Responding to the COVID-19 crisis, on March 27, Congress decided to send some of us $1,200 checks. Now they are again debating a second round of support.
Before we assess the second program, let’s take a look at how the March money was spent.
The Legislation
Through the CARES Act, $1,200 stimulus checks went to individuals who earned less than $75,000 annually. Those people also got $500 for each of their children. At the same time, couples whose yearly earnings were less than $150,000 got a one-time $2,400 payment; they too received $500 for each child.
However, no one could immediately say, “The check is in the mail.”
The individuals that deal with the IRS through direct deposit got their money first. Next, Social Security beneficiaries with direct deposit might have waited an extra several days. The delays–as long as six months– start with paper check recipients and, they continue with the prepaid Visa debit cards (sent to 4 million people) that weren’t even mailed until mid-May.
Stimulus Spending
In a new paper, economists used a July survey with 12,000 participants to determine how the stimulus money was spent. They found that there really was not that much spending for goods and services. Instead, individuals diminished their debt. Yes, 15 percent spent or planned to spend what they received. But 33 percent said they saved the CARES money while 52 percent paid down debt. Looked at differently, 40 percent of a single payment was spent, 30 percent saved, and 30 percent was for debt.
The stimulus was not felt by the industries hit the hardest. Instead, the spending went to food and non-durables (items that last less than three years). Predictably, the researchers also found that the lowest income recipients spent the money as did people out of the labor force, the elderly, larger households, Hispanics, African Americans, and individuals with less education. It was more likely that the savers came from higher income households.
They also let us know that 90 percent of the survey’s participants said the checks did not diminish the incentive to work. Furthermore, 20 percent of the unemployed participants said the checks encouraged them to look harder for a job.
The Heroes Act
A second stimulus act was passed by the House. While it will change as negotiations with the Senate unfold, for now, the provisions that apply to individuals are almost identical to the CARES Act.
Our Bottom Line: Consumer Spending
A stimulus payment represents the extra money that we have for consumption. When economists consider how we spend any extra money, they say they are looking at our marginal propensity to consume (MPC). Because marginal can mean extra and propensity, what we tend to do, we are just asking what we tend to do when we have extra income. The two possibilities are spending and saving. And within that spending category, we can include paying down debt.
These were the saving and spending alternatives reported by stimulus recipients:
So, whether looking at the CARES Act or its younger sibling, Heroes 2.0, the stimulus is all about spending and saving our extra money. It is about asking if we will fuel an economic recovery or help those who most need assistance or do both. It is also about asking why consumers did not do more spending.
My sources and more: The October NBER Digest alerted me to the stimulus study. From there, CNET had the clearest summary of both acts. Then, if you still want more, I recommend this paper from the NY Fed on the marginal propensity to consume.
Our featured image was from CNET. Also please note that the CARES Act had other details like cutting payments by “$5 for every $100 of additional income the individual or joint filers have over the limit.”
