67

Direct Stimulus Payments to
Individuals
Claudia Sahm, Board of Governors of the Federal Reserve System

Abstract
This chapter proposes a direct payment to individuals that would
automatically be paid out early in a recession and then continue annuallywhen the recession is severe. Research shows that stimulus payments thatwere broadly disbursed on an ad hoc (or discretionary) basis in the 2001 and
2008–9 recessions raised consumer spending and helped counteract weak
demand. Making the payments automatic by tying their disbursement torecent changes in the unemployment rate would ensure that the stimulus
reaches the economy as quickly as possible. A rapid, vigorous response to
the next recession in the form of direct payments to individuals would help
limit employment losses and the economic damage from the recession.

Introduction
Direct payments to individuals are an effective way to stimulate spending
and making these payments automatic would guarantee that stimulus
arrives early in a recession. These two arguments are supported by a growing
body of high-quality research on the effects of stimulus to individuals
in the past two recessions, in 2001 and 2008–9. This chapter proposes
establishing direct payments to individuals as an automatic stabilizer. The
lump-sum annual payments would be made to individuals, regardless of
their income level, when the national unemployment rate rises by at least
0.50 percentage points. The amount of the individual payments would be
set such that total payments equaled 0.7 percent of GDP, or 1 percent of
personal consumption expenditures (PCE). Payments in subsequent years
would be made only in the case of severe, prolonged recessions that leadto cumulative unemployment rate increases of at least 2.0 percentage
points. Automatic stimulus payments to individuals would provide a rapid,
frontline defense early in a recession and a commitment to sustained
support in a severe recession.

Claudia Sahm

Growth in consumer expenditures slows sharply during recessions—andin many cases turns negative (figure 1). Consumer expenditures make up
about 70 percent of aggregate demand; a pullback in spending by consumers
can lead to employment losses and reduced production. Consumers are
therefore a key focus of efforts to stabilize the economy, and policymakers
have often used stimulus payments to individuals (also referred to as tax
rebates) and temporary reductions in taxes to support household spending
during recessions.
In fact, during the Great Recession and the recovery, individuals received
more than $420 billion in broad-based stimulus from the federal government
through three large, consecutive policies: a stimulus payment in 2008, a tax
credit in 2009 and 2010 (the Making Work Pay tax credit), and a payroll
tax reduction in 2011 and 2012. These programs were broad based in thesense that they applied to many households with few qualifications, suchas having a minimum amount of income. In each case, the administration
and Congress crafted the specifics of the stimulus program in real time,along with other fiscal policies, including targeted discretionary changes intaxes and transfers to support individuals, businesses, and state and local
governments. The range of stimulus programs in the Great Recession has
supported a rich body of research on the efficacy of various tools.
Automatic stabilizers are already an important feature of fiscal stabilization
policy, two of the most notable examples being progressive income taxation
FIGURE 1.
Official logo

Real Personal Consumption Expenditures, 1970–2018
10

Four-quarter percent change

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8

Dark

6
4
2

Reverse

0
-2
-4
1970

1974

1978

1982

1986

1990

Source: Bureau of Economic Analysis (BEA) 1969–2018; author’s
calculations.

1994

1998

2002

2006

2010

2014

2018

Chart branding horizontal

Note: Shaded areas denote recessions.

#f1f0f0 background
Chart color palatte#006ba6#f6511d#711c77#178c58

Direct Stimulus Payments to Individuals

and unemployment insurance (UI). Incomes tend to decline in recessions,but given that marginal income tax rates are lower at lower income levels,
taxes fall more than income does. The disproportionate decline in income
tax burden helps to offset some of the loss in disposable income. The UI
system, by contrast, is a more narrowly targeted automatic stabilizer
that supports consumption for eligible workers who lose their jobs. In
a recession, as the unemployed rise in numbers so do payments fromUI. In both cases, these automatic stabilizers (and others including the
Supplemental Nutrition Assistance Program [SNAP], formerly the Food
Stamp Program) are often paired with additional discretionary measures,such as temporary tax cuts or temporary extensions of UI benefits.
The choice between automatic and discretionary fiscal policy depends on
several factors. First, we want to do only what we know works, and theevidence shows that direct, lump-sum payments are an effective fiscal tool.
Adding a new automatic stabilizer would be a commitment to increase
government support to households in a recession. Improved stabilization—such as shortening the length or severity of a downturn—would limit theeconomic costs of a recession. Even so, stabilizers are unlikely to pay forthemselves. Sufficient fiscal space for such policies could require either
higher taxes or lower transfers outside of recessions. In this case, one could
view the budget for the automatic stimulus payments as a rainy-day fundfor payments to individuals that would be administered by the government.
The fund would accrue savings in good times and make payments in
bad times. Given the thin financial buffers of many households, thedirect stimulus payments would increase households’ resiliency during arecession.
Making the stimulus payments to individuals fully automatic could havesome drawbacks. One concern is that it might give the incorrect appearance
that policymakers are inactive in the face of recession. One responseto this concern would be to implement the stimulus payments in two
legislative phases. First, legislation prior to a recession would determine
the features of prospective stimulus payments, such as size and targeting,
and would allow the preparation of administrative systems. Then whenmacroeconomic conditions warrant (according to a prespecified economic
trigger), Congress would vote on whether to enact the stimulus payments.
The precommitment to the form and delivery of payments would increase
the speed with which stimulus can be distributed but still allow Congress
to control the exact timing. The development of macroeconomic triggers
and schedules for additional payments would provide additional guidance
to policymakers, even if the implementation is not fully automatic.

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Policymakers would only want to make automatic the policies that have
proven to be cost effective in the past. In turn, the effectiveness of stimulus
payments in a recession largely depends on the spending response ofhouseholds. A temporary reduction in taxes or increase in transfers, ifeither action boosts spending, can mitigate the job losses, underutilizationof productive resources, and widespread pessimism in recessions.
Nonetheless, simple economic models with forward-looking consumers
and well-functioning financial markets tend to predict a small increase in
spending from a temporary boost to income. In fact, some models evenpredict that individuals would save all of any rebate (yielding what is known
as Ricardian equivalence), under the assumption that people would have to
repay the debt-financed stimulus with higher taxes in the future. Empiricalevidence (summarized below) across numerous research studies of theGreat Recession strongly suggests that at least some forms of stimulus tohouseholds can measurably boost spending in the near term.

