The case for a "Mankiw pandemic income" for Spain

EsadeEcPol | Policy Insight #12

By EsadeEcPol

Authors: Claudia Hupkau (CUNEF, CEP), Toni Roldán (EsadeEcPol) & Carlos Victoria (EsadeEcPol)

Download the report in Spanish (pdf)

Executive summary

  • Governments around the world have put in place ambitious relief programmes with the aim of not leaving anybody hit by the Covid-19 crisis behind. However, in many countries, help is taking too long to get to those in need.
  • This is partly because governments may not be implementing the right policies for emergencies. In pandemics, such as in natural disasters, conventional benefits with complex pre-requisites are too slow: it is better to spend first and ask later. This can help avoid unnecessary social suffering and a deeper economic recession.
  • In this note, we first illustrate the scale of the administrative delays some governments are facing in processing benefit claims made since the onset of the crisis. Second, we discuss whether different conventional benefit schemes are suitable as emergency responses.
  • Third, based on Mankiw’s (2020) proposal, we estimate the cost of a quasi-universal temporary cash transfer of 1,000 euros for an initial duration of three months for Spain. The transfer would be accompanied by a one-off tax to be paid the following year. The cost over the two-year period would be of less than 1% of GDP. We conclude that ex-post targeting is likely to be superior to complex ex-ante targeting in times of emergency.

Help is not arriving to those in need

Governments have put in place a variety of new measures to respond to the economic and social crisis provoked by the Covid-19 pandemic. Most of these measures have been focused in protecting vulnerable workers and insuring that enough liquidity gets to firms and the real economy.

More flexible short-time work schemes have been approved in order to reduce the incidence of unemployment and extraordinary income support has been extended to vulnerable workers – including those in non-standard forms of employment.

New lines of credit and grants have been put in place to help companies bridge liquidity gaps and some taxes and social-security contributions have also been postponed to help SMEs and the self-employed through the lockdown. There is no question that governments have been active (see OECD 2020). However, being active is not the same as being effective.

One problem some countries are facing is that help is taking too long to get to those in need

One problem some countries are facing is that help is taking too long to get to those in need. Take the case of Spain. Over the months of March and April, about 900,000 people lost their jobs and applied for unemployment support. In the same period, another 4 million workers, accounting for 21% of the workforce, were affected by so-called ERTEs, a temporary collective redundancy scheme similar to the "Kurzarbeit" system in Germany or the "Activité partielle" in France.

In the meantime, the government approved seven Royal Decree-laws with plenty of employment-related measures and several new extraordinary measures to offer ad hoc social protection to different groups of vulnerable workers affected by the lockdown, such as the badly protected self-employed workers, temporary workers or domestic workers (see Table 1).

Table 1. Coverage of income support measures in Spain

Table 1 unemployment in Spain
Source: 2020 Stability Programme Update, Government of Spain.

The laws were quickly approved, but the design of the different subsidies did not take into account the gigantic problem the administration would face in processing them. First, the newly implemented benefits often require complex eligibility checks before they can be approved. For instance, in order to receive the new extraordinary benefit, self-employed workers are required to prove that their activity over the lockdown period has fallen below 70%.

Compiling this information takes time and for many workers whose income is distributed irregularly over the year (such as designers or architects) it can become an administrative nightmare or simply impossible. The government ended up having to modify the conditionality criteria of the original Royal Decree-Law three weeks later in order to clarify how to fulfil pre-requisites for different activities [2].

The design of the different subsidies did not take into account the gigantic problem the administration would face in processing them

ATA, one of the largest associations of self-employed workers, denounced that most self-employed workers won’t be able to access any benefits or public credit lines for months and this would lead to a cascade of closures of viable businesses.

Domestic workers, for which an extraordinary benefit was approved at the end of March, have only just been able to start applying for this benefit at the beginning of May, nearly two months after many workers of this type lost their jobs.

Second, the administrations' digital systems were unprepared for the quantity of applications and many workers lacked the technology to work from home effectively. According to the Ministry of Territorial Policy and Public Function, as a result of the lockdown about two thirds of public administration workers had to work from home.

