As Congress continues to disagree on how or even whether to provide additional stimulus and the Biden administration begins planning its pandemic response, 11 million Americans remain unemployed and overdue housing benefits and utility bills pile up.
We have now wasted seven months since the economic impact of the pandemic became clear without addressing the underlying issue, but Janet Yellen and her new senior management team in Finance have an opportunity to change that dynamic.
To cope with the current economic crisis, incentives need to restore the cycle of the economy. And the most effective way to do this would be for the US Treasury Department to pay direct for electricity, telephone, cable, broadband, water, and heating for American homes. This can be targeted at those who need help making sure the dollars circulate through the economy, have a built-in multiplier effect, and are easily self-funded. It meets the demands of the financial conservatives for prudence and the demands of the progressives for immediate and substantial aid.
However well-intentioned, the first round of economic activity just wasn’t structured to allow for an economic recovery. The government spent $ 3 trillion, but we didn’t make $ 3 trillion in economic gains. Rather, 60 percent of the money received through the CARES Act was either saved or used to pay off credit card and other debts. In other words, it did not restore the cycle of the economy.
As a respected economist, Yellen has a deep understanding of the economic reality that stands in the way of recovery – my consumption is your income, and your consumption is someone else’s income. Every dollar of GDP changes hands almost three times on average in the US economy. The government’s shutdown policy, however, disrupted the cycle of money through the economy.
The best way to restore that flow is to have the federal government pay for goods and services such as utilities and communications costs directly, rather than sending cash to people who may choose not to spend it. In return, utilities would agree not to turn off the service while the program is running. The utilities will then use the money to pay suppliers and initiate projects that, in turn, stimulate economic activity and – give people money to spend and circulate. The program could be structured so that it expires as soon as employment or GDP increases to a certain level.
At the very least, the program would prevent a flurry of utility shutdowns and make it easier for those struggling to pay for other essentials like housing, food, and medicine. It would also help reduce the number of overdue bills that have to be paid back before service is restored, and ensure access to the necessities for remote working and learning, social distancing and proper hygiene. With the cold weather ahead, heating bills will rise in many parts of the country, making the situation even worse, especially given that most energy aid programs only cover heating bills and target only low-income populations.
It would only cost $ 60 billion a month to pay for all utilities for every household in the US. The CARES bill cost over $ 3 trillion. And let’s not forget that the chance of wasting it, created by near zero interest rates, would be shameful. Using the Treasury Department to effectively fund this program over a long period makes direct payment the fastest and cheapest stimulus option. The government can amortize the cost with a modest 0.5 percent excise tax on utility bills for every month it takes over a 20 year period. Best of all, the plan will restore the cycle required to begin recovery.
In addition to the effectiveness of the program, the speed, flexibility and transparency it would offer are unparalleled. The program can easily be tailored to deliver economic outcomes needed for recovery and re-employment, or to provide greater benefits to the low-income or unemployed. And since utility companies already have extensive usage data and are actively monitoring for fraud, it would be very difficult to defraud the system. The same data can be used to analyze the effectiveness of the program and provide a model for the implementation of similar forms of economic incentives.
We know what will happen if we don’t act. The US economy is no longer in free fall. So let’s learn from past mistakes and think differently about how we are helping the warring Americans and how we are ensuring the country’s economic recovery.
Howard Newman holds a PhD in business administration from Harvard University and has served on the boards of over 45 companies. He is the co-founder and managing partner of the private investment firm Pine Brook and a trustee of the Salk Institute for Biological Studies.