Headline: How do Direct Payments help in Fiscal Stimulus?

Date: 6/7/21

Body  Whew!!  What a year and a half THAT was!!!  What?   We still have some room to go before returning to an economy similar to 2019?   Well, yes.  

So what did the government do?   They ramped up unemployment payments, they gave out loans to businesses to meet payroll AND they sent out direct payments (several) to individual taxpayers.   So, the question that I have is, do these direct payments to individuals really provide the fiscal stimulus they were aiming for?

What is Stimulus?

Fiscal Stimulus is defined as “action by the government to encourage private sector economic activity by engaging in targeted, expansionary monetary or fiscal policy.”  (This  definition is furnished by Investopedia.)   According to the Center on Budget and Policy Priorities (CBPP), “The federal government provides fiscal stimulus when it increases spending, cuts taxes, or both, to shore up households’ and businesses’ demand for goods and services during a recession.”

Let’s unpack that a bit.     When the economy falls into a recession, the government wants to do various things to help encourage private enterprise to invest in the economy.   Often, this is done by changes in monetary or fiscal policy.   When focused on monetary policy, the Federal Reserve will do things like buying back bonds, thereby inserting more liquidity into the market,   They might also lower the discount rate, or the rate at which financial institutions can borrow.

Fiscal policy focuses mainly upon changes in Tax Law, meant to encourage investment.   They might do something like offer forgivable loans (a la the PPP) to ensure that the businesses continue to invest in their employed workforce.   Or, they might give the individual taxpayers direct payments to encourage them to spend within the economy.    There is always a debate about the most effective manner to offer fiscal stimulus, and much of it today seems to focus upon the effectiveness of direct payments.  (I know that my landlord certainly appreciated my ability to pay rent, I suspect your landlord or mortgage company might’ve been similar.)  But, there are some scholars who suggest that direct payments are not the best method.

What is the Support for Direct Payments to Individuals?

There is much evidence to suggest that direct payments to individuals is effective in providing stimulus to the economy.  The logic of this argument is simple: When a household receives a direct payment, they already have bills to pay, and the funds received are immediately used, and funneled into the larger economy.    We have not had enough time to analyze much of the effectiveness of these most recent direct payments, but, looking at what happened in 2001 and 2008-2009 can yield some constructive ideas about the effectiveness of direct payments. 

In a study of the effectiveness of direct payments in 2001, researchers found that the payments were initially used to pay down credit cards and other debt.  But, within 9 months, credit card spending increased significantly (about 40%), indicating that people were using the payments to provide more energy to the economy.

A recent research paper from Northwestern University’s Kellogg School of Management, however, suggests that on average, households spent half the amount of each 2008 stimulus check within the same quarter that it was received.  In fact, scholars who are of this mindset often point to inflation being the indicator light that the economy has received enough stimulus.     As of yet, inflation seems to be essentially absent.  In another study of the 2008-9 direct payments, economists estimate that 50-90% of the payments were spent within 3 months.   This argues persuasively for the effectiveness of the direct payments

There is some research already on the effectiveness of the present direct payments, and these are largely supportive of the effectiveness of direct payments.   In another study by Northwestern University, among households without substantial savings, almost half of their direct payments were spent within 10 days.  When considering the entire population receiving direct payments, 29% of the payments were used within the first 10 days.

Scholars continue to make the point that direct payments will not make up for a lost job, but it could encourage people to spend into the economy instead of saving.

What is the case against Direct Payments to Individuals?

The people most against direct payments often point to the payments adding to an already incredible debt load.  In view of these arguments, many more financially-conservative officials have argued that the debt load that we already have should encourage policy-makers to not engage in distributing direct payments.    They do have a point that our debt has to be dealt with.   But, given the very low interest rates in the present economy, the new debt could be easily dealt with when we are on a firmer fiscal footing.

  These critics contend that if there are direct payments, to be effective, they should be targeted precisely.  They point to the data that if a family had $3,000 of savings, they were unlikely to use much of the CARES payments, but, if they had less than $500 in savings, they spent 50% of it within 10 days.  They also posit that people worried about being taxed on those direct payments would be reticent to use them, leading to less effectiveness in providing needed stimulus.

Very often, these individuals argue that it would be more effective to bail out specific industries, like restaurants and airlines.  They claim that these bailouts would target the most vulnerable of out citizens as these are the industries that tend to most often employ them.   This is intuitively a good argument, but in recessions of the past, we have bailed out the airlines, and after the infusion (and a few years) they return to the policies that got them into trouble in the first place.

The Verdict

It would appear that the direct payments are effective in providing economic stimulus.   While critics claim that the direct payments make the price of legislation too high, there are some other considerations.   Looking at the longer span of history (think of the recovery from the Great Depression and the Great Recession) it would seem that the greater danger lay in not doing enough to stimulate the economy.  In both cases, the recovery took much longer than was necessary and this was very harmful to the citizens of this nation.   Further, with interest rates so low, the additional debt is not nearly as serious a danger as at almost any other time in history.   For these reasons, I think it is safe to say that the direct  payments were an effective portion of the stimulus plan.





https://www.npr.org/2020/12/10/944903654/many-would-like-direct-payments-included-in-next-relief-package Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice.   Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or

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