The Challenge
EVIDENCE ON THE EFFECTS OF DIRECT STIMULUS PAYMENTS PROVIDEDTO INDIVIDUALSMounting evidence in the past decade finds that broadly distributed
payments to individuals increase spending during a recession and help
stabilize the economy. This new research has overcome a methodologicalchallenge: previously, a challenge in showing the effectiveness of these
direct payments was the difficulty in distinguishing the positive effects ofthe direct payments from the negative effects of the recession. When thesestimulus payments are disbursed, the overall economy is weakening and so
the trajectory of total spending can make the stimulus look ineffectual. In
other words, a simple comparison of consumer spending before and aftera stimulus payment to individuals is not enough to determine whether
stimulus is effective.
A novel feature in the delivery of stimulus payments in 2001 and 2008
provided an opportunity to tease apart and separately identify the effectof the payments. The resulting studies have bolstered the view that suchpayments are an effective and fast-acting stimulus. Due to administrative
constraints on the number of payments that could be sent out at one time,
the timing of individuals’ payment in 2001 and 2008 was determined by
the last two digits of their Social Security number. This random variationin the timing provided a way to measure spending before and after a
stimulus payment under the same macroeconomic conditions. Comparing
the spending of individuals who have (randomly) already received their
payment with the spending of those who will (randomly) receive it in a

Direct Stimulus Payments to Individuals

BOX 1.

Stimulus Payments to Individuals During the GreatRecession

The mix of discretionary stimulus to individuals in the GreatRecession and subsequent research on the effects has provided
several lessons on the best ways to structure stimulus payments.
Early in the recession, the Economic Stimulus Act of 2008 enacted
on February 13, 2008, included one-time recovery rebates toindividuals. Most single tax filers received a $600 payment while
couples that were married and filed jointly received $1,200 at somepoint between May and July of 2008. Filers received an additional$300 for each qualifying child. The rebates were phased out for
high-income earners, while individuals with nontaxable Social
Security or pension income were eligible for smaller lump-sum
payments.
After the financial crisis and recession intensified in the second
half of 2008, a large array of fiscal stimulus policies was used. On
February 17, 2009, the Making Work Pay tax credit, a broad-based,
two-year tax cut for individuals, was signed into law as one part ofthe expansive American Recovery and Reinvestment Act of 2009
(ARRA). The Making Work Pay tax credit was implemented via
lowering withholdings, so the annual tax savings of $400 for singles
and $800 for married couples was spread out in smaller amounts
across pay periods. As the Making Work Pay tax credit was set to
expire, a temporary 2-percentage-point cut in the payroll tax for2011 was signed into law on December 17, 2010, in the Tax Relief,
Unemployment Insurance Reauthorization, and Job Creation Act
of 2010. A year later, on December 23, 2011, The Temporary Payroll
Tax Cut Continuation Act of 2011 extended the payroll tax cut for
the first two months of 2012, and then on February 22, 2012, theMiddle Class Tax Relief and Job Creation Act of 2012 extended the
payroll tax cut through the end of 2012.
Notably, this last stimulus policy required three legislative actions,
underscoring how precommitment could simplify the process andreduce uncertainty for households. As with the tax credits in 2009
and 2010, the reduction in payroll taxes was spread throughout theyear in the form of larger paychecks. One difference is that this last

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stimulus was proportional to income (up to the taxable maximum),whereas the earlier stimulus to individuals were closer to a lumpsum payment. The temporary payroll tax cut was allowed to expire
at the end of 2012. Across these three stimulus programs morethan $420 billion in additional income was sent to individuals
from 2008 to 2012.
matter of weeks helps to isolate the effect on spending of having (versus nothaving) the stimulus payment.
Studies of the 2001 and 2008–9 recessions have yielded stimulus spending
estimates that are uniformly positive. Johnson, Parker, and Souleles (2006)
analyzed Consumer Expenditure Survey data in their study of the 2001
tax rebates. They used the random variation in timing of payments toestimate that, on average, households spent 20 to 40 percent of their rebates
on nondurable goods in the three-month period when the rebate wasdistributed. Within the first six months, individuals spent nearly two thirdsof the rebate on nondurable goods. In their follow-up study of the 2008
rebate, Parker et al. (2013) estimate that 12 to 30 percent of the rebate wasspent on nondurables within three months of receipt. Including durables
spending, 50 to 90 percent of the rebate was spent over three months. With
the same data, Misra and Surico (2014) estimate that 40 to 50 percent of thehouseholds who received a payment in 2001 or 2008 did not change theirspending, but about 20 percent spent half or more of their stimulus. Other
analyses using different data sources and randomized timing also findthat the 2001 and 2008 tax rebates quickly boosted consumer spending.
Broda and Parker (2014) use transactions data in 2008 for a narrower setof consumer goods and find a 10 percent increase in spending in the weekof receipt. Using credit card data, Agarwal, Liu, and Souleles (2007) findthat initially the 2001 rebate led to a reduction in debt but then credit
card spending rose by about 40 percent of the rebate amount within ninemonths. Altogether, these studies find a sizeable boost to spending from thepayments.
After making the case for sending income to many households in a recession,
the next challenge is structuring the payments to most effectively increasedemand. A key finding that draws on results in multiple research studies isthat larger one-time payments lead to more spending, more quickly, thanpayments that are smaller or more spread out. The composition of spending
induced by the payments in 2001 and 2008 is one piece of the explanation.
Parker et al. (2013) find that the larger payments in 2008 (almost twice thesize of the payments in 2001) led to a large increase in durable spendingDirect Stimulus Payments to Individuals