The Spanish Public Employment Service (SEPE) is trying to process about 80,000 ERTE requests a day. In April, the government recognised that payments for four out of five ERTE files received in March, when the lockdown started, would not be received by the beneficiaries until May, or even June [3].

The Spanish Public Employment Service is trying to process about 80,000 ERTE requests a day

Additionally, designing specific ad hoc measures for different groups of workers (rather than more universal schemes) means that all workers in the informal economy – estimated to represent between 15 and 20% of Spain’s GDP (Fernández Leiceaga et al., 2018) – are not covered by any of the existing measures.

Spain is not the only country failing to deliver cash transfers in a timely manner. Reuters reports that Italy pledged aid to 2.3 million workers who were forced to stop working through the lockdown. But only 29,000 people have actually received it. This is not surprising given the complex application process: Italy's small business subsidy requires companies to fill out a four-page document for each worker; the document is then sent to the regional government for checks before the request can be forwarded to the national welfare agency, the INPS.

These examples are in sharp contrast with those in other countries using simple and fast cash-transfer schemes. In Canada, for instance, the government approved an income support scheme (the Canada Emergency Response Benefit) of CAN$2,000 (approximately €1,400) per month for all those affected by unemployment due to social distancing measures for up to four months.

Spain is not the only country failing to deliver cash transfers in a timely manner

According to the government of Canada, the application can be done either by internet or by phone and requirements are minimal (a bank account and a social insurance number), although people may be asked to provide additional documentation to verify eligibility at a future date [5].

The money is received within 10 working days. On 12 March 2020, the Australian government announced an immediate cash transfer of $750 for 6.8 million low-income earners. Prime Minister Scott Morrison said the package had been "deliberately designed to be very front-end-loaded because (…) that’s when it’s needed [6]."

Ayudas Covid
In many cases money is not arriving to those in need and this will cause unnecessary social suffering (Photo: Clara Soler)

Rethinking social policy in times of emergency

As we have shown, in many cases money is not arriving to those in need and this will cause unnecessary social suffering and deepen the economic recession. As Gourinchas (2020) explains: "A modern economy is a complex web of interconnected parties: employees, firms, suppliers, consumers, banks and financial intermediaries… Everyone is someone else’s employee, customer, lender, etc. (…) the priority is to short-circuit all the negative feedback loops and channels of contagion that otherwise amplify this negative shock."

The mistake of some governments has been to underestimate the exceptionality of the times we are living. In Spain, and other countries, it has also brought to light the holes in the current social security system: large parts of the working population are not covered by the social safety net (like unemployment insurance), and this disproportionately affects workers in low income jobs – those most affected by the crisis.

The mistake of some governments has been to underestimate the exceptionality of the times we are living

In times of emergency, social policy (like monetary or education policy) needs to be re-thought. The ideal emergency policy should be fast and simple (ideally processed electronically or via telephone), using existing sources of information within the government (i.e. social security registers, resident registries) for largely automated eligibility checks.

Eligibility criteria should be minimal and the benefit should reach the entire affected population. Finally, it should be affordable. This means avoiding, when possible, overlapping with other existing measures and/or smart ex-post targeting. In what follows we discuss some possible types of benefits, and how suitable they are in an emergency situation like the Covid-19 crisis.

Minimum income schemes

Minimum income schemes are already in place in many advanced countries, and the Spanish government, in response to the Covid-19 crisis, has recently proposed such a scheme. These schemes are generally means-tested and targeted at the most vulnerable segments of the population.

A minimum income is cheaper than, for instance, a universal basic income, but for that reason it is less effective for emergencies like the Covid-19 crisis. For instance, well designed permanent minimum income schemes like the one implemented in the Basque Country (Renta Mínima de Ingresos) are effective in reducing extreme poverty (De la Rica & Gorjón, 2017), but they often imply complex eligibility checks with respect to income as well as assets and beneficiaries might take between two and four months to receive the money after registration (De la Rica & Gorjón, 2020).

In this crisis, many individuals who would ex-ante not have been perceived as vulnerable are affected

Additionally, they are targeted at structurally disadvantaged households, like single parent households or the long-term unemployed (De la Rica and Gorjón, 2017). In this crisis, however, many individuals who would ex-ante not have been perceived as vulnerable are affected. For these reasons, a minimum income scheme is not suitable for emergencies like the Covid-19 crisis.

