If the economy’s in recession, shouldn’t stimulus payments be automatic?

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Imagine this scenario.

Your economy hits a rough patch and some people start losing their jobs.

Over several months, the job losses slowly edge higher.

As always, economists start arguing about the meaning of the rising unemployment rate but they can’t agree on its cause.

But then — bang!

Stimulus payments start automatically flowing to households anyway.

The unemployment rate has hit a certain trigger, a real-time indicator that the economy is in recession, long before policymakers would traditionally make that call.

And the payments are already hitting peoples’ bank accounts to alleviate the pain of rising joblessness, and to hopefully reduce the severity of the recession.

And the best part?

It’s occurred without politicians getting involved. People are getting the stimulus payments without having to wait for the government to give the okay.

Does that sound far-fetched?

Well, it’s not.

It’s the brainchild of Claudia Sahm, a former US Federal Reserve and Council of Economic Advisors economist.

Her so-called Sahm Rule uses the unemployment rate to show when an economy has entered recession much earlier than traditional indicators.

And it’s now caught the eye of Canada’s Conservative Party, which this month included the rule in its election platform.

So, let’s look at the Sahm Rule quickly, before seeing what Canada’s conservatives are doing with it.

Historically, they’ve been ideologically close to Australia’s Liberal Party.

What is the Sahm Rule?

The Sahm Rule originated in a report published by the Brookings Institution in mid-2019.

The report was called Recession Ready: Fiscal Policies to Stabilize the American Economy.

Dr Sahm wrote a chapter for the report explaining why lump-sum stimulus payments for households were so effective in recessions.

She also argued that policymakers in the United States should consider introducing a system of automatic stimulus payments to their policy toolkit.

She said the payments could be triggered by an increase in the unemployment rate, and then she introduced her “rule”:

 

“The direct stimulus payments to individuals begin after a 0.5 percentage point increase or more in the three-month moving average of the unemployment rate relative to its low in the prior 12 months.”

 

She argued that, based on past recessions in the United States, such a change in the unemployment rate would be a “highly effective trigger” for automatic stimulus payments.

“Early in each recession since 1970, the unemployment rate rose at least 0.50 percentage points,” she wrote.

She included the graph below.

The shaded columns show when the US economy was officially in recession between 1970 and 2018.

The orange dotted line is Dr Sahm’s proposed trigger point where the three-month moving average of the unemployment rate shows when a recession has begun.

That’s where automatic stimulus payments could start flowing.

“Even a modest rise in the unemployment rate such as 0.50 percentage points has occurred only during or closely following recessions,” she wrote.

“In other words, by this rule the stimulus payments would have been triggered only in recessions.”

Dr Sahm then provided another graph.

It showed how long it would have taken for automatic stimulus payments to begin flowing in past US recessions, according to her rule.

“On average, payments would have been triggered within three months of the start of the past six recessions,” she wrote.

“The automatic trigger would have been met four months after the 2008-9 recession began, and two months after the 2001 recession began.”

See the graph below.

It’s a fascinating idea.

Dr Sahm suspected some politicians mightn’t warm to it because they’d fear it could take some control away from them.

To ease their fears, she said governments could obviously tinker with the size, structure, targeting, and funding of the stimulus payments when they designed the system.

And if they were still concerned about losing some control of fiscal policy, they could even have the final say on whether or not the stimulus payments were sent to households at all, which would unfortunately remove the automatic nature of the payments.

However, imagine a situation in which a rising unemployment rate triggered the alert that the economy was in recession and stimulus payments should start flowing.

In that situation, if the government didn’t want the stimulus payments to start flowing it would have to explain to voters why it wasn’t going to allow it.

The politics of that could be interesting.

At any rate, if you want more details about how the system would work, have a read of Dr Sahm’s original 2019 chapter.

It’s written clearly and simply.

She suggested a special fund could be created to supply the automatic payments in a recession (imagine something like Australia’s Future Fund).

She also provided details on how large she thought the stimulus payments should be, and at what point in the recession they should be released.

Importantly, she’s insisted her “rule” is specific to the US economy and it’s not necessarily universally applicable.

But that doesn’t mean a version of the rule wouldn’t work in other economies.

O Canada!

Which brings us to Canada.

In November last year I wrote about the bizarre shift in ideology that has been occurring on the conservative side of Canadian politics.

A few months before that piece, the Conservative Party of Canada had got a new leader, Erin O’Toole.

Mr O’Toole became leader in the wake of the party’s loss at Canada’s 2019 federal election. And almost immediately afterwards, he began making a series of unusual speeches that made him sound like a member of Australia’s Labor Party.

It was a deliberate attempt to try to attract voters among the country’s working class and lower middle class who’d drifted away from the left.

He called on Canada’s conservatives to start taking income inequality seriously.

He warned declining union membership had been bad for Canada, because unions were an essential part of the balance between what was good for business and what was good for workers.

He complained that real wages hadn’t risen in Canada since the 1970s, and criticised Canada’s former governments for sending so many manufacturing jobs overseas.

But fast forward to this month.

Mr O’Toole is now preparing his party for another federal election (a snap election has been called for September 20, less than two years after the last one).

Two weeks ago he released his party’s election platform, called Canada’s Recovery Plan.

And it included the Sahm Rule.

“We will launch a Super Employment Insurance that temporarily provides more generous benefits (75 per cent of salary instead of 55 per cent) when a province goes into recession (a 0.5 per cent increase in the unemployment rate, as defined by the “Sahm Rule”),” Mr O’Toole pledged.

“Employment Insurance will return to normal levels once the recession is over, as evidenced by three months of job gains.”

It will be fascinating to see if it leads anywhere.

Dr Sahm tweeted about it last week, saying it was her “first international Sahm Rule”.

“Automatic enhancements of jobless benefits would be a big win for workers in recessions,” she said.

She also did some calculations with Canada’s unemployment data to see what the Sahm Rule ought to be for the country.

Turns out, it should be slightly higher than the one Mr O’Toole’s proposed.

“Same principle as US Rule except 0.6 percentage point cutoff is better,” she tweeted.

We’ll see what Canadian voters think of it next month.

But could it work in Australia?

By business reporter Gareth Hutchens (Original ABC Article)