COVID-19 Stimulus Package, Direct Money Payments, and Scarcity

by Gregory S. Schober, PhD


The Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law in the United States on March 27. The CARES Act is the third major legislative package aimed at combatting the negative health and economic consequences of coronavirus disease 2019 (COVID-19). It also is the largest economic stimulus package in American history.      

A key part of the CARES Act provides funding for direct, one-time money payments to eligible Americans. The maximum payment amount is $1200 for each adult individual ($2400 for each married couple) and $500 for each child.  The total payment amount for each household will depend on adjusted gross income, with individuals making up to $75,000 a year (and married couples making up to $150,000 a year) eligible for the full payment amount. Because this component of the CARES Act transfers money from the government to individuals, I will refer to the direct money payments as “money transfers.”

A crucial question for people’s health—physical, mental, and financial— is how recipients will respond to the money transfers in the current economic climate. Fortunately, there is a lot of available research on how people think and behave when faced with severe economic insecurity, and this research offers clear lessons that can help policymakers maximize the positive impact of the money transfers.

This post describes the money transfers that are included in the CARES Act, identifies relevant insights from behavioral economics (with a focus on recent scarcity research), and uses these insights to develop additional policy recommendations amid the COVID-19 pandemic. Although the money transfers are an important first step to help individuals with their most pressing needs, they fall short of removing other psychological barriers to effective decision making under scarcity.  If US policymakers are serious about helping struggling families during the pandemic, then they should implement additional policies that will reduce perceived scarcity and allow individuals to make less constrained decisions. 

Money Transfers

Through the CARES Act, it is estimated that over 80 percent of adults will be eligible to receive a one-time money transfer, and most of these transfers will come in the form of a tax rebate. Income eligibility is based on adjusted gross income from the 2018 (or 2019) tax filings. Most adult individuals who make up to $75,000 will receive $1200, and most married couples who make up to $150,000 will receive $2400.  Additionally, these individuals and couples will receive $500 for each child. The payment amounts are reduced for individuals making between $75,000-$99,000 ($150,000-$198,000 for couples). Individuals who earn above $99,000 (and couples who earn above $198,000) will not be eligible to receive the money transfer. The maximum allowable income amounts are higher for a single head of household with children. 

Scarcity and Decision Making

COVID-19 has closed many companies in service industries and halted the operation of the US economy. As a result, many workers in the US are newly unemployed, and even more workers are at risk of losing their jobs in the near future. These individuals now find themselves in an involuntary and debilitating mental state—what Mullainathan and Shafir call the “scarcity mindset.” When faced with severe perceived scarcity, individuals’ minds become consumed with trying to obtain the scarce resource immediately, leaving less mental space and energy for other demands and activities. Several studies (see here, here, and here) demonstrate that this intense focus often leads to negative short- and long-term consequences, as resource-poor individuals are unable to consider other pressing needs and often make decisions that exacerbate long-term scarcity.

Economically disadvantaged families, in particular, face extreme financial scarcity from the COVID-19 pandemic.  Not only do poor families struggle to cover their basic needs at baseline (by definition), but many now have lost their jobs AND taken on more family responsibilities and expenses due to school closures. According to the scarcity research, poor adults will respond by obsessing—or tunneling—on what is perceived to be their most urgent need, and this singular focus will be to the detriment of other pressing needs and their long-term financial stability. For instance, a food-insecure family under the threat of quarantine may purchase excessive quantities of food supplies, ignoring that they will need rent money next month. A key lesson of this research is that there is nothing inherent in the poor that causes these flawed choices; we all would act in a similar way if faced with the same scarcity.

One does not need to be poor to experience the negative effects of scarcity amid the COVID-19 pandemic. If you currently have many weeks (or months) of toilet paper supplies in your home, but do not have the recommended two weeks of food supplies, then you too likely fell victim to the scarcity trap. As reports surfaced of a toilet paper shortage, many people became singularly focused on obtaining more toilet paper. If they were lucky enough to find some rolls at a store, then they often purchased more than what they needed.

Policy Recommendations

Because many adults are now facing extreme scarcity, it is likely that they are channeling their mental energy on their most pressing perceived need (eg, obtaining food, paying their rent or mortgage, etc.).  The direct money transfers will help resource-scarce individuals address this perceived need, but for many the payment amounts will not be enough to remove the scarcity mindset. These insights from behavioral economics lead to several policy recommendations that will complement and maximize the positive impact of direct money transfers to American adults.

In particular, I advance policy recommendations that aim to reduce perceived scarcity among struggling families. With less perceived scarcity, adult family members will be able to reduce the grip of the scarcity mindset, and in turn consider other pressing needs when deciding how to spend money transfers. For each family, a more comprehensive examination of all pressing needs in the short term is more likely to produce decisions that will increase financial security in the long term. The policy recommendations are:

  • The US government should begin a large-scale campaign to share information on all the assistance that is being provided through recent policy changes. Individuals under the scarcity mindset—the key intended audience for this information—will be distracted and difficult to reach during the pandemic. Information must be presented clearly, repeatedly, and through multiple avenues: social media, television, radio, podcasts, and print sources. Individuals need to be aware of the available assistance before they can properly allocate resources.    
  • Similarly, local governments should create easily accessible information resources (lists, maps, schedules) that clearly explain the assistance that is currently available in their area, and how local community members can safely access these resources from community organizations and government agencies. The spread of COVID-19 will affect the availability of these resources over time, so local governments should continuously update these information resources and make the updated information available online and by phone.
  • Governments at all levels must support essential community organizations (food banks and pantries, shelters, etc.) by investing in their supplies, labor, and health safety procedures. These organizations provide lifesaving assistance for many struggling families. I consider the case of hunger as an illustrative example. Prior to the COVID-19 pandemic, it was estimated that 11% of US households (14.3 million households) were food insecure. With recent job losses and/or increased childcare and medical expenses throughout the country, it is likely that far more families are food insecure and that the average need per family is much higher. Increased government support for community organizations can help ensure that needed assistance is provided in a way that minimizes the spread of COVID-19.  
  • Governments at all levels should expand recent efforts to protect all households—including renters and homeowners—from evictions and foreclosures. Housing is another basic necessity that, if not protected, will reduce the ability of money transfer recipients to effectively use their benefits.
  • US Congress members should examine which disadvantaged individuals and families were excluded from the direct money transfers, and create legislation to provide assistance to these excluded groups.

Acknowledgements

I would like to thank Jonathan Oberlander and Miriam Laugesen for insightful comments on earlier drafts of this post.

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Gregory S. Schober, PhD, is a behavioral scientist and Assistant Professor in Rehabilitation Sciences at The University of Texas at El Paso. His research interests include health policy, civic engagement, and public health. He is the coauthor of published articles in American Journal of Kidney Diseases, Political Behavior, Journal of Development Studies, and other journals.