COVID-19 – Three reasons why $1000 a month is not a good idea

Another proposal to provide relief would give $1000 to every American adult. This has been proposed by Senator Mitt Romney and former Obama-administration economist Jason Furman. The total cost would amount to $252 Billion. While that aid would surely be useful to many Americans, and the simplicity of it would facilitate timely administration, there are three problems with this proposal: It is unfair, inefficient, and inadequate:

First, the aid is not proportional to the harm. As of writing, several states have ordered the closure of bars and restaurants, completely eliminating revenue. Other cities have done the same. Meanwhile, some companies, like Amazon, are ramping up hiring to meet growing demand.

Second, a large portion of the aid would be wasted on people who do not need it. The Consumer Expenditure Survey shows that the average yearly savings from households earning at least $70,000 (who are the 70th percentile of the income distribution) is $7,000 and rises to $64,000 for those in the top decile. This suggest that many of these households could weather 3 to 4 months of reduced income. If one accepts that the bottom 70th percentile of the households need aid much more than those in the top three deciles, then $117 billion of the aid money would be largely unneeded. This point has been made by Treasury Secretary Mnuchin.
Third, $1000 is not nearly enough to replace the income of most workers whose business has been shut down as a result of SARS-Cov2. Median individual income for workers receiving income from employers is just over $32,000. $1,000 would not even cover one month of lost income, let alone 3 to 4 months.

A larger cash plan has been put forth from Charles Schumer and several other Senators. One of these proposals would provide cash payments of $2000 in cash to every person and adult with individual income below $90,000. This would cost at least $500 billion in total, but despite the income cutoff, it would face the same problems. Many people would get checks despite being completely unaffected by the virus, and the payment would be inadequate for those whose business is shut down. Also, even some higher income individuals in affected industries would be forced to stop paying their commercial and residential mortgage, leading to a potential collapse in the real estate markets and balance sheets of financial lenders.

Other plans have suggested massive loans to businesses with generous interest rates and pay-back periods. That would be better than nothing, but it is unfair to ask businesses (and their employees, indirectly) to finance this epidemic by absorbing massive debt. Many self-employed workers and small and even mid-sized businesses would be forced to close when they realized that paying back their debt would lead to bankruptcy. When the government forces a business to close for public health reasons, the government should absorb the debt, not the business.

Chosen excerpts by Job Market Monitor. Read the whole story @ Keep your distance and your income: A policy proposal for COVID-19