As COVID-19 attacks communities and endangers lives, the Cato Institute remains focused on offering public policy options for legislators and executive decisionmakers aimed at streamlining care and improving outcomes. Our team of subject‐matter experts and scholars has compiled a list of policy options that focus on personal finance, getting folks back to work responsibly, addressing new opportunities and risks in education, and addressing impending state budget shortfalls.
The COVID-19 pandemic’s economic impact will linger long after the disease subsides. The federal government has implemented a package of temporary support measures to ease the short‐term effects on Americans, including one‐off lump‐sum payments of up to $1,200 per person, extensions to unemployment benefits, flexible debt forbearance, and new Small Business Administration loans and other emergency lending for firms of all sizes. Despite the unprecedented scale of the rescue program, many households and businesses will face cash‐flow issues as they gradually return to a new normal.
Cash‐flow problems during the pandemic stem from both declines in income due to an inability to work or a drop in business activity and increases in medical and other expenses. Faced with a cash‐flow disruption, U.S. households will likely rely on savings and consumer credit more than they normally would. According to the Federal Reserve Board’s latest Survey of Consumer Finances, 55.4 percent of U.S. families save part of their regular income. But for the bottom half of the income distribution, the proportion of savers is much lower, at 42.9 percent.1 Other studies have shown that 39 percent of Americans could not meet an emergency $400 expense solely out of savings and that while some of them would use a combination of savings and credit, 12 percent say they would not be able to pay for the expense.2
These survey results underscore the existence of financially fragile households, for whom a small change in economic circumstances can have a significant negative impact. There are various reasons for this predicament: high levels of expenditure relative to income, a tendency to use all the revolving credit at one’s disposal (to “max out the credit card”), and a lack of access to traditional short‐term loans from credit cards and bank overdrafts. There is a wide gap in credit card ownership by income and credit history. Worryingly, cardholding rates among subprime consumers dropped after the 2008 financial crisis and have only partly recovered.3 There is a similar gap in bank account ownership rates: minorities, the young, and lower‐income households are disproportionately represented.
The COVID-19 pandemic is heightening financial fragility. In addition to the increased likelihood of household income shortfalls, banks operating reduced services in times of uncertainty will be slower to process, and more reluctant to approve, new credit applications. Yet precisely those who already have limited access to short‐term credit need it most if they are to weather the pandemic’s economic fallout. The two policy changes outlined below would make it less likely that these fragile households will find themselves lacking credit options.
Temporarily Suspend State Usury Laws for Loans under $5,000
Most states impose limits on the interest rates that lenders may charge borrowers. Thirty‐three states have special exemptions for small‐dollar credit, such as payday and vehicle title loans, but even then, restrictions on loan amounts and on the number of loans that a borrower may take out in succession constrain access to credit. For example, in California, the maximum payday loan amount is $300, and subsequent loans are prohibited. Considering a fee cap of 15 percent, the maximum amount of credit available to a California payday borrower is $255. Such an amount is not nearly enough to cover the regular bimonthly expenses of a typical U.S. household.
A temporary suspension of usury laws would allow lenders, both banks and nonbanks, to extend emergency liquidity to cash‐constrained households on economically viable terms. Usury limits discourage lenders from serving households with little wealth, volatile incomes, and limited credit histories—a disincentive no doubt bolstered by the uncertainty of current economic circumstances. Temporarily suspending usury laws would allow some of the available credit to flow even to borrowers that lenders perceive to be risky. While the cost might be higher than that of standard credit options, these are rarely open to financially fragile households in buoyant times, let alone during an economic emergency.
Proponents of usury laws argue that their suspension encourages “predatory lending,” usually taken to mean lending undertaken in the knowledge that the borrower cannot repay. Yet what is presently constraining credit availability to underserved households is the perception by lenders that they cannot profitably serve these groups at or below the usury limit. Under the proposed temporary suspension, lenders would continue to underwrite borrowers and offer terms and conditions in accordance with federal and state consumer protections. Borrowers would ultimately decide whether the terms offered were in their interest. And lenders would compete to serve borrowers. Thus, a temporary suspension of usury laws would likely increase the choices available to underserved consumers, putting downward pressure on interest rates.
