The Effects of Stimulus Checks on the Economy
Overall, the government dedicated $6 trillion to pandemic relief, according to CNN, around $850 billion of which was spent on three different installments of direct cash payments. Together, those payments represented one of the greatest transfers of wealth in history — never has more money flowed from federal coffers back into American households.
According to the Economic Security Project (ESP), there’s clear evidence that direct payments were “the fastest and most impactful investments helping Americans get through this crisis, lifting more people out of poverty than any other single policy.”
The three payments — $1,200, $600, and $1,400 — gave a 20% boost in income to the poorest households and rescued the most vulnerable Americans from financial disaster. Cash in bank accounts, it turns out, is the single best remedy to poverty and economic crisis — and the stimulus payments turned out to be both good policy and good politics.
How the Checks Were Spent Revealed the State of the Economy
The American economy went on a roller-coaster ride throughout the pandemic, and its ups and downs were chronicled in the way that people spent their checks.
When the first payments from the Cares Act were distributed in April 2020, fear, anxiety, and unemployment were running high. Nearly 15% of the country was out of work and essentials were scarce both in stores and online. That first round of checks was more of a lifeline than a stimulus.
Nearly three out of four people — 74%, according to Forbes — used the money to pay for household necessities and expenses. Just 14% saved the money and only 11% used it to pay down debt.
But as the economy changed, so, too, did those spending patterns.
By the time the second round of checks went out under the Consolidated Appropriations Act in December, the country and the economy had evolved — and it showed in the new round of stimulus spending.
This time, just 22% spent the cash on household expenses, but more than half — 51% — used it to pay down debt and about a quarter saved it.
By the spring of 2021 and the arrival of the American Rescue Plan, fewer than one in five people were so strapped that they had to spend the cash on necessities. Here, too, about half used it to pay down debt — but this time, a full one-third were able to sock the money away in savings.
The Payments Delivered Real Relief to Households on the Brink
Research from the University of Michigan published in May revealed that the transfer of wealth from the federal government to American households resulted in sharp drops in food insecurity, financial instability, and mental health issues.
Researchers found that the final two stimulus packages were responsible for:
- A 40% decrease in food insufficiency
- A 45% decrease in financial instability
- A 20% drop in mental health complications like anxiety and depression
Low-income households benefited the most and enjoyed the biggest reduction in household hardship, but improvements were evident across the entire income scale.
The Checks Boosted Consumer Spending and Economic Recovery
The stimulus payments rescued millions of American households from impending financial disaster, but there was a significant indirect impact, as well. The desperately needed food, diapers, car repairs, and other necessities that the stimulus payments made possible provided a shot in the arm to the country’s stumbling economy. When the third and final round of checks were delivered in March, the economic impact was immediate.
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At the end of April, Reuters reported that consumer spending soared as the stimulus payments boosted personal income by more than 21%. An economic indicator that measures consumer spending called the Personal Consumption Expenditures Price Index showed an impressive year-over-year gain of 1.8%. After falling by 1% in February, consumer spending — which accounts for two-thirds of all economic activity in the U.S. — shot up by 4.2% in March, laying the foundation for the economic recovery that followed.
But They Also Helped Trigger a Spike in Inflation
All that spending provided a much-needed boost to a sagging economy — but it came with a tradeoff. Increased demand equals higher prices, and the arrival of the third round of checks signaled the start of rising inflation that would come to define the economy throughout the spring, summer, and current runup to the holidays.
It’s important to note that the stimulus payments were far from the only force that drove prices up. A year’s worth of pent-up demand for things like travel and entertainment flooded the economy at exactly the same time, as did shortages of fuel and critical components like microchips.
The truth is, shoppers are experiencing greater and greater sticker shock just as the holidays are approaching. But while inflation worries some economists, it’s hard to argue that the tradeoff wasn’t worth the higher prices — particularly for the 16 million people that the ESP says were kept out of poverty by the highly successful cash payments.
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