Relief Is Funneled to the Wealthy. We Need a Financial Infrastructure Overhaul.

The coronavirus — both the pandemic itself and the economic recession it caused — are hitting marginalized groups the hardest: low-wage workers, women and people of color (especially women of color) and small businesses. But instead of providing equitable relief targeted to the most disadvantaged households and businesses, Congress and the Federal Reserve are reinforcing many of the existing disparities that made our health care system and economy so fragile to begin with. Indeed, richer companies edged out smaller ones for pandemic aid, and wealthier individuals have already received their stimulus payment via direct deposit, while lower-income households still wait to receive their check in the mail.

Delivery systems for getting aid to individuals are either laggard or nonexistent in the U.S. The best we have is Social Security and the Supplemental Nutrition Assistance Program (SNAP). There are 65 million individuals each receiving monthly Social Security payments. But that system is targeted only to the elderly and people receiving other supplemental social security assistance — one of the few cohorts of people our society deems “worthy.” There are 40 million U.S. residents receiving SNAP, but this program is under constant threat of cuts by the Trump administration, even during the pandemic. Meanwhile, unemployment systems are meant to be able to get money to individuals, but coronavirus has shown how brittle and broken these systems are. Some people are unable to access their state’s unemployment website. Others either cannot get through to their state’s unemployment hotline, or must wait for hours to be connected.

And the corrosion isn’t by accident — states have deliberately underinvested in systems in order to deter individuals and families from receiving aid. It’s also the result of state-sanctioned indirect theft out of state unemployment trust funds, as companies like Uber, Lyft, DoorDash and Grubhub get away without paying into the system by misclassifying their workers as contractors, which gets them out of paying what they owe into state unemployment funds.

By contrast, the government is quite efficient at deploying money quickly to corporations and to wealthier individuals. While there were cutoffs for the stimulus check, topping out at incomes of $198,000 for a couple filing jointly, it is relatively wealthier individuals who will get their money first, as they are most likely to have their direct deposit information on file with the IRS. Meanwhile, millions of lower-income households may have to wait for paper checks in the mail weeks later and long after rent has come due and savings have been depleted (further delayed because Trump wanted his name on the check).

But while this botched and unequal rollout may appear to be the result of clogs in the system, it’s actually a reflection of where our policymakers chose to lay financial pipes in the first place. Inequality is embedded in the very design of our nation’s financial plumbing. And any relief package, if it is to be effective, will need to provide for the financial infrastructure to enable the government to actually get money to those who need it: postal banking, public access to direct accounts with the Federal Reserve and a National Investment Authority.

The USPS Could Democratize Banking

According to the Federal Deposit Insurance Corporation, the agency that backs all bank customers’ deposits, 14.1 million Americans don’t have a bank account, more than half of them because they “do not have enough money to keep in an account.” Nearly half of Black and Latino households have little to no access to checking and savings accounts. Ninety-three percent of the nearly 2,000 banks shut down from 2008-2013 were in zip codes where the household income was below the national median, which was $52,250 in 2013. And high fees are the most-cited reason why low- and moderate-income households don’t access bank accounts.

One way to solve this problem would be with postal banking. In 2012, law professor Mehrsa Baradaran proposed the creation of a banking system run through the U.S. postal system. The United States Postal Service (USPS) is uniquely situated to tackle some of these existing inequities. Due to its legal requirement to serve all Americans, regardless of geography, the USPS has over 31,000 branches serving every community in the country. Fifty-nine percent of post offices are in zip codes with either no bank or only one bank. Many have embraced this idea, including the American Postal Workers Union, who have a campaign for advancing postal banking. The Office of the Inspector General of the USPS wrote a report in 2014 noting that since it already provides money orders, it could explore expanding certain financial services. And Sen. Kirsten Gillibrand has supported this idea with her Postal Banking Act legislation, which she is advocating as a part of her work to save the USPS during the pandemic.

