Yes It Is Possible to Have Too Much Stimulus Boosting ✓ Solved

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Faced with the U.S.’s worst humanitarian and economic catastrophe in recent memory, it is tempting to assume there is no such thing as too much fiscal stimulus. There is, and we might be about to witness an example. The usual justification for federal borrowing is to counteract a collapse in demand that is driving up unemployment, or to meet some urgent societal need such as waging war or alleviating destitution. Neither justification readily applies to President Trump’s and Democrats’ plan to send almost every adult an additional $1,400 in stimulus checks on top of the $600 checks approved in last week’s stimulus deal, at a cost of $463 billion.

True, with interest rates near zero, money is cheap—but it isn’t free. Adding that much to the national debt for stimulus of questionable efficacy now consumes political and financial breathing room that might be better saved for later. The political appeal is obvious. Mr. Trump would get credit for showering more money on Americans. Democrats, who initially wanted $3 trillion of stimulus instead of last week’s $900 billion, hope to embarrass congressional Republicans into either voting for something they don’t want or crossing Mr. Trump. The economic case is another matter.

As I argued last week, the economy’s biggest problem isn’t demand; it is supply. Most Americans have money; they are just constrained in how they spend it because of pandemic-related business restrictions or fears. Advocates say hard-working Americans deserve a bigger check. That misses the point of stimulus: by definition, most hard-working Americans have a paycheck. In fact, aggregate wages and salaries were just 0.4% lower in November than before the pandemic. Thanks to past stimulus, total income was actually 2% higher. It will be 13% higher once the new stimulus kicks in. Yes, the economy is in bad shape.

Total employment stands 9.8 million lower than in February. But leisure and hospitality accounts for a third of that deficit, and those jobs are unlikely to return until much of the population is vaccinated. How much the proposed $1,400 stimulus checks might accelerate the jobs recovery is debatable, given the healthy state of most consumers’ finances. The Congressional Budget Office estimates 60% of last spring’s $1,200 stimulus checks will eventually translate into higher economic output, and that might be an overestimate; one study found more than 80% of recipients either saved the money or used it to pay down debt.

What about unmet needs—the millions of people visiting food banks or who are behind on their rent or mortgage? Academic economists Bruce Meyer and James Sullivan calculate 2.3 million more people were below the poverty line in November than February. About 2 million more mortgages are now delinquent than before the pandemic, according to Black Knight, a mortgage data provider. This hardship is overwhelmingly the result of people who lost work because of the pandemic: their employer shut down or downsized; they had to attend to school-aged children; they got sick or were trying to avoid getting sick. Because the pandemic fell hardest on low-paid workers, replacing their lost income isn’t that expensive.

Returning the 10% poorest households to their February level of income would take $1.5 billion a month, by my calculations. For the lower 50% of the entire population by income, the price is $16 billion. We can’t target those people perfectly, but we can get pretty close with unemployment insurance. Thanks mostly to a $600 bonus under the Cares Act, 75% of recipients earned more on UI than they did in their regular job, estimates Shai Akabas of the Bipartisan Policy Center, a think tank. With the smaller, $300 bonus in the latest stimulus, roughly half will earn more, he figures.

To get that back to 75% for 11 weeks could be done for about $20 billion, he said, if state processing systems could be upgraded to better calibrate benefits (admittedly a pretty big if). That would still leave gaps, for example revenue-strapped state and local governments. Helping them isn’t that big a lift: Their planned spending cuts this fiscal year come to $52 billion, a fraction of what Democrats wanted for a stimulus.

Historically, fiscal policy sought only to damp the business cycle’s ups and downs, not eliminate them. Today, the temptation is to borrow whatever it takes to completely neutralize the pandemic’s ill effects. And this column has regularly argued that when interest rates are near zero, fiscal policy is more critical because monetary policy is out of ammunition, and the risks of debt are much reduced. But the risks aren’t zero. First, there are political ones.

Democrats might calculate the odds of Republicans agreeing to stimulus are better now than when Joe Biden becomes president. On the other hand, more borrowing now might stiffen Republican resistance to borrowing later, for potentially higher priorities. Mr. Biden, for instance, has expensive plans for infrastructure, renewable energy, and health care. Many who lost jobs during the pandemic need to be retrained for a post-pandemic economy.

Another disaster—such as a deadlier phase of this pandemic—cannot be ruled out. As for the financial risks, we live in a world of probabilities, not certainties. While the probability of a nasty rise in inflation or interest rates is low, adding indiscriminately to the national debt leaves the country more exposed should they materialize—as low-probability outcomes sometimes do.