within three months of receipt. In 2001 most of the spending responsecame from nondurables and occurred over six months. Similarly, Misra
and Surico (2014) find that some people increased their durable purchasesby more than the amount of their rebate, for example by using the stimulus
to make a down payment on a motor vehicle.
Another source of evidence in favor of large one-time payments comesfrom a method developed by Shapiro and Slemrod (2003a, 2003b, 2009)that asks individuals directly in surveys whether they planned to “mostly
spend,” “mostly save,” or “mostly pay off debt” with the stimulus. With the
one-time payments in 2001 and 2008, they found that about 20 percent of
adults said that they had “mostly spent” the rebates.1 When this method
was applied to the Making Work Pay tax credit in 2009–10, the spending
response was more muted. Sahm, Shapiro, and Slemrod (2012) find thatthe smaller, repeated boost to income from lower tax withholding led toless additional spending than the one-time payments. The share of people
who planned to “mostly spend” the lower withholding from Making
Work Pay was about two-thirds the share who planned to spend the tax
rebate. The structure of the stimulus payments—not the deterioration in
macroeconomic conditions between the spring of 2008 and the spring of
2009—appears to have dampened the spending response. In both years
retirees received a small, lump-sum payment, and in both years their selfreported spending rates were similar. In addition, among non-retirees
a hypothetical one-time payment elicited a spending rate higher than
the withholding change (similar to the effect observed for the 2008 tax
rebate). Similarly, Sahm, Shapiro, and Slemrod (2015) find a similarly small
spending response to the payroll tax cut.2
The evident lack of public awareness of the more gradual stimulus likethe Making Work Pay tax credit—as documented in Sahm, Shapiro, andSlemrod (2012)—raises some additional questions. In particular, one roleof economic stabilization policy is to assuage the negative views on theeconomy. Pessimism and uncertainty could lead households to pull back on
spending and instead save as a precaution. Durables spending, which canbe more easily delayed than nondurable necessities, is particularly sensitive
to precautionary savings motives. A stimulus payment—even disbursed
annually—is not large enough to make up for a job loss but it could temper
the need to build up extra savings as a precaution. Stimulus that is notseen or recognized by individuals is unlikely to affect their sentiment andtendency to engage in precautionary saving. The direct boost to spendingis the key criterion for efficacy of stimulus payments, but the saliency (orsentiment) effects are also worth considering.

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RELEVANT EVIDENCE FROM OTHER CONSUMPTION RESEARCH

The finding that additional income boosts spending on receipt is confirmed
by other research, not specifically related to stimulus payments or
discretionary tax cuts. Moreover, the initial spending response does notappear to depend on the additional income being a surprise to households(as has been the case with stimulus payments in the past). Simple, forwardlooking economic models predict an increase in spending only if thetemporary increase in income is unexpected. One concern with making
stimulus payments automatic is that they would be less of a surprise tohouseholds than discretionary stimulus payments. Yet, research showsthat additional income will often generate additional spending, even if
individuals anticipate the income and it is a regular, large payment, such as
the annual Alaska Fund payments (Kueng 2018) or the Earned Income Tax
Credit (Aladangady et al. 2018). Empirically, spending is tied to the receiptof the income, a relationship that does not appear to differ much acrosspredictable and unpredictable income.
Research findings are mixed on the benefits of targeting stimulus to
low-income individuals. A common—but not universal—finding is thathouseholds with low liquid assets relative to their income tend to spend
more (and more quickly) out of additional income than those householdswith ample liquidity. Thus, as argued by Kaplan and Violante (2014),
even high-income households with illiquid assets, such as housing wealthor retirement savings accounts, would spend out of stimulus income.
Targeting current low-income or low-wealth households may not identify
the households most likely to spend the stimulus, which could include
some wealthy households.3 However, it would be difficult to target stimulus
payments to individuals with low liquidity, since the government does notreadily have information about households’ assets.

The Proposal
This section lays out the case for direct stimulus payments to individuals
to become part of our system of automatic stabilizers, building on theevidence in the previous sections that additional income translates quickly
into additional spending. I discuss several economic considerations thatmilitate in favor of automatic stimulus payments. I then propose a specificpolicy to deliver automatic fiscal stimulus through direct payments toindividuals.
ECONOMIC CONSIDERATIONS RELEVANT TO AUTOMATIC PAYMENTS

There are three reasons why I argue that direct payments should be madeinto an automatic stabilizer. First, automatic stimulus payments would

Direct Stimulus Payments to Individuals

provide a policy precommitment to broadly support aggregate demand ina recession. Second, analysis and deliberation over the size, structure, andfunding of stimulus payments, as well as the development of administrative
procedures to disburse payments, could occur at a time other than thecrisis of a recession. Finally, automatic payments could also commit fiscal
policymakers to maintain support if the recession is severe and the recovery
is drawn out. The payroll tax cut, the last of the broad-based household
stimulus after the Great Recession, expired in the first quarter of 2013. Atthat time, the national unemployment rate was still 2.7 percentage points
above its prerecession level—a sign that stimulus was withdrawn while theeconomy was far from a full recovery.4 Fiscal support during the GreatRecession was less than in prior recessions, and the additional stabilization
later in the recovery was largely due to monetary policy.
Putting administrative systems in place ahead of time could ensure that thestimulus is delivered more quickly and more broadly. It is also importantto minimize errors and ensure that only intended populations receive thepayment. With the 2008 stimulus payments, the Internal Revenue Service(IRS) estimated that it would require 60 days to program the system tocalculate payments after the legislative details were settled (Joint Committee
on Taxation 2008). In addition, the payments could not be disbursed
during the peak tax filing system. Thus, without advance preparation of thesystem, it is not currently possible to send out payments from late January
to mid-May each year.
Moreover, advance planning could also be used to reach a wider population
than those filing income tax returns. A key impediment to sending out
payments is the lack of a centralized, up-to-date address or electronic funds
transfer information on individuals. The IRS maintains this information for
tax filers, as does Social Security for all its benefit recipients. Collaboration
between the IRS, the Social Security Administration, and other agencies
that interact with non-filers could also extend the receipt of payments tomore individuals than tax filers and ensure that individuals receive only asingle payment from the government.
Automatic stimulus payments in recessions and recoveries—paid for byhigher taxes during expansions—would provide additional liquidity when
uncertainty about employment and income is high. Many households
have low savings and even outside of recessions would have difficulty
paying a modest unexpected expense (Board of Governors of the Federal
Reserve 2018). Given the thin financial buffers of many households and theheightened uncertainty in a recession, automatic stimulus payments could
be a popular form of rainy-day savings and support to spending.

