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Stimulus Checks: A Short Term Success
In March of 2020, the American economy was in a complete tailspin as the Covid-19 Pandemic began to grip the nation’s economy and daily life. The economic shutdowns deemed necessary by public health officials led to an economic crisis, resulting in millions losing their jobs and the markets tanking. In an attempt to combat this economic destruction, Congress passed the Coronavirus Aid, Relief, and Economic Security Act, or CARES Act. Besides providing essential liquidity to keep businesses from slashing their payrolls through the Paycheck Protection Program (PPP), the economic impact payments, or $1200 stimulus checks sent out to qualifying Americans were meant to inject a shot of adrenaline into the failing economy. Over the course of 2020, the IRS sent out at least 153 million direct payments to Americans totaling $269b, according to the Peter G. Peterson Foundation. But how did people use their money and how effective was the program on stimulating the economy?
The objective of the stimulus checks issued by the federal government was to provide emergency fuel for a freefalling economy by providing funds that would in theory be quickly reentered into it. Measuring the success of this initiative varies by income grouping within those who received a check. The $1200 stimulus checks that were received by low-income earners had begun to be spent almost immediately after the money was deposited into their bank accounts. According to data presented by Kellogg Insight in May, researchers discovered that “Those in the lowest income group, who earned less than $1,000 per month, spent about 40 percent of the checks in the first ten days.” This was approximately double to those earners making $5000 per month. The report also noted that “on average, Americans spent roughly a third of the government-issued funds within 10 days of receiving it.” Measuring the overall effectiveness of the emergency stimulus once examining the behavior of higher earners is where things become murkier.
The report released by Kellogg Insight notes that higher liquidity levels possessed by check recipients, often a result of higher earnings, meant less money going back into the economy. “…Those with less money in their bank accounts when the check arrived tended to spend more of their check right away.” Once the spending data was compared against the liquidity levels of the recipients, the report found that there was a threshold to where the money was no longer spent by the individual. “People with the highest amounts of cash on hand—$3,000 or more in their checking accounts—had no response to the appearance of their stimulus check.” In other words, the money received by those with more cash was not spent immediately once it arrived.
How money was used by Americans once the economic impact payments arrived can be broken down into three categories: consumption, debt-reduction, and saving. According to data reviewed by The New York Federal Reserve and released Liberty Street Economics in October found that the majority of stimulus check recipients either saved their money or used it to pay down prior debts. “We find in this analysis that as of the end of June 2020, a relatively small share of stimulus payments—29 percent—was used for consumption, with 36 percent saved and 35 percent used to pay down debt.” A closer examination of how the money that was spent was used reveals that of the people who did use their funds immediately, it was mostly spent towards essential, daily living expenses. “An average 18 percent of these funds was used for essential spending and an average 8 percent used for non-essential spending, resulting in a total MPC of 29 percent after including the 3 percent of the funds donated.
”Ultimately determining the success of the economic impact payments, or stimulus checks, depends on your perspective. The data presented by both Kellogg Insight and The New York Fed indicate that the majority of the money was not spent immediately on consumption, which was its intended use. But in an indirect manner, the program just may have contributed to an economic explosion in the third quarter. Fred Economic Data reports that shows that Americans’ savings rate of disposable income exploded to over 30% in April, where it had typically remained around 7% pre-pandemic. The spending that Americans did in the summer months led to a GDP explosion in Q3 2020, a record breaking 33.4%. Tying a direct correlation between the stimulus checks and immediate economic stimulus is difficult in this unique pandemic scenario because when the majority of Americans received their money, the economy was essentially locked down and greatly restricted. But the case can be made that the extra cash led to higher savings and reduced debt for most Americans, which created an economic firestorm in the third quarter as they were eager to spend on consumption once they were finally allowed to. But with small businesses on Main St being destroyed by lockdowns at the whims of local government, it is clear that economic stimulus payments directly to citizens can be a great short-term boost to the economy, but in the long term is ineffectual at combating the worst effects of this pandemic economy. The only cure for that is to open up.
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