The Problem

During recessions growth in consumer expenditures in the United States slows markedly—and in many cases declines. Consumer spending makes up about 70 percent of aggregate expenditures in the economy, and sharp slowdowns in consumer spending can exacerbate employment losses and reduced production, making a recession even worse.

The Proposal

As a response to these problems, Sahm proposes to distribute stimulus payments to individuals automatically in response to recessions. Recent research finds that broadly distributed, lump-sum payments to individuals directly boost spending and help stabilize demand, making these types of payments effective responses to recessions. Sahm’s proposal would offer lump-sum annual payments to individuals when the three-month average national unemployment rate rises by at least 0.50 percentage points relative to its low in the previous 12 months. The total amount of stimulus would offset about half of the slowdown in consumer spending, totaling about 0.7 percent of GDP.