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A Proposal for Social Insurance During the Pandemic

Summary:
There has been a lot of discussion about how to best help people through the difficult economic times being caused by the pandemic. Some economists have suggested keeping things simple and quick by sending lump-sum checks to all Americans. Other economists are concerned that such an approach is expensive if the checks are generous and not sufficiently targeted on those who are hardest hit. But targeting takes time, is difficult because it requires identifying who most needs the money, and, if imperfectly done, may miss some people who are truly needy. So here is an idea: Don’t target ex ante. Target ex post. Let’s send every person a check for X dollars every month for the next N months. In addition, levy a surtax in 2020 (due in April 2021) equal to N*X*(Y2020/Y2019), where Y2020

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There has been a lot of discussion about how to best help people through the difficult economic times being caused by the pandemic. Some economists have suggested keeping things simple and quick by sending lump-sum checks to all Americans. Other economists are concerned that such an approach is expensive if the checks are generous and not sufficiently targeted on those who are hardest hit. But targeting takes time, is difficult because it requires identifying who most needs the money, and, if imperfectly done, may miss some people who are truly needy.

So here is an idea: Don’t target ex ante. Target ex post.

Let’s send every person a check for X dollars every month for the next N months. In addition, levy a surtax in 2020 (due in April 2021) equal to N*X*(Y2020/Y2019), where Y2020 is a person’s earnings in 2020 and Y2019 is a person’s earnings in 2019. The surtax would be capped at N*X.

Under this plan, a person whose earnings fall to zero this year keeps all of the social insurance payments and does not pay the surtax. A person whose earnings fall by half keeps half of the payments and returns half. A person whose earnings remain the same (or increase) returns everything: They will have just gotten a short-term loan.

Of course, there is an implicit marginal tax rate in this scheme. If Y2020 is less than Y2019, each dollar of earnings in 2020 faces an additional marginal tax rate of N*X/Y2019. A hardcore supply sider might object. But at this moment in history, social insurance is more pressing than avoiding the distortionary effects of taxes. One might even argue that, considering the externalities associated with leaving home to go to work in this time of contagious pandemic, a higher marginal tax rate might be efficient.

For concreteness, let me put some numbers to this idea. (I am not recommending these particular numbers but using them to illustrate feasibility.) Suppose we send $2000 a month to every adult for the next six months. The adult population is about 300 million. We would send out $12,000 per person for a total of $3.6 trillion.

This staggering number, however, is not as scary as it seems. Because these payments would be short-term loans for most people, the net budgetary cost would be much smaller. The only people who would not repay the loans in full via the surtax would be those with reduced earnings in 2020. Let's say 25 percent of the labor force is unemployed for half the year (a very bad scenario). Then 40 million people would experience earnings declines of 50 percent. Their surtax would repay half the social insurance payments, resulting in their receiving net payments of $6,000 per person. The net budgetary cost would be only $240 billion. about 1.2 percent of GDP. This is surely feasible.

The above description of the  proposal has been expanded and slightly revised  from the original post.

Greg Mankiw
I am the Robert M. Beren Professor of Economics at Harvard University, where I teach introductory economics (ec 10). I use this blog to keep in touch with my current and former students. Teachers and students at other schools, as well as others interested in economic issues, are welcome to use this resource.

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