Andrew Yang, the former Democratic candidate for President, based his campaign on the concept of the Universal Basic Income. It was his contention that the majority of families earn so little that saving is impossible, and that their low level of savings would leave them vulnerable to a serious recession. He also believed that low income families actually “earned” more income than they were receiving and that the best way to correct this problem was to guarantee each adult family member $1,000 per month.
Unfortunately his proposal never gained traction. And it should now be obvious to all that Andrew Yang was right. We’re entering into a recession that could be bigger than the 2008 recession. Since 1989, the top 1 percent have increased their net worth by $21 trillion, while the bottom 50 percent of income earners have seen their net worth decline by $900 billion. In the US, per capita Gross National Income is $63,000 (the equivalent of $189,000 per family) but the reality is that the bottom 20 have an average income of $18,000 and cannot survive more than a month without a pay check.
Congress is beginning to understand the seriousness of the position families are in. The first bill passed by Congress was too modest and somewhat of a scattershot approach. Recognizing these limitations, Democrats in Congress are now considering direct income replacement payments to households for four to six months, and a provision for ending student loan interest payments and a partial forgiveness of student loan debt. Republicans in the Senate are looking at subsidies to business firms who agree to retain workers or payments ranging from $1,200 to $2,400, for those unemployed, based on marital status and previous income and tax liability.
Recessions start for different reasons. This recession will be caused by an orderly (for public health reasons) closedown of much of the nation’s service sector. Workers can’t buy when they have no income and firms can’t rehire workers when they have no revenue. The hardest thing to do in macroeconomics is to restart an economy that has largely ground to a halt.
Unfortunately, time is not on our side. Business firms will not immediately face the threat of bankruptcy, but eventually the fact that firms have to pay fixed costs will force some firms out of business thus delaying the recovery because some workers will have no job to return to.
So even with a monthly assistance program for workers, the government is going to have to come up with a plan to assist business firms’ stay afloat until consumer demand returns. We’ve bailed out firms in the past. This is not complicated and ideologically wrenching as direct payments to households. But if we’re going to bailout business firms then we’re going to have to rethink corporate governance. Over the past 10 years the airline industry has devoted more than 90 percent of their profits to stock buy backs. Between June of 2017 and June of 2018, the S&P 500 devoted $1 trillion to stock buy backs. We can’t continue to allow business firms to privatize profits while socializing their losses.
The government in conjunction with the Fed regularly increases the money supply to help finance economic growth. The method is simple, working through the public, the Fed will regularly purchase a portion of federal debt increasing the amount money households and businesses have. Our current crisis will require a method of financing direct cash payments that doesn’t burden the economy with more interest bearing debt. For now, the government should sell non interest-bearing Treasury securities to the Fed directly (technically illegal, but laws can be changed) with the proceeds going directly to families. The bond sale would not increase the level of publically held debt, nor the interest payments on it. As the economy recovers, and we begin to see signs of inflation, the government should then switch to debt financing with interest-bearing bonds sold to the private sector. As employment levels rise, the need for direct assistance to families will decline.
In our system the private sector must earn the money it acquires, the same is not true for the federal government. Nothing backs our money but custom, confidence, and scarcity. As long as the government’s creation and distribution does not cause inflation, or disturb the nation’s confidence in the payment’s system, we have the means to forestall a 1920s style depression. The Great Depression generated the Social Security Act, the Federal Housing Administration, and the Tennessee Valley Authority, all designed to fix a broken economy and stabilize it in the future. This recession should cause us to rethink why our economy is so fragile. It’s definitely time to give Andrew Yang’s proposal serious consideration.