Money in the Mail
As you open the mailbox, plop onto the couch and gape at the $600 check addressed to you from the U.S. Treasury, your mind begins to meander off to all of the latest merchandise you are now able to purchase. That blissful thought is abruptly met with a consideration that is of a broader and more global perspective. If everyone is receiving a stimulus check, won’t that prompt the devaluation of all my personal capital and assets? You cash in the check, figure that this question is one for an economist and leave your house to buy the latest Nike shoes.
With widespread quarantining and the shutdown of a large majority of businesses due to the COVID-19 virus, March 2020 saw one of the most dramatic market crashes in history. In around four days, the Dow Jones Industrial Average (DJIA) plunged about 26% and unemployment in the U.S. shot up as far as 20%. Like a defibrillator that jolts a heartbeat back at its normal pace, the heart of the economy needs to be shocked back to its initial rhythm. Hence, the CARES ACT, signed into law on March 27, 2020, was the first stimulus check paid out to Americans totaling $1,200 for those who qualified. The objective of this stimulus along with many other stimuli such as unemployment wages, loans to small businesses and direct aid to states, was to lower unemployment and encourage consumer spending on goods and services. The growth in revenue in industries and institutions and the increase in aggregate demand would generate a cycle of more income and higher levels of spending, creating more jobs.
In a paper published by Kellogg Insight based on the research of Scott R. Baker, R.A. Farrokhnia, Michaela Pagel, Constantine Yannelis and Steffen Meyer, Dr. Baker found that those who had $3,000 or more in their checking accounts did not change their spending habits in response to the check while those with accounts containing $500 or less, spent almost half of those deposits within 10 days, which had a marginal impact on the stimulation of the economy. Many factors, most notably the maintained closure of businesses and services during that time, contributed to the negligible impact. The next stimulus check however, ballooned the economy in a more effective manner. As part of the CARES ACT, phase two included a $600 stimulus check received by most Americans in January. Following the second check, a surge in retail shopping increased sales by 5.3%, electronic sales by 14.7% and restaurants and bars even saw a 6.9% increase in sales.
The long-term effects on the economy with stimulus packages will most likely lead to inflation, but that isn't all that bad. In “The Economic Consequences of Peace,” John Maynard Keynes says that some inflation is healthy for an economy because it forces consumers to purchase goods and services immediately since they know the prices will rise in the future. Inflation also makes it easier on debtors, who can now repay their loans with money that is less valuable than the money they originally borrowed, although creditors will lose money.
Although the economy has more room to recover, the current plan for the U.S. to send out another stimulus check along with the current successes of the COVID-19 vaccine provides a concrete path to full reinstitution of America’s once-thriving economy as well as the financial success and security to millions of Americans.
Photo Caption: Stimulus checks have been going out to US citizens for months.
Photo Credit: Pixabay