Even when the economy was humming, before COVID-19 hit, having a steady job didn’t guarantee escape from money troubles. At the end of 2019, 16 percent of Americans surveyed by the Federal Reserve reported that they wouldn’t be able to cover their bills that month. Another 12 percent were living so close to the financial edge that they couldn’t pay their bills if hit by a $400 emergency expense.
The hardships documented by the Federal Reserve were greatest for Black and Hispanic Americans. Over one-third of Black Americans with a high school degree or less reported not paying their bills fully — nearly double the national average. Low-wage jobs are disproportionately done by women of color, who are consequently far more likely to lack sick leave and healthcare benefits. Such broad and persistent insecurity demands long-term structural solutions.
But there are also immediate steps that we can take to address these inequalities. In June, a coalition of fifteen mayors — from cities including Seattle, Atlanta, Los Angeles, and Newark — came together and identified one key policy priority to address their constituents’ most urgent needs: a guaranteed minimum income.
But what form should this guaranteed income take? It’s not as obvious as it might seem. Andrew YangAndrew YangPelosi spars with CNN’s Blitzer over COVID-19 aid: ‘You really don’t know what you’re talking about’ The shape of guaranteed income Biden’s latest small business outreach is just … awful MORE promised Americans $1000 a month if elected. But why $1000? And why every month?
America’s economic insecurity is experienced differently by families and by single mothers. It’s experienced differently by hourly employees and salaried workers. The right kind of “guaranteed minimum income” could take many forms. For some, the most useful transfer would be a large, once-a-year payment. For others, it might be a series of payments by week or month.
This is a unique opportunity to imagine interventions that can best improve the situations faced by so many Americans facing financial insecurity. Understanding how different policies will address different needs is something we, along with a team of researchers from the Jain Family Institute, New York University and Princeton University (including Sewin Chan, Sara Constantino, Johannes Haushofer and ourselves) have been exploring. The details matter.
Several years ago, researchers followed the financial lives of low-income families in California, New York, Mississippi, Ohio, and Kentucky. People were working hard but living paycheck to paycheck. For family after family, having the right amount of money at the right time was often more valuable than having larger sums of money at less pressing moments. Economic policies don’t always reflect the crucial importance of timing.
Once you get beyond the basic problem of not having enough money, financial challenges tend to be of two types. The first is how to take a relatively large sum of money and be able to stretch it out so that it lasts — what economists call “consumption smoothing.” The second is the reverse: how to take a series of smaller sums, like weekly paychecks, and save parts of each to create bigger amounts that can be used for bigger needs. Instead of smooth, it’s about being able to spend in significant spikes.
Most conversations around guaranteed income assume that consumption smoothing is the biggest challenge for families. As a result, pilot programs give households a steady flow of monthly payments to help pace their spending.
The mayors’ coalition builds on the guaranteed income pilot program that Mayor Michael D. Tubbs initiated in Stockton, California, in 2018. Participants were randomly chosen from communities with income below the local median. They get $500 a month for 24 months with no work requirements and no strings attached. Andrew Yang’s similar $1000 a month proposal helped him exceed expectations in the Democratic presidential primaries.
But, for some households, larger sums received less often could be much more helpful. By experimenting with different versions of guaranteed income, we can learn whether $500 or $1000 a month or another amount is sufficient to improve the material conditions of those in need appreciably. Does it matter who in a household receives the money? Does it matter how often payments are made? Does once-a-week win over once-a-year?
The evidence so far suggests varying possibilities. The Earned Income Tax Credit, one of the country’s most popular anti-poverty policies, is designed to give low-income workers a once-a-year cash payment. A family with two children can receive up to $5,920 in 2020. For recipients, receiving a single large payment provides the means to take big steps like moving apartments, buying or fixing a car, clearing debt, and paying tuition bills.
When given a choice to instead receive the single EITC payment as a series of smaller payments over the year, recipients almost always stick with the lump sum. A study from Chicago in 2014-15, however, shows that recipients who chose to receive EITC payments quarterly rather than annually experienced less financial stress, needed to borrow less, were more food-secure, and had fewer unpaid bills.
As the mayors suggest, this is the time to try new policies — and not just new policies but different versions of those policies that meet the different needs of people across the country. As we open ourselves to new possibilities, we need to resist the temptation to jump at the first versions we encounter.
The current confluence of events — uprisings against racialized police violence, a global pandemic, an unfolding economic crisis — have created a desire for change. With everything else that’s going on, families shouldn’t also lose sleep worrying over how to meet basic needs. Cash transfers won’t solve society’s problems, but, with the right design, a guaranteed minimum income can be part of solutions.
Sidhya Balakrishnan is the director of research at the Jain Family Institute (JFI). She leads the research design and analysis for JFI’s basic income pilots and researches the implications and alternatives to student debt.
Jonathan Morduch is a professor of Public Policy and Economics at the Wagner Graduate School of Public Service at New York University. Morduch’s research focuses on finance, poverty, and inequality. He is a founder and Executive Director of the NYU Financial Access Initiative.
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