Facilitate Workers’ Access to Their Earned Income before Payday
Short‐term loans have historically been one of few options available to financially fragile households. But recently, some firms have begun to offer workers, directly or in partnership with employers, access to earned wages before payday. Earned income access (EIA) providers may charge users a fee or recover the cost through other means, such as interchange fees on a prepaid card. Their customers are representative of some of the most hard‐pressed groups in America during the COVID-19 pandemic: 60 percent earn less than $14 per hour, with health care and senior facilities, retail, and hospitality services representing the top employer industries.4
California legislators are considering legislation that would codify and regulate EIA services, including their fees and the maximum amount that may be advanced at any one time.5 But in other states, regulators have been less welcoming of the concept and suggested that EIA providers may be usurious.
It is important for policymakers to facilitate workers’ access to funds. EIA is one option that should be available and may be less costly than the credit products that it competes with.6 While the California legislative draft may serve as a template for other states, policymakers should consider a higher advance limit than the $300 one that California legislators are contemplating. They should also consider a relative rather than an absolute advance limit—for example, 50 percent of earned but still unpaid income.
The effects of the COVID-19 pandemic on U.S. household and business finances will last longer than the health emergency. It is essential to give the most hard‐pressed socioeconomic groups the flexibility and choice they require to confront the inevitable cash‐flow issues that lockdowns, emergency expenses, and temporary business closures bring with them.
Driving Economic Recovery
The fallout from the COVID-19 pandemic and shutdowns has been devastating for the economies of nearly every state. But, unsurprisingly, the citizens who are likely to suffer most are those who were struggling most even before the virus hit: the poor and near poor. They were far more likely to be laid off, work in businesses that had to close, and lack the savings necessary to ride out a prolonged economic downturn.
Therefore, while states will need to pursue a general strategy of low taxes and responsible deregulation to encourage job creation, entrepreneurship, and economic growth, they will also need to pay special attention to those most in need. Fortunately, there are several areas that states can act on quickly to help empower the poor.
Deregulate Occupational Licensing
Much occupational licensing is unnecessary and counterproductive. The COVID-19 pandemic has forced many states to ease licensing restrictions for medical professionals. While these measures were important and should remain after the pandemic, states should also loosen licensing requirements for nonmedical occupations.
Economists have long argued that occupational licensure operates as a barrier to entry, protecting existing license holders while blocking competition from new entrants. Economist Morris Kleiner found in a study that as many as 2 million jobs are lost due to occupational licensing. Occupational licensing also leads to billions of dollars lost in economic activity and is correlated with higher income inequality. Moreover, it is often the poorest citizens, who lack the funds, time, and expertise to maneuver the maze of licensing restrictions, who are most likely to be locked out.
Deregulate Occupational Zoning
Occupational zoning regulates how one can run a home business. These laws, which municipalities and counties decide on, regulate anything from what can be sold to how many customers can come per day. In some cases there are even limits on how much money someone can make from their home business.
With stay‐at‐home orders, many people, desperate to keep their businesses afloat, may want to run things from home. However, to do that there are often lengthy permitting processes and zoning requirements that must be met. Many people are also unaware that they need permits to run at‐home businesses and thus can find themselves in legal battles. Some jurisdictions have suspended permitting processes temporarily or waived certain small business fees. However, this practice is not as widespread as it should be. States should encourage localities to ease these regulations to allow for more home‐based businesses.
Eliminate Asset Testing
Tens of millions of people have lost their jobs during the COVID-19 pandemic. Nobody has been hit harder than low‐income individuals, many of whom already rely on government assistance programs such as Temporary Assistance for Needy Families, which often employ strict asset tests. For example, in Georgia a family can have no more than $1,000 in savings to qualify.
Studies show that such asset tests disincentivize welfare recipients from saving. This leaves them highly vulnerable to issues such as eviction during an unexpected economic downturn and makes it difficult for them to get off welfare. Eliminating asset testing is a smart move to increase financial stability.
Switch to Cash Welfare
The federal government’s $2 trillion economic rescue package that gave everybody making under $75,000 a year a $1,200 cash payment stands in sharp contrast to most social welfare benefits, which provide payments to vendors that serve the poor rather than providing cash to poor people.