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Automatic stimulus payments to individuals would also be a broad-based,transparent source of macroeconomic stabilization. Lump-sum payments
disbursed annually to households based on macroeconomic conditions
would be a more direct, easier-to-understand form of stimulus than changes
in interest rates or asset purchases via monetary policy. Income payments
would go directly to individuals and would not rely on propagation throughfinancial and labor markets. Monetary policy is an effective way to stabilize
business cycles—lowering interest rates to increase demand during arecession—but its initial direct effects vary across individuals (depending,for example, on their assets and debts) and the overall, beneficial effects
are often hard to communicate.5 The broad-based nature of the stimulus
payments would also make it easier to explain the details of the program tothe public, increasing its salience and effectiveness. Recessions coincide withheightened pessimism and the stimulus payments would directly counterthat pessimism. Understanding how the government is directly supporting
individuals in the recession could create public support for more targeted
policies or for those policies with less direct effect on individuals.
POLICY PROPOSAL

I propose a new automatic stimulus payment—lump-sum annual payments
to individuals—that would be triggered automatically by a rise in theunemployment rate. Key details of the proposal are as follows:• Automatic lump-sum stimulus payments would be made to individuals
when the three-month average national unemployment rate rises byat least 0.50 percentage points relative to its low in the previous 12
months.
• The total amount of stimulus payments in the first year is set to
0.7 percent of GDP.
• After the first year, any second (or subsequent) year payments would
depend on the path of the unemployment rate.
○○ An increase of 2.0 percentage points or more from the initial
unemployment rate would result in a second year’s payments withaggregate stimulus again equal to 0.7 percent of GDP.
○○ After the second year and after the unemployment rate has peaked(whichever comes later), the total stimulus amount would be scaled
down as the unemployment rate declines.
○○ Annual payments would continue in the third (and subsequent)years until the unemployment rate is no more than 2.0 percentage
points above the level at the time of the first payment.

Direct Stimulus Payments to Individuals• Eligibility for direct stimulus payments would not be restricted tohouseholds with taxable income.
• All adults would receive the same base payment, and in addition,
parents of minor dependents would receive one half the base payment
per dependent.
Each aspect of the policy, including its administration, is discussed in moredetail below. This section concludes with an example of how the automatic
payments would have been applied in the Great Recession and recovery.
These automatic stimulus payments to individuals should be thought of as afirst line of defense in the recession and not a replacement for discretionary
fiscal policy or other automatic stabilizers, which could add to stimulus asmacroeconomic conditions evolve.
Trigger to Start Automatic Stimulus Payments

This proposal requires an explicit trigger that will turn on during acyclical downturn. This trigger could be used to automatically disburse thepayments or to initiate a congressional vote on payments. In this proposal,
the trigger is based on changes in the national unemployment rate.
The direct stimulus payments to individuals begin after a 0.50 percentage
point increase or more in the three-month moving average of theunemployment rate relative to its low in the prior 12 months (figure 2). The
three-month average smooths out some of the monthly random variationin the rate and avoids false positives, such as stimulus payments madeoutside economic downturns. The trigger depends on recent changes in theunemployment rate, as opposed to a fixed unemployment rate threshold,because this type of trigger accommodates changes over time in the naturalrate of unemployment.6 Even a modest rise in the unemployment rate suchas 0.50 percentage points (shown by the orange dashed line in figure 2) has
occurred only during or closely following recessions. In other words, by thisrule the stimulus payments would have been triggered only in recessions.7
Based on past recessions (and the data available to policymakers at thetime), the change in the unemployment rate would be a highly effective
trigger for the stimulus payments. Early in each recession since 1970, theunemployment rate rose at least a 0.50 percentage points (figure 3).8 On
average, payments would have been triggered within three months of thestart of the past six recessions. The automatic trigger would have been met
four months after the 2008–9 recession began and two months after the
2001 recession began. The specific trigger in this proposal—comparing
the three-month average unemployment rate to its low over the prior 12months—signals a recession well before the official dating of a recession.

77Claudia Sahm

The proposed trigger would reliably deliver stimulus to the economy earlyin recessions.
The unemployment rate has other advantages as the basis for the trigger
in an automatic stabilizer. The unemployment rate has been used as a coresignal of labor market strength and overall economic well-being, and has
been measured consistently for many decades. It is a timely measure: agiven month’s unemployment rate estimate is available at the beginningof the subsequent month. By contrast, output growth is measured with alag, is revised frequently, and, given its volatility, would require waiting
for at least two to three weak quarters to signal recession. Partly due tothese advantages, the U.S. government has extensive experience using theunemployment rate as a trigger for social programs. Making the stimulus
payments to individuals automatic once the unemployment rate trigger
is met would guarantee that stimulus flows to the economy quickly. If
administrative systems are already in place to disburse payments, thenindividuals would receive their automatic payments early in the recession.
In contrast, for discretionary payments work also has to be done on both thelegislation and the logistics before stimulus can be delivered to households.
There are some concerns with using the unemployment rate as a trigger
to start stimulus payments. First, the unemployment rate tends to lag thebusiness cycle, such that unemployment usually peaks after the recession
has ended. The slow-moving nature of the unemployment rate implies
FIGURE 2.

Unemployment Rate (3-Month Average) Relative to Prior
Official logo
12-Month Low, 1970–2018
4.5
4.0

Percentage point difference

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3.5

Dark

3.0
2.5
2.0
1.5
Reverse

1.0
0.5
0.0
-0.5
1970

1974

1978

1982

1986

1990

1994

1998

2002

2006

2010

2014

2018

Source: BLS 1969–2019; author’s calculations.
Note: Shaded areas denote recessions. Dashed orange line denotes
the proposed trigger threshold. Calculation uses real-time estimatesof the unemployment rate.

Chart branding horizontal#f1f0f0 background
Chart color palatte#006ba6#f6511dDirect Stimulus Payments to Individuals

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that it gives little advance warning of recessions. Still, as seen in figure 3,
this trigger would signal a downturn nearly immediately and long before
it has been officially recognized. Second, the rise in unemployment prior
to a recession does not predict the severity of the recession. For example,
the increases in the unemployment rate prior to the 2001 and 2008–9
recessions were similar, even though the subsequent rise during andafter the 2008–9 recession was more than double the rise with the 2001
recession. In other words, a prerecession unemployment rate rise is not agood guide to the shortfall in demand in a recession and speaks to having
a plan for additional payments in severe recessions. Finally, one may worry
about whether people leaving the labor market or reentering it mask thequality of the signal from the unemployment rate, but, at least at the startof recessions, the change in the unemployment rate is a remarkably reliable
signal.
Aggregate Amount of Stimulus Payments

Because the goal of the direct payments to individuals is macroeconomic
stabilization and shallower recessions, the total amount of the stimulus isa core concern. During the initial months of the recession when the firstpayment arrives, the eventual severity of the downturn will be unknown.
And, in fact, one goal of such fast-acting stimulus is to help stave off thenegative dynamics that often accompany recessions—that is, the stimulus
can itself reduce the severity of the downturn. Fiscal stimulus can provide
FIGURE 3.