Short-time work

Short-time work programmes are public programmes providing wage support to employees affected by temporary reductions in working hours. They are aimed at reducing job loss, allowing firms to keep employees despite temporarily low revenues (Cahuc, Kramarz and Nevoux, 2018).

Employees receive a subsidy from the government that is proportional to the reduction in hours. The theoretical case for short-time work during the Covid-19 crisis is strong: through labour hoarding, they allow firms to keep specific human capital, thereby avoiding having to rehire workers when the shock is over and enabling them to recover more quickly. Workers avoid the long-term career costs associated with job loss and preserve firm-specific human capital (Giupponi and Landais, 2020).

Covid-19
Short-time work benefits only cover those individuals who keep their job (Photo: Isaac Planella)

Short-time work benefits only cover those individuals who keep their job. For some firms it may not be viable to keep all of their employees, either because they expect the crisis to have long-term consequences for their businesses or because they are not eligible for short-time work schemes. While many workers who do lose their job are covered by unemployment benefits, an important share are not; either because they do not satisfy the minimum contribution requirements or are not eligible for other reasons (see Scarpetta et al., 2020).

Temporary extension of unemployment benefits

Temporary, ad hoc transfers like the one implemented in Canada are designed to target everyone who has lost their job due to the consequences of the Covid-19 crisis. Spain’s ad hoc measures for domestic workers, the self-employed and temporary workers whose contract expired during the quarantine and who are not eligible for regular unemployment benefits can also be counted under this category. As we already discussed above, in contrast to the Canadian approach, each of these measures has its own set of eligibility criteria, making it hard for people to apply and slowing the approval process.

Such a transfer can be beneficial in countries where a large share of workers is either not covered by regular unemployment benefits or short-time work programmes. While these transfers are targeted at everyone affected by job loss, individuals working in the shadow economy are not covered by them.

Each of these measures has its own set of eligibility criteria, making it hard for people to apply and slowing the approval process

Also, contrary to short-time work schemes, they do not allow labour hoarding by firms, with the consequent negative effects on workers' human capital and slowing firms' recovery after the negative shock. As a standalone measure such schemes are therefore probably suboptimal.

Temporary unconditional cash transfers

The literature on emergencies and disasters shows that temporary unconditional transfers are likely to be superior to other alternatives. According to the World Bank, there are currently 130 new cash initiatives introduced in response to the Covid-19 crisis (Rutkovski, 2020). These measures have been used in past natural disasters too, for instance, in the response to the Indian Ocean tsunami in 2004, the South Asia earthquake in 2005, to hurricanes Katrina and Rita in the United States in 2005 and to floods in Germany in 2002 (Harvey, 2007).

However, given the large size of the population potentially affected by job loss due to the Covid-19 pandemic, implementing such a transfer would be very costly to governments.

The design proposed by Mankiw implies giving a cash transfer to every working age individual for the duration of the crisis

Mankiw (2020) proposes a temporary unconditional cash transfer with ex-post targeting, which we already discussed in a recent article [7]. It implies giving a cash transfer to every working age individual for the duration of the crisis. In the next year (or spread over several years), an extraordinary tax would be levied that is proportional to the total earnings loss suffered in 2020 compared to 2019. The tax would be capped at the amount of the cash transfer received. Because presumably many people would repay large parts of the received benefit payment, the implied net budgetary costs would be much smaller than the initial cost of the programme.

The advantages of such a programme are that it would cover everyone that is potentially affected, it is administratively easy to manage, due to minimal eligibility criteria, and can therefore reach people within a short time frame. Moreover, ex-post targeting allows reducing the cost of the programme, making it more efficient.

The case for an unconditional temporary cash transfer with ex-post targeting à la Mankiw

Cost

To get a sense of the cost implied by a programme à la Mankiw, suppose a payment of €1,000 is made to every adult aged between 18 and 65 while social distancing measures force a large portion of the population to reduce working hours or out of work. For simplicity, let us assume these payments are made for three months to a total of 30 million people (approximately the number of 18-65-year-olds in Spain). Let’s further assume that 25% of the adult population is unemployed with no earnings for three months, experiencing earning declines of 25% for the year 2020 compared to 2019, and a further 25% of the workforce loses half their earnings for the three-month period.

