By Jack M. ’23
The third round of stimulus checks in response to the COVID-19 pandemic has started to arrive in American families’ mailboxes, providing much needed aid and support to 90 million Americans. Individuals who earn less than $75,000 per year and married couples who earn less than $150,000 have qualified for all three rounds of stimulus checks: $1,200 in March 2020, $600 in December 2020, and the current $1,400 payment. Stimulus packages have played a large role in the US government’s response to the COVID-19 pandemic, as three bipartisan packages, passed notably under both a Republican and Democratic president, have reached Americans this year. These packages are historic, providing over $5.5 trillion dollars of economic aid combined.
President Biden’s economic rescue package, entitled the American Rescue Plan, aims to help those most vulnerable to the pandemic and to increase funding for vaccination efforts. In addition to the stimulus payments sent directly to qualifying Americans, the plan includes enhanced unemployment payments of $300 per week, $25 billion in rental assistance to low income families, $20 billion for vaccinations, expansion of the child tax credit, a 15% increase in food stamp benefits, a restoration of emergency paid sick leave, and over $350 billion dedicated to the distribution of vaccines and helping states keep frontline workers employed.
While government support is a critical tool to help America in its recovery from the effects of COVID-19, concerns have been raised by prominent economists over the long-term effects of these packages, including unintended consequences such as a rise in inflation. Renowned economist and former Treasury Secretary, Lawrence Summers stated that the US is suffering from its “least responsible macroeconomic policy in at least 4 decades.” Summers, who has served in the prior two Democratic administrations, is concerned that the latest round of stimulus will give rise to inflation and potentially lead to stagflation, a dreaded economic condition where inflation and unemployment rates are high, while economic growth stagnates.
Lawrence Summers’ concerns may be valid. According to research from George Mason University, optimal economic stimulus follows the 3 T’s: it is timely, temporary, and targeted. In other words, economic stimulus is most effective when it is provided in an economy well below its potential, in a temporary manner so as to reduce the risk of inflation, and when it is targeted to provide resources to those who need them the most. It is not clear whether the latest stimulus package fulfills the 3 T’s as many economists already expect rapid GDP growth in 2021-22. According to economist Ed Yardeni, “Too much of a good thing is often just too much. The economy is hot and will get hotter with the bonfire of the fiscal and monetary insanities.” According to the Washington Post, while US fiscal stimulus as a percentage of GDP was on par with that of other leading nations including Canada, Germany and Japan in 2020, it has vastly exceeded the stimulus packages of every other country in 2021.
Also, some analysts are concerned that the stimulus checks are going to those who do not actually need the financial assistance. A survey by Deutsche Bank suggests that retail investors under the age of 50 plan to invest, on average, 37-50% of their third stimulus checks in the stock market. At the other end of the spectrum, ProPublica estimates that 12 million Americans who were eligible to receive their second stimulus checks did not because they did not earn sufficient income to file a tax return and therefore did not receive an automatic payment. These Americans, including the unhoused, immigrants, minorities, and prisoners are among the population hardest hit by COVID-19.
Despite the imperfections of providing widespread fiscal stimulus to millions of American households, our nation needs to focus on recovering from the impact of COVID-19. President Biden describes the plan as “historic legislation” which aims at “rebuilding the backbone of this country.” According to Biden, timid solutions during crises are big mistakes, and the stimulus plan provides much-needed support to individuals and communities who have suffered greatly this year. The stimulus payments provide hope that light is indeed at the end of this very long tunnel, and as Biden says, “finding light in the darkness is a very American thing to do.” Let’s hope that the light provided by this third round of economic stimulus indeed finds its way to shine on Americans who need it most.