With President Biden inaugurated and the three newest members of the Senate sworn in, one of the top items on Congress’s agenda is another round of direct stimulus payments to Americans. Much of the debate has concerned how much money the government should give out—$1400 per person? $2000?—but more consequential would be how the payments are structured. Rather than sending people another check, the government should send them a credit card.
Unemployment is still at about twice its pre-pandemic level. In response to this, some have suggested giving stimulus checks only to those who are unemployed or underemployed. But the vast majority of Americans are either still employed or not in the labor force. Focusing too narrowly on unemployment ignores most of the economy, as well as disincentivizing returning to work.
Other proposals involve support only to those whose household incomes are below a certain threshold. The problem with this approach is that it fails to take into account that a person’s income from past years may not accurately reflect whether they are struggling now. It could be both over-inclusive—giving money to people who struggled last year but are in more stable financial situations now—and underinclusive of those who have suffered most dramatically due to the pandemic.
People who receive $2000 that they don’t urgently need are likely to deposit the money into their savings accounts. This goes in particular for those who are worried they might soon be unemployed and thus will need to rely on their savings. They will of course spend the money eventually, but this nonetheless defeats the purpose of the stimulus, which is to give a short-term boost to the economy.
The best way to prevent this issue would be for the government to issue a special credit card to every single American.
Such a credit card would come with a $2000 limit. The difference is that this card would be automatically deactivated after three months, after which the government would pay off the balance. In other words: Every adult would get to spend $2000 on the government’s tab, but they would have to do it now. Anyone who didn’t spend all the $2000 within three months would be throwing away free money.
To prevent people from withdrawing the $2000 from an ATM and stuffing it into their mattresses, the credit card would have to contain a technical barrier against cash withdrawals. This technology already exists: Food stamps haven’t been physical stamps for decades. Today, those in the SNAP program are issued a card that looks like any other credit or debit card, but with restrictions.
The remaining loophole would be through retail returns: People could buy something, e.g. a $2000 TV, and return it for cash, which they could then deposit. The friction of the process, the sheer hassle of it, would make it relatively uncommon, and to prevent problems with cash flow, retailers could also institute no-return/no-refund policies for purchases made with stimulus cards.
This is not a perfect solution, and just as with direct deposits or paper checks, there are bound to be cases of people not receiving their credit card and cases of people receiving more than one. These are costs associated with inaccuracy that the government has been willing to pay in exchange for getting stimulus payments out fast.
And none of this is to say that direct stimulus payments to individuals is the best strategy for mitigating the economic impact of the pandemic. There’s reason to believe that payments to individuals might allow too many businesses to go under, which will make the eventual recovery more difficult. Supporting businesses to maintain their payroll, as the PPP program tried to do, might arguably be the better intervention.
Stimulus credit cards wouldn’t make these problems any worse, but they would make the stimulus itself more effective. If direct payments to individuals are the path Congress has decided on, credit cards are the way to do it.