Economy
$2,000 Stimulus Checks Won't Hurt the Economy – Bloomberg
Senate Majority Leader Mitch McConnell blocked a vote on a proposal for $2,000 stimulus checks, but it’s not dead yet.
Photographer: Bloomberg
Let’s get down to brass tacks: Sending $2,000 in direct payments to Americans is a politically effective but economically inefficient way to provide needed relief to workers and families.
When Congress recently approved a new stimulus package, it included $600 cash payments to Americans. But that struck many people as a measly gesture compared to the $1,200 checks issued in the previous stimulus, and considering the economic damage done by the pandemic over the nine months since the Cares Act. So when President Donald Trump called for $2,000 checks, Democrats immediately jumped on board and some Republicans followed.
The new $2,000 amount was approved in the House on Monday, though a vote in the Senate today was blocked by Majority Leader Mitch McConnell. The proposal is still very much alive, garnering support from both GOP Senate incumbents David Perdue and Kelly Loeffler, who face a runoff election on Jan. 5 in Georgia. Given the controversy, it’s worth asking how much the larger amount will actually help the economy.
I’ll start with the positives. Most of the unemployment benefits passed in the Cares Act expired at the end of July, and because of archaic unemployment systems in states, many eligible workers never got them. These individuals have gone months wondering if or when more fiscal relief would come, and when we’ll get the kind of economic reopening that will bring back millions of jobs in industries like travel and dining. The fiscal relief package just passed by Congress will reinstate those unemployment benefits for a while, but at a reduced level. For everyone that falls into these buckets, an additional $1,400 payment is an efficient way to provide additional relief without relying on state unemployment systems to process claims on time, and to make up for Congress letting relief lapse over the summer.
And checks are broadly popular with the public. According to Data for Progress, 78% of Americans support the $2,000 payments. There’s something to be said for giving the people what they want in a high-profile way. It makes them feel like the system is working for them and builds trust for the future. Arguably, it was the success of the $1,200 checks in the Cares Act that bought the political will for another round of fiscal relief this month.
Those positives dwarf the negatives associated with the checks. From a macroeconomic or distributional standpoint it would be better to tailor relief more to where it’s most needed — unemployed workers, or certain hard-hit state and local governments that continue to have big revenue shortfalls. But those options lack the political momentum that the $2,000 checks have. And a larger cash payment will still benefit these groups — for instance, money spent by individuals will be taxable, indirectly benefiting state and local budgets.
The bigger checks might be wasted on some recipients who don’t need the money — but not entirely. Any two-person households making $150,000 that receive the additional payments might just stick it into savings. Or maybe they’ll spend it on a Playstation 5 or a new set of AirPods Max.
Individuals with an impulse for gambling might use the money to buy speculative stocks or bitcoin. That could add some froth to the financial markets, but that’s not particularly harmful to the economy, either. With inflation and interest rates as low as they are, a little excess consumption of trendy gadgets or risky stock bets isn’t going to lead to any kind of economic overheating.
The bottom line is that checks are popular with the public, easy to deliver, will help the fortunes of those who are struggling, and don’t pose a near-term inflationary risk to the economy. Congress should go ahead and send ’em.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
To contact the editor responsible for this story:
Susan Warren at susanwarren@bloomberg.net
The ‘poor borrower’ narrative rules in media coverage of the Bank of Canada and high interest rates, and that’s appropriate.
A lot of people have been financially slammed by the rate hikes of the past couple of years, which have made it much more expensive to carry a mortgage, lines of credit and other borrowing. The latest from the Bank of Canada suggests rate cuts will come as soon as this summer, which on the whole would be a welcome development. It’s not just borrowers who need relief – the boarder economy has slowed to a crawl because of high borrowing costs.
But high rates are also a big win for some people. Specifically, those who have little or no debt and who have a significant amount of money sitting in savings products and guaranteed investment certificates. The country’s most well-off people, in other words.
Lower rates will mean diminished returns for savers and less interest paid by borrowers. It’s a stretch to say lower rates will improve financial inequality, but they do add a little more fairness to our financial system.
Wealth inequality is often presented as the chasm between well-off people able to pay for houses, vehicles, trips and high-end restaurant meals and those who are driving record use of food banks and living in tent cities. High interest rates and inflation have given us more nuance in wealth inequality. People fortunate enough to have bought houses in recent years are staggering as they try to manage mortgage payments that have risen by hundreds of dollars a month. You can see their struggles in rising numbers of late payments and debt defaults.
Rates are expected to fall in a measured, gradual way, which means their impact on financial inequality won’t be an instant gamechanger. But if the Bank of Canada cuts 0.25 of a percentage point off the overnight rate in June and again in July, many borrowers will start noticing how much less interest they’re paying, and savers will find themselves earning less.
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