Date that Unemployment Rate Trigger Activated Relative to the
Official logo
Start of Selected Recessions
Months since start of recession

4

3

Dark

2

Reverse1

0
Mar 1974

Apr 1980

Nov 1981

Nov 1990

Jun 2001

Apr 2008

Month of trigger activation
Source: BLS 1969–2019; author’s calculations.

Chart branding horizontal

Note: Calculation uses real-time estimates of the unemployment
rate.

#f1f0f0 backgrou
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Claudia Sahm

additional spending power to those who are liquidity constrained andcounteract the rise in precautionary savings that might otherwise lead to a
reduction in spending, particularly for purchases of durables that can moreeasily be delayed.
I propose setting the total dollars of first-year direct payments to address the
weakness in a typical recession. Since the mid-1970s, a typical recession has
entailed a slowdown in real consumer spending growth—on a four-quarter
basis—of about 2 percentage points, with substantially larger slowdowns
in growth in 1973 and 2008. In this proposal, direct payments that are halfof a typical recession’s slowdown in consumer spending growth—equal toapproximately 1 percent of real PCE (or about 0.7 percent of GDP)—would
be a substantial commitment to stabilize the economy.9 This additional
income, on aggregate, is on the high end of past discretionary payments.
By comparison the 2001 tax rebates were about 0.4 percent of GDP, andthe payments in 2008 were about 0.7 percent of GDP (Shapiro and Slemrod
2003b, 2009).
Several considerations speak in favor of a large initial stimulus tohouseholds. First, the costs of recession, whether at the macroeconomic
level or at the household level, are substantial.10 Thus, vigorous efforts tostabilize demand early in a recession would have large payoffs. Second,larger aggregate stimulus translates into larger individual payments. Large
direct payments to individuals are spent more quickly since their size can
support the purchase of (or the down payment on) large consumer durables,such as automobiles (Parker et al. 2013). For consumers, large payments
are also more salient than small ones (Sahm, Shapiro, and Slemrod 2012),
allowing them to more effectively counter precautionary saving motives
and bolster popular support for stimulus. Finally, these direct stimulus
payments—especially if made automatically—would be some of the earliest
support to the economy in the recession. Most of the support from otherautomatic stabilizers, including progressive income tax rates or UI benefits,
arrive later than the initial months of a recession. Large, direct payments
to individuals would provide an aggressive, frontline defense against thenegative effects of a recession.
Structure and Targeting of Payments

With the aggregate amount of stimulus set, the next step is to structure theindividual payments to maximize the immediate boost to spending. Fromthe empirical research on the 2001 and 2008 to 2012 stimulus policies, thepropensity to spend out of the stimulus payments is likely to be highest
for one-time, lump-sum payments (Sahm, Shapiro, and Slemrod 2012). In
addition, one-time payments add stimulus spending more quickly to theDirect Stimulus Payments to Individuals

81

economy than a change in tax withholding (which would spread fiscal
stimulus throughout the year). Consider two hypothetical $100 billion
stimulus packages. The first is paid out in one-time payments (with allindividuals receiving checks within 10 weeks) and the second is spread out
evenly during the year in the form of higher take-home paychecks (via lower
tax withholding). Even if individuals responded to both forms of stimulus
in the same way—in other words, if the marginal propensity to consume(MPC) out of each dollar was identical—it would not be until early in thenext year that the full stimulus spending occurred under the second option(figure 4). The delay in payments necessarily delays individuals’ spending.
In contrast, the increase in spending from one-time payments would
occur within three months (Parker et al. 2013). Furthermore, because
research shows that the individual spending response is larger from onetime payments than from changes in withholding (Sahm, Shapiro, andSlemrod 2012), the overall stimulus boost would be both larger and more
rapid. The faster timing and higher spend rate favor one-time payments for
macroeconomic stabilization.11
The speed—supported by empirical research—with which direct payments
increase aggregate demand is particularly important. To meet its primaryobjective macroeconomic stabilization needs to occur when resources areunderutilized in the economy. The outright declines in output occur early
FIGURE 4.

Cumulative Spending by Disbursement Form and Spend Rate
Official logo

Billions of dollars

100

75

50

25

Lump sum,
MPC = 0.7

Dark

Withholding,
MPC = 0.7
Withholding,
MPC = 0.5

Reverse0
3 months

6 months

9 months

12 months

Months since stimulus begins
Source: Author’s calculations.
Note: Spending is based on a $100 billion stimulus. The MPC, which
determines the spend rate, for lump sum payments is set at 0.7, with
60 percent of the spending response in the first month, 30 percent
in the second month, and 10 percent in the third month. The MPC forwithholding is alternately assumed to be 0.5 or 0.7.

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Claudia Sahm

in recessions, and stimulus that quickly supports aggregate demand would
be particularly beneficial. The direct spending out of stimulus payments
to individuals is followed by indirect (i.e., second-round or multiplier)effects, in which production responds to the initial boost to spending.
These multiplier effects are likely larger in a severe recession when moreslack exists in the economy (and even more so when monetary policy isconstrained at the zero lower bound). Stimulus demand, then, is lesslikely to crowd out other spending (Auerbach and Gorodnichenko 2012).
This finding argues both for a rapid first payment and for a commitment
to repeated payments in a severe recession until the lingering economic
weakness has subsided. Finally, as mentioned previously, other forms ofstabilization policy—for example, UI benefits or reductions in interest rates
via monetary policy—tend to work with a lag, so stimulus payments offer
one of the most rapid responses in a recession. Thus, the direct payments toindividuals should be structured to maximize timeliness.
The direct stimulus payments to individuals would be made broadly
available and would not be restricted to those working or with tax
liabilities. The broad nature of the recipient pool aligns with the broad
negative economic effects of recessions. A defining feature of a recession is
the pullback in demand across a wide range of households: recessions leadhigh- and low-income households alike to sharply reduce their assessmentsof buying conditions (figure 5). Stimulus intended to boost demand in arecession should therefore encompass a range of households.12 Generally,
the fastest spending responses to additional income are from lowliquidity individuals, but targeting liquidity is more difficult in existing
administrative data, and low liquidity also exists among higher-income
households.
However, some criteria are needed for eligibility for stimulus payments.
Individuals with any taxable or nontaxable income (like Social Security or
Veterans Affairs benefits) would be eligible, though the stimulus payments
would not be tied directly to tax liability.13 (Non-filers without any
income would also be eligible, though locating them can be a challenge.)
The presence of dependent children would increase the amount of thestimulus payment. One important criterion would be that no individual(or dependent) receives more than one payment in a round of stimulus
payments. Further limitations on eligibility, such as residency requirements
or no unpaid taxes, could be added to the legislation authorizing theautomatic stimulus payments.
Administration and Marketing of Stimulus Payments

