, prompting the Fed to make two emergency rate cuts bringing down its target interest rate near zero. 
  • The second surprise cut comes on the heels of a dramatic effort to stabilize the market for U.S. Treasury securities, which came close to the breaking point during the week of March 9-13. There is usually a very small difference between prices for U.S. Treasury securities offered by buyers and those that sellers are willing to accept (the “bid-ask spread”), which is normally around 4 or 5 basis points. However, traders reported spreads as high as 50 basis points. The unusually wide spread is symptomatic of a situation in which buyers are unable to find ready sellers, and vice versa. Several factors likely contributed to the disruption. The sheer volatility in the bonds’ prices is one. As shown in the graph, the standard deviation (a common measure of volatility) of the yield on 30-year Treasury bonds hit 18 basis points by the end of the week, compared with 4 basis points during normal periods; and since the price of a bond is inversely related to the yield, this implies a comparable jump in price volatility. 
  • The Federal Reserve Bank of New York announced plans to lend $1.5 trillion to banks and financial institutions. The operation allows banks to borrow from the Fed for periods as long as three months, using Treasury securities as collateral. This enables banks and other financial institutions to access needed funds without having to sell the Treasury securities outright, which could cause disruptions if a widespread sale flooded the market for these bonds. The Fed also announced that it would purchase $37 billion in U.S. Treasury securities, which will allow owners of these bonds to sell them directly to the Fed rather than attempting to undertake transactions in the secondary market where, as indicated by ballooning bid-ask spreads, buyers are scarce.
  • The actions are not in any sense a bailout of banks or financial institutions. The Fed is not simply “handing out” $1.5 trillion to Wall Street. The funds are short-term collateralized loans, made at competitive market-based rates, so there is no subsidy involved for those borrowing from the Fed. Nor do the loans represent a capital injection, since the cash received through this borrowing does not represent an increase in banks’ capital.

What this Means:

The covid-19 pandemic has created an unprecedented array of problems for the world economy. Those related to public health will surely require difficult and costly solutions. Aggressive fiscal policy and transfers will most likely be needed to address the macroeconomic fallout. With interest rates already so low and the effectiveness of Quantitative Easing uncertain, the Fed’s role in providing macroeconomic stimulus through monetary policy may be limited. But ensuring the smooth functioning of the market for U.S. Treasury securities is an important element of the collective policy response — and one the Federal Reserve is able to do with the tools it has on hand.

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