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

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Stimulus checks sent out during the coronavirus pandemic were hugely popular.

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

Still, the checks were not without controversy. Among the criticisms were too many rounds of payments, that they should have been better targeted at financially distressed Americans, and that the money has driven, at least in part, the runaway inflation we are seeing now.

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Still, the payments’ popularity and findings that they have reduced poverty and encouraged spending mean they are likely to become a tool retired by government in the next recession, which could 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 are not a new recessionary tool

In times of economic downturn, the US government has a number of levers it can pull to keep family spending in check and protect them from the most dire situations. Continued spending is key, because if people’s shopping slows or dries up, companies respond to lower profits by laying off even more workers, which only deepens and prolongs the tough times.

Relief strategies include increasing unemployment benefits, increasing food stamps, temporarily cutting taxes and sending stimulus checks.

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

There were three rounds of checks: eligible people 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 a few reasons Sahm and other economists cite as making it likely that stimulus checks will be sent in the event of another recession.

Checks can have an impact “within days”

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

For one thing, they get to people quickly.

Stimulus check research shows that people spend about half the checks, and they do it quickly.

Claudia Sahm

macroeconomic policy consultant

“The bottom is falling into a recession, so it’s important to mitigate the fall,” Sahm said. “Checks do it well. The second and third rounds were done in a matter of days.”

“No other relief program has come close.”

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

Stimulus spending can stabilize demand

Ultimately, the stimulus checks made the pandemic-era recession less severe, said Zachary Parolin, a research fellow at Columbia University’s Center on Poverty & Social Policy. The first two payments alone lifted 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 likely have been weaker, threatening a larger decline in employment,” Parolin said. Families spent the money primarily on food and utilities.

As a result, he also expects to review the checks.

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

Payments can fill other gaps in delivery systems

Although some people have argued that the payments should have been better targeted to those who are suffering financially, it is the bureaucracy surrounding all the other benefits that makes direct payments necessary, some say.

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

Less will of the legislator to stimulate inflation

Whether the government rolls out checks in another recession may depend on the cause of the recession, 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 are intended to rein in rising prices, many might argue that sending money to Americans might run counter to the Fed’s objective and allow inflation to get out of control.

The fact that some believe that “the high inflation we are experiencing is partly the consequence of large government transfers may mean that there is less will to [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’ll 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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