The initial cost of this measure would be 90 billion euros, or 7% of GDP. The population not affected by job and earning losses would repay the cash benefit in full and the benefit would effectively have been a short-term loan. For individuals affected by a three-month job loss, the extraordinary tax implies that they would repay 75% of the cash payments received, thus being left with a net cash transfer of 750 euros.

Individuals affected by a 50% drop in earnings during three months would receive a net benefit of 375 euros

Individuals affected by a 50% drop in earnings during three months would receive a net benefit of 375 euros. Total surtax revenues would amount to 81.5 billion euros, implying a net budgetary cost of the measure of only 8.5 billion euros, or 0.68% of GDP.

In Table 2 we present the estimated costs of the scheme, including two more generous scenarios. When adding a benefit of 150 euros for every child below the age of 18, the net budgetary cost would rise to 0.71% of GDP (8,788 million euros). In the third case, with an income threshold below which individuals would not have to repay the benefit (e.g. 8,500 euros), the cost would amount to about 2% of GDP (24,750 million euros).

Table 2. Estimated costs of a pandemic income scheme for Spain (different scenarios)

Benefits Covid-19 Spain
Source: Authors’ own calculations using data from Instituto Nacional de Estadística (INE).

Advantages and concerns

The advantages of this proposal are that it is simple, could be implemented fast, and the budgetary costs implied over the two-year period are similar to those of other schemes implemented at the moment (see Banco de España, 2020), while having the potential to reach everyone who is affected by income losses, without involving ex-ante targeting that is likely to miss many individuals and takes time.

This proposal could be implemented fast and has the potential to reach everyone who is affected by income losses

It is compatible with already existing measures, like unemployment benefits, temporary collective redundancy schemes or other extraordinary measures: if such benefits are included in the income calculation for 2020, this reduces the effective income loss suffered by individuals with respect to 2019, and increases the amount of the benefit that will have to be repaid.

The extraordinary cash benefit is likely to raise the overall replacement rate – the share of lost income that is replaced by transfer payments from the government. Having a generous replacement rate is unlikely to induce opportunistic behaviour in the Covid-19 crisis: workers are effectively forced to stop working during the social distancing measures and many of those who are looking for jobs are unable to find one.

One might worry that the scheme creates disincentives to work. The marginal tax rate implied by the scheme is equal to the ratio of the total cash payment received (e.g. €3,000) to income earned in 2019. For all people whose incomes in 2019 were above €3,000, the additional marginal tax rate is below 1, meaning that there is a net gain for every extra euro earned. The transfer should be strictly limited to the months with the most severe drops in activity and while social distancing measures are crucial to slow down the epidemic. This would reduce incentives to refrain from looking for a job or returning to work for the remainder of the year.

The transfer should be strictly limited to the months with the most severe drops in activity

The government might be concerned that it cannot recover the tax at all from some individuals. Take the case of an individual with no income in 2019 that spends all the transfer and receives no income in 2020. This could be the case for a full-time student, for instance. The government would have to implement a mechanism in order to recover the tax, for instance by spreading the tax liability over future years and making it contingent on future earnings.

Implementation

In terms of the practicalities of implementing such a policy, it is not straightforward to send checks to all adults in a country. An automatic bank transfer is not feasible either, because there is no centralised register of all up-to-date bank account details of the entire Spanish adult population. Some form of application system is therefore inevitable.

One possibility is to set up a very simple online application (or via telephone for those not able to use the internet) that verifies applicants' identities (using their national identity number, DNI) and asks for bank details [9]. The details provided could be checked against the Padron (register of inhabitants) and other identity check sources (for instance, social security records). Ex-post targeting and the payment of the extraordinary tax can be managed through the income tax return in 2021.

The benefit of a simple online or telephone application with electronic eligibility checks is that the approval process can largely be automated

The benefit of a simple online or telephone application with electronic eligibility checks is that the approval process can largely be automated, requiring minimal or no checks by administrative workers. The disadvantage is that even the simplest application form might pose a significant challenge to those most in need because they lack the resources, ability or knowledge to apply.