Yet cash has several advantages over such traditional “in kind” benefits. Cash is more transparent and treats equally situated individuals equally. Second, cash treats the poor like adults, allowing them to manage expenditures according to their individual needs rather than a paternalistic set of government requirements. Third, cash payments avoid much of the bureaucracy and special interest pleading that accompanies the existing welfare system. Giving the poor cash rather than in‐kind benefits would be greatly beneficial.
Getting the U.S. economy moving again will require a reinvigoration of its transportation system. The United States is massive and stretches from Alaska to Puerto Rico to Hawaii to Maine. Overcoming such distances is vital if Americans are to be able to trade with one another. Unfortunately, the U.S. transportation system—and particularly its maritime sector—is hamstrung by protectionist legislation called the Jones Act, which has made waterborne transport within the United States incredibly expensive and should be repealed immediately.
Passed in 1920, the law restricts such transport to U.S.-flagged, U.S.-built, and at least 75 percent U.S.-crewed and -owned vessels. But U.S.-built ships cost up to five times as much as those constructed in other countries. In addition, there are only 98 of them to meet the needs of the world’s largest economy. This combination of high costs and limited supply has produced eye‐watering shipping costs that Americans strenuously try to avoid. Instead of ships, other forms of transportation are used, such as trucks and rail. While ships account for 40 percent of coastal transport in Europe, ships transport a mere 2 percent of U.S. domestic freight. That is remarkable for a country with nearly 40 percent of its population living along its coasts. More trucks and fewer ships means more pollution and highway maintenance.
High domestic shipping costs, meanwhile, are a disincentive to buying American products. Instead, products are often sourced from abroad as the transportation costs can be lower despite greater distances. Shipping can be so expensive that the Department of Agriculture reports that Puerto Rico is buying rice from China instead of the U.S. mainland in large part due to lower transportation costs. The Jones Act even makes it impossible to buy American products in some instances. New England, for example, has purchased natural gas from Russia instead of domestically because there are no Jones Act ships capable of transporting it. Hawaii purchases propane from West Africa instead of the U.S. mainland for the same reason.
The Jones Act’s burdens also manifest in less obvious ways. The law raises the cost of maintaining ports and waterways by blocking access to foreign dredgers who can offer their services for up to one‐third the price of the U.S. dredging fleet. The Jones Act’s U.S.-build requirement also increases the price of buying ferries and other government vessels.
Repealing the Jones Act would go a long way in helping reinvigorate the U.S. economy after the pandemic.
Education and School Choice
Education systems across the country have had to implement online education as part of social distancing to flatten the SARS‐CoV‐2 curve. How should state education systems prepare for a future in which COVID-19 remains a threat and knowing that a different pandemic could someday strike? The key is greater freedom.
The country was fortunate that while most people attend traditional, brick‐and‐mortar public schools, there were already educational arrangements functioning at fairly large scales that are both home‐based and often online. Homeschoolers have offered invaluable advice to families that have suddenly found their children receiving education at home, and cyber schools—especially cyber charter schools—have been delivering fully online education for years.
Moving forward, states need to transition from directly funding schools (regardless of type) to connecting funding to children and letting parents choose educational arrangements that work best for them. Most parents’ choices will certainly remain traditional, physical public schools, but some who have previously found homeschooling or private schooling cost‐prohibitive will try those models. This is crucial because having more people trying different models allows those alternatives to be vetted and improved at greater speed and scale, making more—and more effective—alternatives available when a disruption such as COVID-19 occurs.
Perhaps ideal for an uncertain world are education savings accounts. With these accounts, the state deposits funds annually that families can use not only to pay private school tuition but also for many other qualified educational expenses, including computers and online service, therapies for children with disabilities, homeschool curricula, and more. Such a mechanism would be ideal for times when the best way to deliver education is uncertain; people could more quickly switch from brick‐and‐mortar schools to online programs, and kids with disabilities could already have some virtual therapies lined up. A permutation of this is a tax‐credit‐eligible education savings account program in which funds come from private donors who receive a credit for their donations, removing much of the impetus to regulate that comes if taxpayers’ money is directed to schools or other options to which some taxpayers object. Voluntary donation is crucial.
