Why The Stimulus Package Just Won’t Stimulate Us

On Monday, Congressional Democrats proposed a $750 billion stimulus package to mitigate the damage being done to the economy by the shutdowns (soon to be, lockdowns) over COVID-19, the Coronavirus.

Not to be outdone, President Donald Trump and Treasury Secretary Steven Mnuchin upped the ante Tuesday with a stimulus proposal of $850 billion which they quickly morphed into a package in excess of $1 trillion. By the end of the day on Tuesday, the proposal had reached $1.2 trillion.

Mnuchin said at a Tuesday press conference, “Americans need cash now, and the president wants to give cash now. And I mean now, in the next two weeks.”

READ MORE: Could 3,000,000 Americans Already Be Infected With Coronavirus?

Does getting more cash into the hands of more Americans really stimulate the economy?

2020-03-18 07_42_14-Microsoft Word - Crisis@10 Paper for The Recession session - Fiscal Policy-MC

This chart from the Hoover Institution examining Fiscal Stimulus Programs During the Great Recession would appear to show that it does not.

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The bump in the red line during the first quarter of 2008 corresponds to the Economic Stimulus Act of 2008. The federal government spent $152 billion to provide taxpayers rebates of $300 (plus as much as $300 more for a dependent child). There is a clear change in the volume of personal disposable income resulting from the payments but no noticeable change in personal consumption expenditures.

In a review at the end of 2009, nearly two years after the rebate program, the Wall Street Journal found that only around 1/3 of recipients spent the rebate within weeks of receiving it.

They noted,

“Although the rebates clearly did not stave off the sharp drop in economic activity in 2008, they did affect the timing of its onset by making growth in household spending noticeably stronger in the second quarter and noticeably weaker in the fourth quarter than it would have been absent the rebate.”

One estimate pegged the spending increase at 3.5% when the rebate arrived, with overall consumption in the second quarter boosted by 2.4%.  It is important to note, however, that the estimate took place at the end of the second quarter of 2008 and did not account for the possibility that the damage had not been avoided but only postponed.

READ MORE: Dark Days For Airlines and Cruise Lines Spark Pleas For A Massive Taxpayer Bailout

Remember, 2008 (like 2020) was a presidential election year with control of Congress also likely in play, in case you were wondering why politicians in Washington would seek to shift the impending damage of an economic slowdown (or possibly, a recession) from the second quarter (before the election, likely during primaries) to the fourth quarter (after the election).

One key difference between 2008 and 2020 is that in 2008 there were opportunities for consumers to spend the rebates they received. Those options are limited in 2020 as the Coronavirus has shuttered stores, restaurants, and entertainment venues.

Much as they did in 2008, the majority of Americans will put the rebate in the bank, or use it to pay a bill or to pay down debt, and not in any way that stimulates the economy significantly.

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