Stimulus checks could be used in the next recession, economists say & More news

 

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The stimulus checks sent out during the coronavirus pandemic were wildly popular.

Nearly 4 in 5 voters were in support of the direct payments to American families. And Democrats and Republicans alike rallied behind the policy, an increasingly rare sight in Washington.

Still, the checks were not without controversy. Among the criticism was that there were too many rounds of the payments, that they should have been better targeted to financially struggling Americans and that the cash led, at least in part, to the runaway inflation we’re now seeing.

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Nevertheless, the popularity of the payments and findings that they reduced poverty and promoted spending means they’re likely to become a tool pulled out by the government in the next recession, which may be coming soon, experts say.

“I expect stimulus checks to be used again,” said Claudia Sahm, a macroeconomic policy consultant and former Federal Reserve economist. “They worked.”

Stimulus checks aren’t a new recession tool

In economic downturns, the U.S. government has a number of levers it can pull to keep families spending and shielded from the most dire situations. Continued spending is key, because if people’s buying slows or dries up, companies respond to lowering profits by laying off even more workers, which only deepens and prolongs the hard times.

Relief strategies include enhancing unemployment benefits, boosting food stamps, temporarily slashing taxes and sending out stimulus checks.

The government deployed stimulus checks in the 2001 and 2008 recessions, but the pandemic prompted payments on an unprecedented scale, Sahm said: “This Covid recession was the first time that multiple rounds were sent out.”

There were three rounds of the checks: Those who were eligible received up to $1,200 in April 2020, up to $600 in December 2020 or January 2021, and up to $1,400 in March 2021.

Here are some reasons Sahm and other economists cite as making it likely stimulus checks will be sent out again in the event of another recession.

Checks can make an impact ‘within days’

Sahm points out that stimulus checks have unique advantages compared with other forms of aid.

For one, they get to people quickly.

Research on the stimulus checks shows that people spend about half of the checks, and they do so quickly.

Claudia Sahm

macroeconomic policy consultant

“The bottom falls out in a recession, so it’s important to blunt the fall,” Sahm said. “Checks do that well. The second and third rounds went out within days.”

“No other relief program came anywhere close.”

The payments also stimulate the economy in a short amount of time, she said. “Research on the stimulus checks shows that people spend about half of the checks, and they do so quickly.”

Stimulus spending can stabilize demand

In the end, stimulus checks made the pandemic-era recession less severe, said Zachary Parolin, a research scientist at the Center on Poverty & Social Policy at Columbia University. The first two payments alone were found to lift more than 11.7 million Americans out of poverty, including more than 2 million seniors and 3 million children.

“In their absence, consumer demand would have likely been lower, threatening larger declines in employment,” Parolin said. Families spent the cash mostly on food and utilities.

As a result, he expects to see the checks again, too.

“If economic shocks put the economy at risk, then stimulus checks will certainly be a tool that the federal government considers applying,” he said.

Payments can fill other benefit systems gaps

Although some people argued that the payments should have been better targeted at those hurting financially, it’s the red tape around all the other benefits that make the direct payments necessary, some say.

“Some states have actively undermined their unemployment insurance by making the eligibility narrower and underfunding the administrative systems,” Sahm said. “If the unemployment insurance and the [Paycheck Protection Program] worked properly, we would not need big stimulus checks.”

Less lawmaker will for stimulus in inflation

Whether the checks are deployed by the government in another recession may depend on what caused the downturn, said Joseph Vavra, an economics professor at the University of Chicago.

In particular, if the next crisis is triggered by the Federal Reserve’s interest rate hikes, which aim to curb rising prices, many may argue that sending out cash to Americans could run counter to the Fed’s goal and allow inflation to remain out of control.

The fact that some believe “the high inflation we are experiencing was partially a consequence of sizable government transfers may mean there is less will for [the payments] in the immediate future,” Vavra said.

Still, he added, if things get bad enough, that could change. “I think it’s likely they may be used again in future deep recessions.”

Correction: This story has been updated to reflect the official name of the Paycheck Protection Program.

 

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