6 Ways More Government Stimulus Checks Might Hurt the Economy
Written by
G. Brian Davis
Edited by
Zuri Anderson
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Everyone loves “free” money — until they realize it isn’t actually free.
Why doesn’t the government just print a bunch of new money and mail it out to everyone? What are the risks and downstream effects of sending out government stimulus checks?
GOBankingRates unpacks why government stimulus checks might actually harm the economy in various ways.
Inflation
When more money floods into the economy, it boosts demand without boosting supply. That leads to higher prices, also known as inflation.
Thomas Brock, a charted financial analyst (CFA), certified public accountant (CPA) and expert contributor for RetireGuide.com, explained further:
“If the federal government started sending out more stimulus checks tomorrow, you could expect a return of the soaring inflation we experienced in recent years,” he said. “Government stimulus checks immediately inject more money into the economy. This in turn accelerates spending and puts upward pressure on prices as the providers of goods and services raise their rates to capitalize on the elevated demand.
“Workers’ wages have still not caught up with the price increases resulting from the last bout of inflation. Another hyper-inflationary environment would be disastrous for the average person.”
Higher Government Debt
While the government can (and does) sometimes just “print” more money to pay for all the things it wants to do, that accelerates inflation as noted above. To keep a lid on currency supply, it borrows money, as well. So, more government spending means more government debt.
Doug Carey, a CFA with a master’s degree in economics and the owner of Wealthtrace, noted that the combination of higher interest rates and debt balances would spell trouble for the government’s balance sheets.
“This would further increase interest owed by the federal government and would continue to drive up the deficit and the already massive federal debt load,” he said.
Higher Interest Rates
“Increasing inflation would cause the Federal Reserve to pause its interest rate cuts, which would certainly cause overall interest rates to increase,” Carey continued.
One of the Federal Reserve (Fed)’s few tools to fight inflation is raising interest rates. It effectively pumps the brakes on the economy, making it harder for banks and businesses to borrow money to grow. Slowing business growth also slows hiring and raises, which in turn pinches consumer spending, which helps tame inflation.
The risk? The economy slows too much and faceplants into a recession.
Higher Recession Risk
It takes time for interest rate changes to work their way through the economy — and that goes both ways.
The Fed keeps an eye on slowing economic growth or even contraction, while raising rates. But sometimes the economy shifts faster than they expect and tumbles into a recession.
The Fed can then open the floodgates wider by cutting interest rates and by buying up more bonds from banks, but that too takes time to juice the economy.
So yes, stimulus checks do offer an initial shot of steroids into the economy. And then all the negative side effects become clear, including higher recession risk after the initial rush.
Pinched Housing Market
Higher interest rates make it more expensive for homeowners to borrow, as well. That cramps homebuying activity, which further dampens the economy.
The National Association of Realtors estimates that each home sale generated $124,800 in broader economic activity last year. Even in a not-so-stellar year for real estate transactions, real estate accounted for around $4.9 trillion of the nation’s gross domestic product, or around 18%.
Higher mortgage rates also keep many homeowners feeling locked in their current homes. With the overwhelming majority of homeowners enjoying fixed interest rates between 2 to 5%, few homeowners are willing to give those up in order to borrow at 6.5 to 8%.
That in turn leaves little housing inventory for first-time homebuyers and keeps home prices artificially high.
Reduced Workforce
Stimulus checks can also incentivize some workers to retire early, and unemployed workers to delay finding a job. Who needs a demanding boss if the government’s handing out free money?
It happened in the midst of stimulus checks flooding the economy during the pandemic. Dubbed the “Great Resignation,” The Washington Post reported on this effect back in the days of free-flowing stimulus checks.
“Free money” isn’t actually free. It leads to plenty of downstream effects that no one wants to hear about when the taps are flowing and everyone’s swimming in that “free money.”
But after the party comes the hangover, which the U.S. has suffered through over the last two years.
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