Making the Case for Stimulus
As 2020 ended, the U.S. economy was far from recovering losses from the recession. But the mere mention of stimulus causes budget hawks to panic. Words like “national debt” and “handouts” are uttered, along with fearsome handwringing and anxiety for our children’s future. Yet there are good ways and bad ways to create stimulus.
First, don’t think of stimulus spending (or infrastructure spending or even pork barrel spending) as simply giving money away. Instead think of it as passing out dollars that will be spent over and over again by people who need and will spend those dollars. In economic terms, such stimulus spending takes advantage of “fiscal multiplier theory.” The theory estimates the number of times a dollar will be spent based upon the recipients’ tendency to spend. This tendency to spend is called the marginal propensity to spend (MPS). It quantifies the increase in consumer spending, as opposed to saving, when receiving an increase in income. For example, if a population has an MPS of 0.75, the fiscal multiplier would be four, meaning every dollar of stimulus spending would generate four dollars of national income. A fiscal multiplier also increases the impact of infrastructure spending.
The tendency to spend will vary within a population. If stimulus dollars are distributed, lower-income households spend a greater share than higher-income households. The millions of workers who have lost their jobs in the current recession would likely spend most if not all their stimulus dollars. Stimulus dollars would not be effective going to people who do not need them and generally save or invest them.
Researchers at the Kellogg School at Northwestern University used real-time transaction-level spending data to measure how quickly recipients spent their stimulus money after Congress passed the $2 trillion aid package in late March. Their overall conclusion found “Americans spent roughly a third of the government-issued funds within 10 days of receiving it.”
The research went beyond the overall average to determine who spent the money most quickly. They found that those with income less than $1,000 per month spent about 40% of their stimulus dollars in the first ten days, while those with incomes over $5,000 per month spent about half that much in the same period.
Personal liquidity, measured by the amount of money in individuals’ checking accounts when the money arrived, was a better predictor of who spent most quickly. “People with the highest amounts of cash on hand – $3,000 or more in their checking accounts – had no response to the appearance of their stimulus check. On the other hand, those who maintained accounts with $500 or less spent almost half of the deposits – 44.5 cents per every dollar – within 10 days.”
But that is only part of the justification for making now the time to commence stimulus spending. Paul Krugman made the economic case for stimulating the economy. “Given the current and likely future state of the U.S. economy, it’s time to (a) spend a lot of money on the future and (b) not worry about where the money is coming from.”
The current investment environment could not be more favorable. Krugman refers to the current “global savings glut – the sums individuals want to save persistently exceed the sums businesses are willing to invest. And this situation … translates into extremely low government borrowing costs.”
Krugman’s objective is helping families afford housing and food, helping local governments restore cuts in services, and replacing consumer spending that has collapsed in the pandemic-induced recession. He cites long-neglected infrastructure needs and improving health and educational outcomes for children.
His concern for children is echoed by Catherine Rampell: “It’s unconscionable that, here in the richest country on Earth, nearly 1 in 6 households with children report they either sometimes or often didn’t have enough to eat in the previous week.” She adds relief for the long-term unemployed during the pandemic to the list of needed investments and summarizes the case for immediate action by the incoming administration: “There are two main arguments for Congress to provide generous, immediate fiscal relief. One is based on humanitarian concerns; the other, economic growth. President-elect Joe Biden should use both.”