By Annie Nova -
CNBC
The economic stimulus checks sent out during the coronavirus pandemic were very popular.
Nearly 4 in 5 voters supported direct payments to American families.
And both Democrats and Republicans backed the policy, an increasingly unusual occurrence in Washington.
Still,
the checks were not without controversy.
Among the critics were that there were too many rounds of payments, that the resources would have been better spent if they had been directed to Americans with the greatest financial difficulties and that the cash contributed, at least in part, to the rampant inflation that we are seeing now.
Nacho Lozano analyzes the Government's intention to eliminate the federal gasoline tax
June 21, 202203:03
However, the popularity of the payments and evidence that they have reduced poverty and boosted spending mean they are likely to become a government tool in the next recession, which may come soon, experts say.
“I hope that stimulus checks will be used again
,” said Claudia Sahm, a macroeconomic policy consultant and former Federal Reserve official.
"They worked," she added.
Stimulus checks are not a new tool
In economic downturns, the government has several levers it can use to keep families spending and protect them from the most extreme situations.
Continued spending is key, because if people start buying less, companies respond to falling profits by laying off more workers, which becomes a vicious cycle.
Strategies to combat that situation include increasing unemployment benefits, food stamps, temporarily lowering taxes and sending stimulus checks.
[Going to a wedding as a guest costs an average of $825. So you can go without accumulating debt or feeling pressured]
The government used stimulus checks in the 2001 and 2008 recessions, but the pandemic led to payments on a scale never seen before, Sahm explained: “This COVID-19 recession was the only one where multiple rounds were sent out.”
There were three rounds of checks in total: Those who were eligible received up to $1,200 in April 2020, up to $600 in December 2020 or January 2021, and up to $1,400 in March 2021.
These are some of the reasons Sahm and other economists think stimulus checks are likely to be sent out again in the event of another recession.
Checks can make an impact 'in a matter of days'
Sahm points out that stimulus checks have unique advantages compared to other forms of aid.
For one thing, they reach people quickly.
Studies indicate that people spend up to half of their paycheck very quickly.
Claudia Sahm macroeconomic analyst
"No other aid program has come close," he said.
The payments also stimulate the economy in a short period of time.
“Studies show that people spend up to half of their paycheck very soon,” he added.
Spending Can Stabilize Demand
In the end, the stimulus checks made the pandemic recession less severe, said Zachary Parolin, a research scientist at Columbia University's Center on Poverty and Social Policy.
The first two payments alone were found to have lifted more than 11.7 million Americans out of poverty, including more than 2 million seniors and 3 million children.
"Without them, consumer demand would likely have been lower, threatening further declines in employment," Parolin said.
Families spent the cash mainly on food and utilities.
Your money counts: An expert teaches us how to save using discount coupons
June 22, 202230:58
For this reason, he also hopes that there will be checks again.
"If economic shocks put the economy at risk, then stimulus checks will certainly be a tool that the federal government will consider applying," he said.
Payments can fill other gaps in benefit systems
Although some people argued that the payments should have been directed to those who suffer most financially, the payments should be universal because of all the exceptions that exist in the aid programs, others argue.
"Some states have actively undermined their unemployment insurance by making eligibility more difficult and by underfunding administrative systems," Sahm said.
"If unemployment insurance and the [Paycheck Protection Program] were working properly, we wouldn't need big stimulus checks."
Less willingness of legislators for inflation
The government's decision to send more checks in the event of a recession may depend on what caused the recession, said Joseph Vavra, an economics professor at the University of Chicago.
In particular, if the next crisis is caused by interest rate hikes by the Federal Reserve, which are intended to curb rising prices, many may argue that sending cash to Americans could defeat the purpose of the Federal Reserve and allow inflation to remain out of control.
[The Federal Reserve raises the interest rate by 75 points, the biggest increase in 28 years]
The fact that some believe that "the high inflation we are experiencing was in part a consequence of the considerable transfers from the government may mean that there is less will for [the payments] in the immediate future," Vavra said.
Still, he added that if things get bad enough, that could change.
“I think they are likely to be used again in deep recessions.”