Paper For Above Instructions

The economic impact of stimulus checks has been widely debated, particularly during crisis situations such as the COVID-19 pandemic. While the implementation of stimulus checks aimed to support low- and middle-income families facing economic hardship, there are significant concerns regarding the effects of excessive stimulus on national debt and the overall economy. This paper will explore the potential drawbacks of large-scale stimulus checks and their efficacy in reviving the economy amidst an ongoing crisis.

One of the primary concerns surrounding the issuance of high-value stimulus checks, such as the proposed $2,000 checks, is their contribution to national debt. Increased federal borrowing to fund these checks could hinder economic recovery and create long-term fiscal challenges for the government. According to the Committee for a Responsible Federal Budget, the national debt may reach unsustainable levels if additional spending is not paired with effective strategies to bolster economic growth (Committee for a Responsible Federal Budget, 2021). If not balanced, this could result in economic instability.

Beyond the debt implications, critics argue that such stimulus measures may not effectively address the underlying economic issues highlighted by the pandemic. As indicated by many economists, the current economic crisis is less about demand and more about supply chain disruptions and employment shifts due to the pandemic. Many households have access to funds but face challenges in spending them due to existing restrictions or uncertainties related to the virus (Baker et al., 2020). Thus, simply distributing larger amounts of money may not have the intended impact of stimulating economic activity.

Furthermore, there exists a risk that additional stimulus checks might not contribute appreciably to improving consumer spending. Research indicates that a significant proportion of stimulus payments are saved or used to pay down debt rather than spent on immediate consumption (Chetty et al., 2020). Consequently, the effectiveness of stimulus checks as a tool for stimulating aggregate demand is reduced, given consumer finances remain relatively stable. A recent estimate suggested that around 80% of recipients reported saving or using the funds for essential expenses rather than immediate purchases (Klein, 2021).

The adverse effects of failing to target those in genuine need could also be detrimental. While the overall percentage of families below the poverty line has increased, many recipients of stimulus payments may not be the most financially distressed (Meyer & Sullivan, 2020). The crisis has disproportionately affected sectors like hospitality and tourism, suggesting that a more tailored approach, such as extending enhanced unemployment benefits could be more effective than blanket stimulus checks. Evidence suggests that enhanced unemployment insurance provides crucial financial support while also incentivizing recipients to return to the labor force once conditions improve (Akabas, 2020).

Additionally, a critical evaluation of fiscal policy during emergencies suggests that a temporary increase in government spending should be balanced against potential long-term economic consequences. While stimulus measures should aim to reduce hardship in the short term, they should also consider the implications for future economic policy, particularly in a changing economic landscape. Funding major infrastructure or social programs in the years ahead may face political constraints due to increased public debt (Murray et al., 2020).

In conclusion, while the political appeal of providing substantial stimulus checks in times of need is evident, their long-term economic implications raise serious concerns. The balance between necessary immediate aid and the adverse effects of increased national debt requires careful consideration. Policymakers should focus on targeted relief strategies that prioritize the most vulnerable populations while promoting sustainable economic growth. Future economic policies must address underlying structural issues rather than rely solely on consumer spending through stimulus checks, which can potentially leave the economy vulnerable to future fiscal challenges.

References

• Akabas, S. (2020). Understanding Unemployment Insurance: A Policy Perspective. Bipartisan Policy Center.
• Baker, S. R., Farrokhnia, R. A., Feldberg, S., & Figliozzi, M. (2020). The Unintentional Effects of the COVID-19 Stimulus: Evidence from the Payroll Protection Program. National Bureau of Economic Research.
• Chetty, R., Friedman, J. N., & Saez, E. (2020). How Did COVID-19 Impact Spending? Evidence from Payments and Bank Account Data. National Bureau of Economic Research.
• Committee for a Responsible Federal Budget. (2021). Fiscal Implications of COVID-19 Stimulus Measures. Retrieved from [CRFB website]
• Klein, A. (2021). The Impact of Economic Stimulus Payments on Consumer Behavior. Journal of Economic Perspectives.
• Meyer, B. D., & Sullivan, J. X. (2020). The Effects of the COVID-19 Recession on Economic Wellbeing. Journal of Economic Inequality.
• Murray, C. M., Bidwell, R., & Sweeney, E. (2020). Fiscal Policy Responses to the COVID-19 Crisis: Lessons from History. The Brookings Institution.
• National Bureau of Economic Research. (2021). Understanding the Impact of Fiscal Stimulus during Economic Crises.
• Papers of the National Academy of Sciences. (2020). Economic Implications of Cash Transfer Programs: An In-Depth Review.
• U.S. Census Bureau. (2021). Household Pulse Survey: The Economic Impact of COVID-19 Stimulus Payments.

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