The closest existing structure to the proposed stimulus has been the advancepayment of refundable, temporary tax credits. Given its experience with

Direct Stimulus Payments to Individuals

83

FIGURE 5.

Index of Consumer Purchasing Sentiment by Household Income
Quartile, 1980–2018
Official logo

200
180

Index

160

Top quartile
Upper-middle
quartile
Lower-middle
quartile
Bottomquartile

Dark

140
120
100
80

Reverse60
1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2009 2012 2015 2018
Source: Survey of Consumers, University of Michigan 1980–2018.
Note: Shaded areas denote recessions. Index for each income groupis the percent of consumers responding that they think it is a “goodtime to buy major household items” minus the percent reporting it
is a bad time to buy, plus 100. Values above 100 indicate that moreconsumers think it is a good time to buy durable goods. Series is afour-quarter moving average.

Chart branding horizontal#f1f0f0 backgrou

Chart color palatte
past discretionary stimulus payments and access to payment
information#006ba6of filers, the IRS would be the appropriate agency to review#f6511dand approve#711c77
disbursement of the stimulus payment. Making the payments#178c58 automatic#ffb400
and setting the structure in advance would allow for administrative
systems#CE0A1A#5bc0beto be designed in advance. This would be especially important if the startof the recession coincided with the annual processing of tax returns, whenadministrative demands on the IRS are high.
Multimedia branding

Equitable

An important administrative challenge in delivering
broad-based
Growthstimulus is that individuals without taxable income, such as many Social
Security beneficiaries, would not normally file tax returns. Despite
multiple outreach efforts, Treasury estimates that only 59 percent of the
20 million Social Security and Veterans Affairs benefits recipients filed astimulus-only return in 2008 and received a payment (U.S. Departmentof the Treasury [Treasury] 2009). Another 24 percent were claimed as
dependents on other tax filings, but that left 17 percent who were eligible
but did not receive the stimulus. Getting information—and instructions
on how to complete the forms—to eligible non-filers was one of the areas
where the IRS viewed its initial guidance as incomplete (Treasury 2008). A
commitment to cover these non-filers in future stimulus payments would
allow time for more coordination with Social Security, Veterans Affairs,
and other agencies delivering other benefit payments. Social Security, forexample, has information to deliver payments, but only to those receiving

84

Claudia Sahm

benefits from Social Security. A centralized system for approving stimulus
payment recipients, overseen by the IRS, could use payment information(mailing addresses or electronic funds transfer) from various agencies. The
coordination would expand the reach of the stimulus payments and still
avoid duplication of payments.
The marketing of the stimulus is another aspect of administering thepayments. The terms in which the stimulus is described are important.
Studies from psychology (Epley, Mak, and Idson 2006) have argued that
describing the additional income as a “tax rebate” yields a smaller spending
response than framing it as a “bonus.” Leigh (2012) found a larger responseto stimulus payments in Australia than in the United States during theGreat Recession and argued that the difference may have been due to theAustralian government calling their payments “bonuses,” though of course
it is difficult to rule out other differences between the two countries as thedetermining factor.
Sending out information about the stimulus payments to recipients may also
be important. The U.S. Treasury sent letters to individuals about the 2008
stimulus payments prior to disbursement, but there were no information
campaigns to recipients of the subsequent Making Work Pay tax credit andpayroll tax cut. Awareness of the stimulus would highlight the government
support for individuals in the recession, but it is unclear how this affects
the spending response. Notably, none of the empirical studies of the earlier
stimulus payments found evidence of consumer spending responses prior
to the arrival of stimulus payments, either at the passage of the legislation
or at the receipt of informational mailings. Rather, the spending response
occurs at the time the income is received.
Stimulus Payments after the First Year of the Recession

Some recessions are more severe and prolonged than the typical recession,and in such cases I propose additional rounds of direct payments toindividuals after the first year. The goal of these additional payments isfurther macroeconomic stabilization and reduction of slack resources inthe economy as quickly as possible. A cumulative increase of 2 percentage
points or more in the unemployment rate in the four quarters after the
initial trigger would result in a second round of payments. The aggregate
stimulus in the second year would be the same as in the initial year
(0.7 percent of prerecession GDP) and would follow the same payment
structure to individuals. Direct payments would continue each year until
the unemployment rate is no more than 2 percentage points above its initial
trigger level, though the total amount of the payments scales down after theunemployment rate has peaked. Specifically, if the prerecession, the peak,Direct Stimulus Payments to Individuals

and the current unemployment rates were 5, 10, and 9 percent, respectively,
the total stimulus would be set at (9 – 5 – 2) / (10 – 5 – 2) = 2/3 of the firstyear amount (or 2/3 of 0.7 percent of GDP). When the unemployment rate
gap falls to less than 2 percentage points, stimulus is entirely discontinued.
Payments after the first year would be triggered in severe recessions: the1973–75, 1981–82 and 2008–9 recessions are the only three recent examples
that would have met this criterion.
In each recession since the mid-1970s, the unemployment rate eventuallyrose at least 2 percentage points during or immediately following therecession, but with a sufficient delay that it would not have qualified fora second payment round under this proposal. One could argue that asecond payment to individuals would have been useful in these otherrecessions. However, other more-targeted policies such as UI or SNAP
payments would better direct resources to those most in need. In addition,
discretionary fiscal policy could add further support, specific to the shocksof that particular recession.
Simulation of Proposed Stimulus Payments in the Great Recession