It would therefore be important to publicise the scheme widely through the media and through information campaigns using, for instance, the data available at the Spanish social security (TGSS) for SMS campaigns and provide telephonic assistance to those unable to fill out the application by themselves.

Even the most basic identity checks might be a barrier for the most vulnerable households

Even the most basic identity checks – for instance, using national identity numbers, addresses and bank details – might be a barrier for the most vulnerable households, like undocumented immigrants. While we currently lack the data to quantify the amount of people who are not covered at all by the social safety net, this crisis is likely to serve as a wake-up call for governments to recognise that irregular situations of certain groups of people cause immense social suffering, especially in extreme situations like the Covid-19 pandemic. They can also pose a public health risk and prolong the health crisis, for instance if workers have no other choice than to go to work.

An advantage of having an application is that potential beneficiaries might self-select into applying for the benefit: those that do not expect overall earning losses, knowing that they will have to repay the transfer in full, are unlikely to apply for the benefit in the first place. This would reduce the initial budgetary cost of the measure.

A measure like this would be more efficient if implemented right at the beginning of the emergency period

While an interest payment could be implemented for those who did not end up suffering any income losses, this would be contrary to the idea of universality. The pandemic income should be understood as a form of ex-ante insurance against possible income losses that might yet hit many more people than currently assumed.

The economic crisis is likely to last substantially longer that the initial quarantine period, and even sectors that were not immediately affected by lockdowns are likely to suffer reductions in employment.

Of course, a measure like this would be more efficient if implemented right at the beginning of the emergency period (when we initially proposed the idea in Spain). Still, given the severe delays with other benefits and the high degree of informality in Spain, the government should still consider it.

Conclusions

In this note, we illustrate the administrative challenges some countries are facing in dealing with the avalanche of applications for unemployment benefits, short-time work and other new benefit payments specifically introduced as a response to the Covid-19 crisis. We show that conventional social policies, with complex ex-ante conditionality and tedious eligibility checks, are not an effective response to pandemics if they take too long to be processed and do not cover large parts of the affected population.

Based on Mankiw’s (2020) proposal, we estimate the cost of a quasi-universal temporary cash transfer scheme of €1,000 for three months for Spain. The transfer would be accompanied by a one-off tax to be paid the following year. The net cost would be of less than 1% of GDP, which is assumable for Spain and surely for most other countries. If well designed, this proposal would be compatible with short-term work schemes, which are crucial to preserve labour relations and conventional unemployment benefits. It would have the advantage of covering everyone in need of help in a timely manner, which is crucial in emergency times.

Bad policy design in the response to Covid-19 is leading to unnecessary social suffering and will probably result in deeper economic pain in the future. The implementation of an unbureaucratic emergency transfer like the one proposed in this paper could still help alleviate economic suffering for people not covered by any of the existing benefits, and could serve as a bridge loan for those who are still waiting for their applications for other benefits to be processed.

Notes

[1] The authors thank Ana Revenga, Ignacio Conde Ruiz, Lucía Gorjón, Ángel de la Fuente and Juan Francisco Jimeno for their useful comments and discussions.

[2] See Real Decreto-ley 8/2020, 17 of March, and Real Decreto-ley 13/2020, 7 of April.

[3] See https://www.rtve.es/noticias/20200416/colapso-oficinas-empleo-retrasa-pago-erte-necesitamos-ingresos-para-cubrir-necesidades-basicas/2012169.shtml

[4] See https://www.reuters.com/article/us-health-coronavirus-italy-jobs/italy-pledged-aid-to-2-3-million-workers-just-29000-have-got-it-idUSKBN22B2Y6

[5] See https://www.canada.ca/en/services/benefits/ei/cerb-application/questions.html

[6] See https://www.dss.gov.au/about-the-department/coronavirus-covid-19-information-and-support

[7] See https://elpais.com/elpais/2020/03/30/opinion/1585560122_606773.html

[8] Mankiw's proposal is intended for all adults. Given that the population over 65 in Spain is mainly covered by pensions, we exclude this part of the population.

[9] In the case of people who do not have bank accounts, transfers could be sent through mobile phones. This is a common practice in developing countries, where a large part of the population does not have access to a bank account (see World Bank, 2020).

References

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