COVID 'stimulus' less than stimulating

Survey finds most of $1,200 payments went into savings and to pay down debt

A new study has found that the $1,200 “stimulus” checks intended to sustain the economy in the coronavirus collapse actually went mostly into savings accounts and to pay down debt. (Shutterstock)

A new study has found that the $1,200 “stimulus” checks intended to sustain the economy in the coronavirus collapse actually went mostly into savings accounts and to pay down debt. (Shutterstock)

By Ted Cox

The $1,200 “stimulus” payments included in the CARES Act coronavirus relief package in March went mostly into savings accounts and to pay down debt, not to stimulate the economy through consumer spending, according to a paper published this month in an academic journal.

The article “How Did U.S. Consumers Use Their Stimulus Payments?” appeared in the October issue of “The NBER Digest,” a publication of the National Bureau of Economic Research. Drawing from Nielsen polls on the $2 trillion CARES Act COVID-19 relief package approved by Congress, authors Olivier Coibion, Yuriy Gorodnichenko, and Michael Weber found that almost a third of the total $265 billion distributed through the $1,200 payments — augmented with $500 per qualifying child — went to pay down debt, 31 percent. Another 27 percent went into savings, so that a majority of 58 percent of the money did not go into the economy through spending, where it would have had an exponential effect in sustaining jobs and businesses.

The CARES Act “was designed to bolster household incomes and support consumer spending,” according to a synopsis written by the digest’s Laurent Belsie. “It achieved the first goal, but had only a modest impact on consumer spending.”

According to the synopsis, “Of the roughly 40 percent that was spent on goods and services, consumers favored food and beauty products rather than large durables like cars or appliances.” There was a wide range in responses by household, however. “Some 20 percent saved virtually all of their stimulus check; another 40 percent spent nearly all of it. Roughly 20 percent used most of their federal payment to reduce their debts.”

The study found that this was basically consistent with previous stimulus payments sent to taxpayers in the 2001 economic decline, following the Sept. 11 terror attacks, and in 2008 in the midst of the Great Recession, but this time the differences were even more pronounced. “The 2020 payments,” according to Belsie, “were much larger and the recipients were somewhat less likely to spend than in the past.”

The study authors hypothesized that part of that lack of spending stemmed from lack of opportunity: with so many businesses shut down this spring, there were fewer places to spend money. But they also proposed that “the law of diminishing returns kicked in,” in that “the larger the stimulus check, the less likely recipients are to spend it.”

“Larger households leaned toward spending most of the money,” the synopsis stated. “Seniors tended to pay down debt while younger and more educated households were more likely to save the payments. Those who were out of the labor force or who lived with parents were more likely to spend. African Americans were more likely to use most of their stimulus money to pay down debts, and Hispanics were more likely to spend.”

A key finding was that “the stimulus payments had little impact on job-seeking.” Two-thirds of unemployed workers who received the check said it had no effect on their pursuit of a job, and a fifth said it actually enabled them to look harder for a job.

That’s critical as Congress considers another COVID-19 relief package ahead of the election. The HEROES Act passed by the U.S. House of Representatives in May would have sustained an extra $600 a week in unemployment insurance for idled workers — an extra benefit that expired at the end of July. Republicans said they thought that extra money discouraged workers from returning to their jobs, but there was little evidence of that. In fact, new weekly unemployment claims rose again as those benefits were expiring, suggesting that workers weren’t simply waiting to claim those extra benefits, and that the economic recovery from the COVID collapse was slowing — concerns that persist even now. “There is no indication yet that the expiration of an extra $600 per week in UI benefits at the end of July 31 has led to a big drop in unemployment," PNC chief economist Gus Faucher told CNN.

The new study determined there is a limit to “how much stimulus can be generated through direct transfers to households,” and it recommended that “decision-makers may want to consider a broad range of policies targeting aggregate demand, with direct transfers being only a part of the fiscal policy response.”

President Trump pulled funding from the Federal Emergency Management Agency to provide an extra $300 a week in benefits after the $600 a week expired, but for a very limited time. Last week, Trump flip-flopped on whether he wanted to sign another relief package, eventually deciding yes, but a proposal well under the $3 trillion to be provided in the HEROES Act was rejected by House Democrats as insufficient and by Senate Republicans as too ambitious.

Democrats have railed at Republicans this week for pushing ahead with the U.S. Supreme Court nomination of Judge Amy Coney Barrett ahead of an additional relief package that might benefit the economy as the coronavirus economic slowdown persists.

The study suggests that the $600 a week targeted to the unemployed might be spent and do more to sustain the economy than the $1,200 stimulus checks, tapering down by rising income levels, sent to all those making under $100,000 a year.