Wednesday, March 18, 2020

Time for Individual Accounts at the Fed

As the COVID-19 virus tears through our bodies and our economy, policy makers are struggling to come up with a response that is bold enough to meet the challenge.

Public health officials have urged us to adopt social distancing and other preventive measures, and to self-quarantine once exposed. Airlines have suspended routes, sports leagues have cancelled seasons, universities have moved classes online, and mayors and governors have mandated closures and cancellations.

All of this will inflict extraordinary hardship on millions of people, especially on those who fall ill, those who care for them, and those who face layoffs or lost hours. Many businesses small and large face bankruptcy. The S&P 500 index has lost a quarter of its value in a month. People close to retirement age face not just the risk of debilitating illness, but also a sharp loss in the value of their savings.

In response to the impending calamity, the Federal Reserve made an emergency cut to a key interest rate on Sunday, taking it close to the lower bound of zero, and initiated a large-scale program of asset purchases. Instead of taking comfort in these measures, the stock market dropped a further dozen percent on Monday, treating the measures as a signal of more bad news to come.

On Monday Senator Mitt Romney announced a proposal for a monthly income of $1000 for each American adult, “to help ensure families and workers can meet their short-term obligations and increase spending in the economy.” A day later Representative Adam Schiff echoed this proposal and added another $500 per child. Representatives Ro Khanna and Tim Ryan proposed payments as large at $6000 for those below an income threshold. And Treasury Secretary Mnuchin asserted that the administration was “looking at sending checks to Americans immediately.”

But sending checks to individuals, who must then cash or deposit them in their commercial bank accounts, is not the best way to implement such policies, especially if they are going to be in place indefinitely. While the post office remains operational and banks remain open for the moment, there may come a time when these services are also disrupted. Furthermore, there are people in relative isolation at locations other than those to which their checks would be mailed.

One alternative is to have people enter their bank account information on a federal website, as many already do to pay taxes or receive refunds. But a far better system—one that would continue to yield benefits long after this particular calamity is behind us—would involve the creation of an account at the Federal Reserve for every American adult. These accounts could then be credited whenever the need for large-scale transfers of this kind arises. And if we as a society were ever to permanently adopt a universal basic income this would be the ideal mechanism for implementation.

One of the most significant and enduring benefits of individual accounts at the Fed would be their absolute safety—unlike accounts at commercial banks, there would be no need to provide deposit insurance to prevent bank runs. Furthermore, the payments system would not be in jeopardy when the next financial crisis arrives, and there would be no need to bail out the banking system simply to ensure that economic transactions are not interrupted. Commercial banks could continue to accept deposits, but much like money market mutual funds today, these would not come with a federal guarantee. And banks could continue to engage in proprietary trading, but would not be able to do so with the help of insured deposits, making the so-called Volcker Rule superfluous.

There are also sound reasons to maintain a universal basic income even after the current crisis has passed.

International trade allows us to consume goods of greater variety and quality, and at lower cost, than could be produced domestically. But it also results in severe and geographically concentrated disruption. Small towns dependent on one or two large employers can be economically and socially devastated, even as major metropolitan areas thrive. In a study examining the impact of trade with China, David Autor, David Dorn, and Gordon Hanson have reported that "adjustment to trade shocks is stunningly slow, with local labor-force participation rates remaining depressed and local unemployment rates remaining elevated for a full decade or more after a shock commences."

The consequences of such disruptions on health and social cohesion can be dire. In their new book Deaths of Despair and the Future of Capitalism, Anne Case and Angus Deaton have documented increasing rates of suicide, drug and alcohol poisoning, and chronic diseases in affected communities, together accounting for an increase in midlife mortality.

The incessant march of technology can have similar effects. Revolutionary advances in natural-language processing, robotics, and autonomous transport have the potential to deliver greater prosperity and improve lives on average, but can also throw multitudes out of work in short order.

As the COVID-19 virus permeates and devastates our communities, it also forces upon us the realization that we are all deeply interconnected and commonly vulnerable. Perhaps this can create conditions for radical change in our economic and financial arrangements. Programs such as Social Security and Medicare have widespread support today in part because they are universal. A basic income and access to our central bank are likewise universal policies that send a message of equal dignity, and this may be exactly the right time to implement them.