Preparing for the Next Recession: How Policymakers Can Safeguard Families and the U.S. Economy

01. 09. 2024

Automatic stabilizers could bridge the divide between macro economic indicators and people's day-to-day experiences.

Americans are angry about the economy, and policy elites are struggling to understand why. Many economic indicators show signs of strong economic fundamentals: unemployment remains at record-low levels, households have more savings than before the pandemic, and real wage growth, particularly for poor and middle-class families, has been significant over the past several years. Over the past six months, core inflation has cooled, and the price of gas is down from its 2022 highs. Even rents are starting to decline in many major urban areas. Yet it’s clear that people aren’t connecting with this positive picture.

There are two key reasons for Americans’ enduring dissatisfaction. The first is the persistently high cost of essential, high-cost items, particularly housing, childcare, and healthcare. 

But second, and just as important and often overlooked, many Americans are angry that the economic stability they enjoyed thanks to significant public investment throughout 2021 and early 2022 has evaporated. Americans benefited from a suite of initiatives to tackle the Covid emergency: recurring stimulus checks, a year of ongoing extended child tax credit payments, a pause in evictions, a two-year hiatus of student loan payments, and enhanced unemployment insurance.

These programs meant that millions of people were able to thrive despite the public health challenges, and the macroeconomy had the fastest recovery from a recession in history, creating millions of jobs in a record short time period. Instead of the mass unemployment, hunger, and poverty that many expected as a result of the pandemic, America enjoyed a robust period of economic growth. Direct cash transfers in particular lifted more than a half million children out of poverty in California and nationally we saw child poverty drop to its lowest level on record. On top of this, the cash transfers spurred consumer spending, kept families in their homes, and enabled many people to actually pay down debt. Behavioral psychologists have known for a long time that humans feel the pain of loss more than the joy of gain. American discontent reflects that today.

The answer is not necessarily to restart all of those same benefits. Such a move could mean government investment is not directed to the people and communities who need it the most. Instead, legislators should learn from the Covid pandemic economic response to inform and build on enduring policies for the next recession.

We’ve released a study taking a closer look at the impact of the pandemic programs and offering a blueprint for a recurring cash program for the next recession, building on what worked so well.

At the heart of that approach should be recurring cash payments in periods of accelerating unemployment, what policymakers call a cash-based “automatic stabilizer.” That unwieldy but important term describes any public policy that kicks in when the going gets rough for families without Congress needing to pass any law or take any new action. All kinds of automatic stabilizers already exist. Policymakers have used these tools for decades with success: unemployment insurance, food stamps, healthcare benefits, even Social Security checks and parts of the tax code work as automatic stabilizers. We can learn from those successes and  use this more stable moment to design and approve a recessionary cash program, avoiding unnecessary political jockeying when the next crisis hits.

The automatic stabilizer we most need for the next recession should be built on what worked during COVID – recurring cash payments that move quickly from the government to families. The Treasury, through its implementing partners, should begin to disburse the funds when non-partisan, objective economic indicators like a rapidly escalating unemployment rate show things are going wrong. The cash transfers need to be sizable enough to ensure they make a meaningful impact. We suggest an average annual payment of roughly $3,500 paid to adults living in families making less than $78,000 a year, with additional funds for those with children. The total cost for payments of this magnitude would approximate the same level as the Covid payments, roughly 2 percent of GDP. 

Our plan targets the cash payments more narrowly than the Covid policies, prioritizing the people who need it the most, with the potential to boost the average income by several percent. Given the racial income inequality in the United States, our plan particularly serves the needs of communities of color, with the median Black family receiving a potential eight percent income boost. In a recession or economic downturn, pre-existing gaps in equity only widen, particularly for Black Americans. Black families are more likely to work in jobs that are on the frontlines of layoffs, and are less likely to have access to unemployment benefits or other government support programs. Our automatic stabilizer is designed with these disproportionate risks in mind.

We don’t know when the next economic downturn will be – but we do know that recessions and crises are inevitable. Automatic stabilizers could bridge the divide between macro economic indicators and the day-to-day experiences of how people feel about the economy and yield a practical and political return. By acting now, Congress can establish a powerful, antiracist framework that builds a durable and resilient economy, whatever the future might hold.  

Chris Hughes, a Senior Fellow at the Institute on Race, Power, and Political Economy at The New School and co-founder of Economic Security Project, and Naomi Zewde, Assistant Professor in Health Policy and Management at the UCLA Fielding School of Public Health, are authors of the new report “Direct Cash Payments in the Next Recession” released by the Institute on Race, Power and Political Economy (the Institute) at The New School.