The macroeconomic comparison of automatic stimulus payments to thediscretionary policies deployed in the Great Recession (see figure 6) serves
two purposes. One is to compare a quantitative example of automatic
stimulus payments with discretionary payments that have been used in thepast. The second is to be able to compare with other more-targeted automaticstabilizers. Two advantages of automatic stimulus payments are the speed
and the scale with which they can deliver stimulus to the economy. Even if
this fiscal stabilization policy remains largely discretionary, these exercises
will help us understand and critically evaluate the menu of policy options
that are available to fight recessions.
In April 2008 the (three-month average) unemployment rate was 5.0 percent,up 0.50 percentage points from its low in April 2007. Under the proposal,
this rise would have automatically triggered a direct stimulus payment to
individuals. The disbursement of the direct payments would have begun
within a few months after the trigger was reached. In this case, the firststimulus payments would have been disbursed in the second quarter of
2008, somewhat sooner than were the tax rebates in 2008. Total stimulus
payments of $100 billion—equivalent to 0.7 percent of GDP in 2006—
would have been issued. The automatic payments in 2008 would have beenaround $500 for singles or $1,000 for couples, with higher payments for
those with dependent children.
The main difference between the actual stimulus to individuals (from the2008 tax rebates, Making Work Pay tax credit, and payroll tax reduction)

85

Claudia Sahm

FIGURE 6.
Official
logo
Automatic Proposal Versus Discretionary Stimulus
Incomein theGreat Recession, 2008–13

120
100

11

Proposal (left)
Actual policy(left)

Dark

policy (left)

80

Unemployment rate(right)

60

10
9
8

Reverse

40

7

20

6

Percent

Billions of dollars

86

5

0
2008:Q1

2009:Q1

2010:Q1

2011:Q1

2012:Q1

2013:Q1
Chart branding horizontal

Source: BLS 2008–13; BEA 2009; BEA 2015; author’s calculations.
#f1f0f0 backgroundcolor palatte
and the proposed direct payments would have arisen Chartafter
the first year.
#006ba6
In April 2009, the unemployment rate (on three-month average#f6511d basis) was#711c77
8.5 percent—a 12 month increase of 3.5 percentage points
from its level#178c58#ffb400
at the time of the first trigger—and was still rising. This #CE0A1A
rapid, first-yearincrease (above the 2-percentage-point threshold) in the#5bc0be
unemployment
rate would signal a severe recession and would have triggered an additionalround of direct stimulus payments to individuals. The
secondround ofMultimedia
branding
direct payments to individuals in 2009 would have again been$100 billion,
Equitable
larger and more quickly distributed than the $50 billionGrowthin additional
income from the Making Work Pay tax credit. Subsequent annual payments
would continue at that level until the unemployment rate had peaked andwas no longer rising relative to its level at the prior year’s payment. At thatpoint, the annual payments would scale down as the unemployment rate
declines and end when the unemployment rate is within 2 percentage pointsof its initial trigger. The total amounts of the direct payments in figure 6 are
only a rough approximation to show the trajectory and timing, and do nottake into account how the direct payments might affect the unemployment
rate. The purpose of the larger, more-rapid stimulus payments is to makethe recession shallower and the recovery faster. In fact, under the proposal(and the assumptions above about MPCs) the boost to spending in 2008
and 2009 together would have been about one and a half times larger thanunder actual policy.

Repeated, large direct payments to individuals offers three main benefits
relative to the discretionary policy mix of broad-based stimulus toDirect Stimulus Payments to Individuals

individuals that was used in the Great Recession. First, the proposed stimulus
payments are more concentrated in the initial years of the recession when
the unemployment rate and slack in the economy was highest. Second, theproposal commits to maintaining stimulus while the unemployment rate
remains elevated. In contrast, during the Great Recession the payroll tax
cut expired when the unemployment rate was nearly 8 percent. Third, therelevant research indicates that the proposal’s lump-sum annual payments
are expected to have an MPC of 0.7 within a quarter or two of receipt, one
third higher than the MPC of 0.5 on the smoothed stimulus (distributed
via lower withholding) that was used during the Great Recession. Taken
together, this proposal for direct payments to individuals is designed todeliver timely, substantial, and ongoing support to the economy in theevent of a severe recession.
Ongoing Research Evaluation

To further study the macroeconomic effects of fiscal stimulus, the proposal
establishes a process for rigorous evaluation of the effects on spending.
Fortuitously, administrative constraints on the number of paper checks thatthe federal government could send out in week led to a natural experiment
during the past two recessions. The timing of stimulus payments in 2001
and 2008 were randomized by Social Security numbers. In conjunction
with the addition of information to official consumer surveys, this allowed
researchers to credibly demonstrate the efficacy of stimulus payments.
With the rise in electronic funds transfers, the constraint on the volumeof payments that can be processed at once has been relaxed. Even so, forevaluation purposes it would be beneficial to maintain some randomizationin the timing of payments. Social Security numbers remain an option,
though this information is not regularly collected in official household
surveys, and the data on spending would be available only with a substantial
delay. Account level data, such as from financial apps or bank account data
sources, might be another option for tracking incoming payments and thespending response, but a nontrivial portion of the population does nothave such accounts. Another option for randomization in disbursement
would be physical location, such as timing based on the final digit of a zip
code. Geographic variation in the stimulus payments would widen theset of evaluation data sources and could be used to explore differences inunderlying macroeconomic conditions that affect the spending responses
to the stimulus. The main policy goal is to deliver stimulus quickly tohouseholds, but given the large commitment of resources some design
features should be studied to inform the design of future policies.

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Claudia Sahm

Questions and Concerns
1. Are there other macroeconomic indicators that could be used as triggers for the
stimulus payments?

The unemployment rate has the benefits of being simple to explain andwidely followed. Indicators from the financial market, such as the yield
curve or near-term forward spread (Engstrom and Sharpe 2018), are also
potential predictors of recessions. However, financial market indicators
tend to produce more false positives (in part due to monetary policy
responses).
2. How would the Congressional Budget Office score an automatic stimulus
payment?

