Americans are eagerly awaiting the next coronavirus relief package to replace unemployment benefits that expired in July. Democrats have made extending the $600-per-week federal unemployment benefits a top priority, while the Trump administration has favored payroll tax cuts. Both parties are also considering direct payments similar to the $1,200-per-adult Recovery Rebates from the CARES Act.
Debate around these policies has centered on work incentives and income stability, especially with respect to Federal Pandemic Unemployment Compensation (FPUC), the program that adds $600 per week to unemployment benefits. Republicans have worried that FPUC discourages work and hampers the economy, while Democrats have sought to protect workers from income shocks.
Beyond these considerations, FPUC and other government actions have helped to prevent poverty from rising. But is extending the controversial program the most effective way to reduce poverty moving forward?
We simulated FPUC, payroll tax cuts and universal payments using data from 2009 to 2018 to find out. To ensure a fair comparison, we set the payroll tax cuts and universal payments to match FPUC’s total cost in each year. For example, our model estimates that extending FPUC benefits from August through December 2009 would have cost $86 billion; this would have equated to one time payments of $280 per person or $370 per adult, or cutting employee-side payroll taxes by a third through the rest of the year.
Our first simulation estimated the impact of each program, had it been implemented in the first stimulus package covering April through July. Across years, we found that FPUC would have reduced poverty and inequality slightly more than universal payments of the same cost. Payroll tax cuts lagged behind both programs, only marginally decreasing poverty and even increasing inequality.
Our second simulation looks forward, modeling the impact of each policy from August through December, assuming that FPUC had run from April to July. Here, universal payments pull away from the pack. In 2009, the highest unemployment year in our sample, a budget-neutral universal payment would have reduced poverty 24 percent more than extending FPUC.
The advantage of universal payments grows for groups with historically high poverty rates: they cut child poverty 36 percent more than the FPUC extension, cut Black poverty 70 percent more and have twice the effect among people with disabilities. Payments also reduce poverty more when they give an equal amount for each adult and child, rather than only giving per adult.
Retrospective simulations like ours inevitably fail to capture dynamics of our unique situation. But the composition of unemployed people has remained similar across income groups before and after the pandemic, and we found that the advantage of universal payments increased in times of economic turmoil, especially in 2009.
These findings highlight the importance of broad-based assistance, particularly in recessions. Targeted relief rarely reaches everyone in need, and in this case, payroll tax cuts miss nonworkers, while unemployment benefits miss low-income workers and people who aren’t in the labor force.
Universal payments avoid imposing a burden of proof that locks many people out. A report from May showed that only 3 in 5 Americans who applied to unemployment benefits had received them. In contrast, the IRS delivered the $1,200 Recovery Rebates with remarkable speed and accuracy, distributing nearly 90 million payments within three weeks. Lingering delays and errors could be further reduced by making the next round truly universal, as we simulated.
The gravity of today’s crisis demands vigorous congressional action to help the neediest in a simple, proven way. By building on the success and infrastructure of the Recovery Rebates, direct payments to all Americans would relieve economic stresses efficiently, equitably, and, as our analysis shows, effectively. Recovery Rebates round two deserves to be the centerpiece of the new relief bill.
Max Ghenis is president of the UBI Center, a think tank researching universal basic income policies. Ghenis previously served as data scientist at Google. He has a master's degree in Data, Economics, and Development Policy from MIT. Follow him on Twitter @MaxGhenis.