The Public Should Get the Same Bank Account That Banks Can Get

Another problem is that the most distressed will either get their payment late, or not at all. An estimated 10 million are at risk of not receiving a payment, because the IRS may not have any information for them: those who earn less than $12,200 a year aren’t required to file taxes. The IRS tried to fix this problem by providing an online form non-filers could fill out — but that is presuming people knew this form existed in the first place.

Contrast this with the instantaneous access to cash available to banks both large and small. Financial institutions have direct accounts with the Federal Reserve. These accounts are very attractive, featuring much higher interest than ordinary checking and savings accounts, as well as instant payments and full government backing. In 2018, law professors Morgan Ricks, John Crawford and Lev Menand proposed that all U.S. individuals have the option to keep a no-fee, no-minimum-balance account at the Fed. Sen. Sherrod Brown embraced the idea, proposing the creation of FedAccounts for all to ensure no one need rely on an expensive check casher to access their stimulus payment. Rep. Maxine Waters has also introduced legislation to create FedAccounts. FedAccounts for all would also ensure that none of the 10 million non-filers would miss their stimulus payment.

A Democratically Accountable Agency for Nationwide Investment in the Real Economy

The Paycheck Protection Program (PPP), created as a part of the CARES Act relief package, was aimed at giving loans and grants to “small business” (defined as those with less than 500 employees, though there are exceptions), administered through financial institution lending programs. Banks have earned $10 billion off the PPP’s first round of $350 billion in small business funding simply because they completed the paperwork on behalf of the Small Business Administration — not because they shouldered the risk of repayment.

Despite the federal government’s stated bipartisan commitment to rescuing small businesses, the actual policy outcome failed to meet its goals and was in fact regressive. Private banks catered to their wealthier clients first, allowing them to beat small businesses to the finite pot of loans. JPMorgan Chase was the largest lender in the program, deploying a whopping $14 billion in PPP funds. As a result, many of the smallest companies failed to get any aid prior to the program running out of the first round of funding.

The existing frictions in our financial infrastructure enable not just the richer companies to move fastest, it also allows profit-making and cronyism to flourish in the corporate bailout programs. For example, former Republican Rep. Eric Cantor’s firm Moelis & Co. was given a contract to oversee bailouts to the cargo industry. Other Washington-connected bankers got work handling loans programs to the airlines and national security companies. And Wall Street titan BlackRock has been hired by the Fed to run its program to purchase corporate debt and other securities. This public work has been outsourced to private market actors — at an added cost to the taxpayer and without the democratic oversight that voters deserve.

A proposal from law professors Saule Omarova and Robert Hockett offers a solution to this last problem. In 2018, they proposed establishing a National Investment Authority (NIA) which would invest in public projects that would boost the real economy. Think of it as a public asset manager, like BlackRock, which invests in projects that help the public good, either in good times or when bailouts are necessary. Their proposal is modeled after an enormous public sector financial institution called the Reconstruction Finance Corporation (RFC). The RFC acted as “the capital bank for the New Deal,” lending to everyone from state and local governments to businesses large and small. At its peak, it had more assets than all the Wall Street banks combined.

When large companies today need to raise cash to invest in big projects, they tap into their existing relationships with private Wall Street firms to create debt offerings. Small businesses lack this luxury. Creating an NIA would allow the U.S. to deploy both emergency funds when needed and nationwide investment, be they small loans for bars and restaurants, or large-scale infrastructure projects like the Green New Deal.

A National Investment Authority would also ensure that the government had in-house expertise instead of relying on private bankers as it does right now. The NIA could act as a bailout manager, ensuring that any funds are managed by an entity independent of any presidential administration, one with a mission to support economic activity by supporting businesses large and small. Omarova and Hockett’s proposal also outlines a democratically accountable governance structure made up of a board overseen by Congress and audited annually by the Government Accountability Office, which would help resist pressures like the Trump administration’s insistence on a big oil bailout.

None of these academic proposals are new, but the solutions they offer to the economic gridlock the pandemic is creating makes them seem prescient. We must invest the time now to build these systems; if we don’t, when the next crisis hits, we will further entrench the inequality built into the very system itself. If we fail to act at this urgent time, we risk cementing our policy-driven inequality indefinitely.