The Stimulus Checks Had Its Good And Bad Moments: What Lies Ahead?

The pandemic hit the US particularly hard at the beginning of 2020 and by March the world economy went into a tailspin as industries shut down across sectors. Businesses in the US shut down, many permanently, and workers lost jobs in their millions. By March the US administration passed the first of the stimulus checks realizing that a large section of the population was on the verge of poverty.

The initial stimulus checks worth $1,200 under the CARES Act were followed by another in December 2020 worth $600. Finally, a third stimulus check was signed under the American Rescue Plan Act in March 2021giving Americans a more generous $1,400.

The stimulus checks were only a part of the federal stimulus support as the administration send direct aid to states, cities, and local bodies. Businesses received direct aid to help them survive. The unemployment support was extended well into 2021 while the 50% of the enhanced Child Tax Credit payments for 2021 were paid out in advance in the form of monthly stimulus checks between July and December 2021.

In all, over $5T poured into the American economy in less than two years. It succeeded to a large extent in halting the economic downslide, but it also contributed to the inflation that gripped the US economy in the last quarter of 2021 and reached record levels by the turn of the year. it went up to as much as 8.5%, a 4-decade high that led to prices shooting up across the spectrum.

Prices of gasoline, essential commodities, and utilities saw huge increases. In the absence of further federal stimulus checks, people were again forced to make major cutbacks in expenses and dip into their savings.

With a large percentage of the population living paycheck-to-paycheck, it appears that the economy is in for another round of severe downturn.

While the stimulus check, particularly the American Rescue Plan Act, has been blamed by the opposition for the inflation, analysts say that it was more a combination of several factors including the war in Europe that led to the rise in the price of gas. International oil prices have a bearing on all economies and inflation is an issue not limited to the US.

The Stimulus Checks Prevented A Recession During The Pandemic

The stimulus checks were the only source of income for millions of Americans in the low and moderate-income groups. It helped families avoid starving and getting evicted from their homes. Unemployment rates were 14.8% at the start of 2020, the highest since 1948. The Dow Jones Industrial Average reported a 37% slide in a month.

The economic situation would have been catastrophic in the absence of immediate support from the government at that stage. There was the ever-present danger of the economy sliding into a deep recession worse than the 2008 crisis. Such a situation would be tougher to manage.

The Stimulus Checks Contributed To The Inflation

The successive stimulus checks poured $5T into the economy and reached directly into the hands of citizens. Prices rose sharply as people spent the cash on buying goods. With production scaled down during the lockdown period, it was a classic case of too much cash going after too few goods.

Economists are hard to put to pin down the exact figures but an approximation by the San Francisco Federal Reserve revealed that by end-2021, the stimulus check contributed 3% to the total inflation rate.

Even as inflation touched 8.6%, the highest since 1981, there appears to be no sign that it has peaked. The government has resorted to desperate measures to rein in the inflation rate, including by increasing bank rates, which again threatens to push the economy into recession.

Stimulus Checks Helped Keep People Above Poverty

The stimulus checks were the only source of income for millions of Americans who abruptly lost their jobs when the economy shut down completely in March 2020. For the first time, even moderate-income groups were face-to-face with the prospect of starvation.

The Census Bureau revealed that over 11.7M citizens stayed out of the clutches of poverty solely due to the support afforded by the stimulus checks. The Health and Human Services dept. noted that unemployment compensation and the Economic Impact Payment under the Rescue Plan had the greatest impact on alleviating poverty even as the pandemic entered the second phase at the beginning of 2021.

The poverty level spiked to 16.3% by end-2020 but by the time the third stimulus check payment started it slid down to a more manageable 9.3%. this was the period when additional stimulus support in the form of extended unemployment checks and the enhanced child tax credit payments were announced.

Direct Payments May Also Have to Encourage People To Stay Out Of The Workforce, Harming The Economy

Some analysts feel that the successive stimulus checks kept many Americans from joining the workforce. There was a huge increase in unfulfilled openings which more than doubled after mid-2020 and reached 11M.

There were multiple reasons behind this and not all of them were the stimulus check amount. People were wary of stepping out of their homes as the pandemic continued to affect large sections of the population. Many workers availed of premature retirement packages. Families affected by the pandemic were also forced to stay indoors for extended periods, especially to care for those affected and to ride out the mandatory quarantine period. The successive stimulus checks in the form of the three stimulus checks, the unemployment payments, and the child tax credit payments had a significant role to play in the return of Americans to the workforce.

Reduction In Credit Card Debts And A Spurt In Savings

Americans used the stimulus checks to pay for their high-interest credit card debts. Around 60% of the initial stimulus check funds went initially to pay for debts and towards savings. The percentage was even more for the 2nd and 3rd stimulus checks as 74% of the funds went towards savings and loan repayments.

Federal Debts Increased At A Huge Rate

The federal administration had to resort to heavy borrowing to fund the successive stimulus checks. The Treasury borrowed around $6T. While the bill rate was a modest 0.4%, the rate might go up as the Fed moves in to tackle high-interest rates and inflation. And if the inflation rates are not tackled immediately, it could drag down the economy into another deep recession last seen in 2008.