If the proposal was enacted during an expansion, precommitting tostimulus payments in the event of a recession would necessitate the use ofprobabilistic scoring by the Congressional Budget Office (CBO), according
to which the CBO would project the expected value of the payments overa ten-year window. In contrast, a two-stage implementation in which thepayments must be authorized by Congress would be scored according to
the full cost of the payments, given that the recession would already havestarted. Consequently, the estimated cost would likely be lower outside a
recession, but at the time the pressing need for the outlay would be lower,too.
3. Would the payments have to be annual or could multiple payments occur
during the year?

The baseline proposal is for annual payments, but once the infrastructure of
distributing payments is in place, it could be used at any time. Accelerating
the schedule of payments based on changes in economic conditions via
additional legislation would be another way to reintroduce legislative
control. For example, the case could have been made for a second stimulus
payment at the end of 2008 after the severe disruption in financial markets.
4. Would a smaller, more geographically targeted stimulus be preferable?

One option to limit the overall costs and to still support demand would be
to target payments after the first year to parts of the country in which the
unemployment rate has risen most. For example, the 2-percentage-point
threshold applied nationally in the baseline proposal for a second round
could instead be applied at the state level. This would allow the stimulus totake into account both national and local economic conditions. However,this geographic targeting would move away from the principle of broadbased income and consumption support. Other policies, such as federal
grants to states and localities, would likely be a more effective way toDirect Stimulus Payments to Individuals

geographically target stimulus. The baseline automatic stimulus payments
could provide broad national support and then be combined with the otherdiscretionary, geographically targeted policies.

Conclusion
Direct stimulus payments would quickly deliver extra income to millions
of households at the start of a recession and maintain income support until
the recession has subsided. High-quality research on similar paymentsin the past shows that this form of stimulus directly boosts spending andhelps stabilize demand. Making the payments automatic and tying them tochanges in the national unemployment rate would guarantee a timely andtransparent source of demand in recessions. The individual payments inthe proposal are designed—based on available research—to maximize thespending out of the stimulus and thereby increase the efficacy of the fiscal
stimulus. As part of a broad portfolio of automatic stabilization policies,
the proposal can help mitigate the worst costs of economic downturns.

Acknowledgments
The views expressed here are those of the author and not necessarily thoseof other members of the Federal Reserve System. I am grateful for many
insightful comments and encouragement from the project editors, Heather
Boushey, Ryan Nunn, and Jay Shambaugh, as well as from participants in a
Hamilton Project author’s conference. Jana Parsons and Jimmy O’Donnell
provided excellent research assistance. This work draws on several years of
research collaboration with Matthew Shapiro and Joel Slemrod.

Endnotes
1.
2.

3.

4.

These survey responses on stimulus do not map directly to a fraction of the payment spent, but
Parker and Souleles (forthcoming) find a strong, positive correlation between spending behavior
and self-assessments in the Consumer Expenditure Survey.
With another survey, Graziani, van der Klaauw, and Zafar (2016) found that the self-reported
fraction spent out of the payroll tax cut rose from 14 percent in early 2011 to 36 percent at the endof 2011. The spending out of this gradual stimulus may slowly rise over time, but the boost is stillless immediate than the boost from one-time payments.
The evidence (and interpretation) of the role of liquidity in spending responses varies to someextent across empirical studies. For example, Parker (2017) finds that low liquidity in years prior
to receiving the tax rebate predicts a spending response nearly as well as low liquidity at the timeof receipt. This finding could suggest differences in preferences and relates to earlier work such as
the Campbell-Mankiw spender-saver model and research from Carroll et al. (2017) on patiencethat appeals to individual-specific preferences for spending. In addition, Kueng (2018) finds a large
spending response to payments among high-income households with ample liquid assets.
Compared to past business cycles and including estimates of discretionary fiscal policy andautomatic stabilizers, Cashin et al. (2018) find that the fiscal support during the Great Recession

89

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Claudia Sahm

5.

6.

7.
8.
9.

10.

11.

12.

13.

was substantial but the support in the recovery was less than in earlier recessions.
As one example of the difficulty in communicating the benefits of monetary policy: Savers who
hold interest-bearing assets will initially receive less interest income due to expansionary monetary
policy; however, these policies to boost aggregate demand and stabilize the economy will lead tohigher interest rates in the future. On net, savers benefit from monetary policy, but this is not astransparent as receiving a direct payment.
The unemployment rate consistent with minimal labor market slack—sometimes called the naturalrate of unemployment—may change as demographics, labor market frictions, and other variables
evolve over time (see, e.g., estimates from the Congressional Budget Office [CBO 2019] that range
from a high of 6.2 percent in 1978 in to a low of 4.6 percent in 2019).
Earlier in the postwar period (not shown in figure 2) the only false positive by this rule was in 1959,
and it was followed six months later by a recession.
Throughout, I use the data on the unemployment rate available to policymakers at a given momentin time. In general, the real-time data trigger a few months later than would the fully revised data.
Measured growth in GDP (or PCE) reflects the effect of past fiscal and monetary stimulus. The
typical shortfall in aggregate demand in a recession—in the absence of stimulus—would be larger.
An estimate of that counterfactual time series could be a better way to calibrate the size of the total
stimulus. The estimates of fiscal policy effects in Cashin et al. (2018) could be used to calibrate theunderlying GDP changes.
As one recent example of the individual effects, Davis and von Wachter (2011) estimate thatworkers who are laid off when the unemployment rate is above 8 percent lose 2.8 years of potential
earnings, twice the loss when the unemployment rate is below 6 percent. For the economy as awhole, Reifschneider, Wascher, and Wilcox (2013) argue that weak demand in severe recessions
like the Great Recession can lead to slower growth in the economy’s overall productive capacity (oraggregate supply). Large, long-lasting costs from recessions are why it is important to stabilize theeconomy as quickly as possible.
Other policy goals, such as increasing take-home pay or making taxes more progressive, could favor
withholding changes over one-time payments. The argument here for one-time payments is basedon trying to bring additional support to the economy during a recession and time of weak aggregate
demand. One-time payments could also be combined with broader changes in the tax code.
Other automatic stabilizers such as UI or SNAP are targeted to those who are most severely affectedby the recession. This proposal has a broader aim. Moreover, decoupling the stimulus paymentsfrom an individual’s tax liability simplifies the structure of the payments and allows for anchoringon the overall stimulus level desired.
While retirees are not exposed to the risk of losing their jobs or reduced wage growth, those living
on fixed incomes are often affected by the low interest rates in recessions.

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