Tax credits for private schooling expenses are also good options. These include donation credits and personal use credits. For the latter, individuals get a credit for private schooling expenses they incur—meaning they do not pay twice for education. With donation credits, individuals or corporations get credits for donations that they make to groups that package scholarships. This enables assistance to reach lower‐income people who may not have a high enough tax liability to claim a meaningful personal use credit. Both have the advantage of not making anyone fund choices with which they may disagree, greatly reducing the impetus to regulate.
Next are voucher programs by which government funding is attached to a child rather than delivered directly to a school to which a child is assigned. Vouchers certainly expand private options, but they tend to attract appreciable regulation because people want accountability for the tax funds they had to supply when they believe schools are not doing any number of things they may want—or are doing many things they may not want.
Charter schools are one final way to bring innovation to scale, but they are public schools that must follow many rules of traditional public schools, including being held accountable using state standards and tests. This limits their ability to fuel innovation, and they are often attacked politically when the innovative things they try, including online schooling, do not work as well as some might hope. And because families don’t have to pay for them but they seem in many ways like private schools or even homeschools, charter schools hurt private alternatives that are freer to innovate but charge families for their services.
School choice is crucial. It allows great differentiation among education vehicles to match the needs of all children and should be pursued even without a pandemic shutdown threat.
Avoid School Shutdowns
Policymakers should also closely scrutinize whether closing schools makes sense. Research largely based on other countries as COVID-19 was emerging in the United States suggested that closing schools made little difference in the disease’s overall effect, and at least some subsequent research seems to back that. While out of school, children may pass the virus to each other and expose an increased number of older people who are less tolerant of it. Essential heath care workers may also find working necessary hours more difficult if they either must be home with their children or make childcare arrangements. States, districts, and schools should consider measures short of closure, including distancing within schools, frequent handwashing, and liberal absentee policies for children infected with the virus.
What we have learned from the SARS‐CoV‐2 situation is that education may need to turn on a dime, and the future is uncertain. Education savings accounts are ideal for coping with sudden change and uncertainty, but other forms of choice can also be very valuable. The worst thing a state can do is continue to put its education funding directly into a cumbersome, bureaucratic system of government‐run, brick‐and‐mortar schools. Flexibility, personalization, and innovation are always crucial but even more so in times of looming, uncertain threats.
State Finance and Budget
The COVID-19 crisis illustrates the importance of state rainy‐day budget funds. In 2019, for the first time since 1990, zero states needed to make midyear budget reductions due to projected shortfalls.7 This, coupled with a wide selection of other metrics, indicated that a full financial recovery from the last recession had been completed at a state level. Revenues across states had continued to rise, and rainy‐day funds, in many, had been partially or fully replenished. In fact, the median rainy‐day fund balance as a share of general fund spending reached 7.6 percent in fiscal 2019, an all‐time high.8
The good news does not end there. Heading into the 2008 crisis, our state governments had a collected $33 billion in rainy‐day funds on hand to weather the crisis. By December 2019, as SARS‐CoV‐2 was taking hold in China, the states had over $72 billion stored away. Many state leaders have learned the lessons of 2008, and our states are in better shape today to respond and recover. While this news is good, it does not mean smooth sailing ahead.
As industries have ground to a halt amid total lockdowns and business closures, state revenue streams are likely to dry up in unprecedented ways as a combination of consumer and business activities drop off precipitously. States that begin to make difficult choices now—to reduce spending, shift to privatization models to reduce liabilities, and build budgets designed to stretch their rainy‐day funds—are likely to avoid some of the catastrophic experiences that befell many states in the aftermath of 2008.
Furthermore, while the holistic state financial picture is far less bleak than in 2008, there is wide variation in state preparedness. Some states, such as Illinois and New Jersey, having little or no emergency funds to tap, and difficult choices are ahead for these administrations. When the economy resumes growth and state revenues start to grow again, state policymakers should remember, regardless of the state of their rainy‐day funds, to always spend less than incoming revenues and sock away the extra cash for true crises, such as the one we are presently faced with. While states are more prepared than ever to face the fiscal cliff that they are headed toward, preparedness today should not be allowed to give way to complacency tomorrow.
We thank you for attention to the options our team has assembled for your consideration. The Cato Institute is ready and available for consultation on these or any other measures you are considering. We wish you and your state the best during this crisis.