Now is the time for a robust cash transfer program

Late Wednesday night the Senate passed a huge economic aid bill, totaling $2 trillion, to help Americans cope with the coronavirus crisis. The package of interventions includes direct payments to most households and modifications to the nation’s unemployment insurance program. Households with 2018 or 2019 earnings less than $198,000 will receive a payment, with the amount varying depending on income and number of children. The largest payments will be for households earning less than $150,000: $2,400 per married couple plus $500 for every child. The unprecedented size and scope of these payments is indicative of not only the urgent needs this public health and economic crisis presents, but also the inability of the US safety net – as currently designed – to effectively help households cope with negative economic shocks.

The US has a patchwork of programs that attempt to provide a safety net for the poor and those experiencing drops in income, but these programs (such as the Supplemental Nutrition Assistance Program (SNAP) and Temporary Assistance for Needy Families (TANF)) are wedded to a dizzying array of conditionalities that vary by state and the amount of direct cash support they provide has been cut dramatically since the welfare reforms of the 1990s. Moreover, because many of these programs’ rules are crafted by states, there is considerable geographic variation in the amount of assistance one can receive. For example, in the case of unemployment insurance, North Carolina ranks lower than most states in terms of percent of unemployed receiving benefits (only 10%), fraction of paycheck received (28%), and duration of payments (12 weeks). And while the Senate bill creates a temporary fix for this problem, unemployment insurance is not typically available to independent contractors and those working in the gig economy. In the case of TANF, research also suggests a racialized component to state-level administration of cash benefits; the more Black a state’s poor population, the smaller the payments extended by states.

Another approach to helping households cope with negative economic shocks would be to provide unconditional cash transfers. A program of regular, direct payments, no strings attached, issued monthly for an extended amount of time could be more effective in reaching those in need than the current hodgepodge of programs that comprise the US safety net. By issuing immediate one-time payments to those most in need and expanding unemployment insurance, the Senate’s bill is a step in the right direction, but many households will require continued cash income support for months to come.

And while the idea of a government-run unconditional cash transfer program might seem radical in the United States, many countries across the world have been implementing such programs for years. In particular, numerous nations in Sub-Saharan Africa, from Ghana to Zambia to Kenya, have unconditional cash transfer programs that offer the rest of the world important lessons about the transformational effects of direct payments. Because these governments have partnered with academics and international organizations to conduct rigorous research on their programs’ impacts, they have amassed a body of evidence that contradicts many preconceived notions about how beneficiaries respond to receiving regular infusions of cash, no strings attached.

It is not uncommon for policymakers to express fear that unconditional cash transfers will make recipients “lazy” and create disincentives for work. However, my own research, and that of many others, shows that productive economic activity actually increases in response to cash transfers. In rural subsistence economies, for example, we find that recipients use part of the payments to expand their agricultural production and invest in their small businesses, leading to growths in income beyond the value of the cash transfer. Another common concern is that cash transfer recipients will blow the money on things they don’t truly “need,” like drugs, tobacco, and alcohol. Here again, we find that the evidence does not support these degrading stereotypes of the poor. Instead we see that cash transfers have enabled poor households across the developing world to increase their consumption of nutritious foods and make important investments in their children’s schooling and health. Policymakers sometimes also think extending unconditional cash transfers will lead to economic stagnation by not rewarding work or entrepreneurial risk-taking. However, this notion is at odds with a basic principle of economics: one person’s spending is another person’s income. As expected, the data shows that putting cash into the poor’s hands also increases the incomes of those in the community not receiving the payments, leading to multiplier effects and economic growth.     

The coronavirus crisis is shining light on many deficiencies in the US economic system. One of these deficiencies is our weak and porous safety net that lets too many fall through the cracks. Going forward, the United States should look to other countries’ experiences with unconditional cash transfer programs to see how we may improve our own system for helping citizens cope with negative economic shocks.

Kathleen Lawlor is an Assistant Professor of Economics for the University of North Carolina Asheville.