Stimulus Check Update: Are Relief Payments Bad For The Economy?
(CBS Detroit) -- A third stimulus check is a very popular idea, and it's not hard to see why. People like free money. A Quinnipiac University poll last month showed that almost 80 percent of Americans favor $1,400 stimulus checks and not quite 70 percent support the $1.9 trillion stimulus package that contains them.
The scope of the American Relief Plan, including income caps on stimulus checks, is currently up for discussion in the Senate. The minimum wage hike looks likely to disappear entirely. The income phase out for stimulus checks also seems like it will become much more drastic. Other changes are certainly possible before an amended version of the bill is voted upon. If it passes in the Senate with the simple majority allowed by the reconciliation process-- no Republicans are expected to vote in favor -- then it will return to the House.
The bill, in whatever form it ends up, will probably be far from perfect. Most bills are. But many complaints have arisen since it was initially proposed back in January. Foremost among them may be that it doesn't match the present needs of the country. The economy and the fight against COVID have both shown signs of improvement in the last two months. The pace of job layoffs has slowed some and the rate of vaccinations has picked up. The country seems to be emerging from the dark days of winter. There is a light at the end of the tunnel that isn't an oncoming train. Yet the country is also about to receive a stimulus package nearly the size to the $2 trillion CARES Act, passed at the pandemic's outset.
That begs the question: is the American Relief Plan, as constructed, really what's needed right now? Pete Kyle, the Charles E. Smith Chair Professor of Finance at the University of Maryland's Robert H. Smith School of Business, doesn't think so.
"I would err on the side of moderation and conservatism in the sense of not make it too big," says Kyle. "Because the dangers of doing too much are really catastrophic. The dangers of doing not enough are that you can do more..."
Aside from a $1,400 relief payment, the American Rescue Plan also currently includes higher unemployment benefits, a bigger child tax credit, help for communities and small businesses, and billions more dollars to stop the spread of COVID-19 through testing, tracing and vaccinations. These and other programs aim to support millions of Americans dealing with financial troubles brought on by the pandemic and prop up the economy as vaccinations continue. The bill passed the House with minimal changes but could face a rockier road in the Senate. How the bill evolves in the coming days will determine how much money actually reaches the public.
But there are dangers -- or, at least, uncertainties -- to injecting this much stimulus into the economy. One of the possible dangers is inflation. By the end of the year, the Congressional Budget Office expects the federal debt to exceed the size of the whole economy, which, as measured by gross domestic product (GDP), is almost $21 trillion. (GDP measures the value of all the goods and services produced in an economy.) Another $1.9 trillion in stimulus would probably add to the deficit and eventually the debt. A higher federal debt means the government has to pay more in interest to service it. More money spent on servicing the debt means less spent on goods and services for the country. People's standard of living declines. U.S. companies become riskier investments, increasing their cost of borrowing. Those costs are passed on to consumers, leading to inflation in the economy. That's how the theory goes.
"My opinion is that [1.9 trillion] will risk government debt overwhelming the private savings, create inflation and lead to high real interest rates," says Kyle. "And that's a very dangerous situation to get into.
"We already had a stimulus enacted back in December," Kyle points out. "And that should carry us forward for six months or so. With the stuff they are doing now, a lot of it will show up later. But later the economy should have recovered. And maybe you don't want to overstimulate the economy later. That poses catastrophic risks. And when I say catastrophic, I mean a repeat of what happened in the 1970s."
The 1970s saw inflation rates reach 8.8 percent in 1973 and rise to 12 percent toward the end of the decade. Interest rates reached as high 20 percent. (For reference, the annual inflation rate in 2020 was 0.6 percent, and interest rates were in the low single digits.)
Stimulus checks, in particular, could also pose a serious risk. According to Kyle, "the kind of stimulus that's being discussed, which is mailing checks to everybody, that is encouraging people to stay at home and not to work. It's going to create, essentially, exactly the possibility of a catastrophic outcome, because inflation is driven both by demand and supply. The demand is the demand for products, and the supply is the supply of labor. Labor is not being supplied, because people are staying home. You get wage inflation, because wages are being bid up. And then that will be passed to the demand side, and we'll see price inflation."
The economy and the public is already expecting a sizeable stimulus package. And politicians -- at least Democrats -- are aiming to deliver the bill by March 14. So it's a little late in the game for wholesale changes. Suppose time were somehow less of an issue. What could be done to allay inflation fears and make the bill more palatable to the more fiscally conservative, while still addressing some of the ongoing weakness in the economy?
As Kyle notes, "there has been a huge amount of support going to the economy. And continuing with a shrinking level of support would be reasonable. And that would mandate going forward with a program of tapering off the support that we have been giving the economy in the past year. Looking towards the private sector industries that have been shut down, the opening will create new jobs. The government spending, which has supported the economy for a while, might go quite moderate or even small."
Whatever else may get cut, there's little chance the country won't see a third round of stimulus checks. They're just too politically popular. But many believe they also come with a significant downside.
"The idea of these giant stimulus checks has an element of let's redistribute some wealth, and let's buy some votes at the same time by taking credit for it," Kyle says. "You have a lot of people who've been sitting at home receiving government support and are used to not working. There's a lot of inertia in a lot of people. So what we need to do is give them incentives, but not incentives to stay at home. But, rather, incentives to get into the workforce. So I would prefer to see incentives that are aimed at rewarding people for getting into the workforce, not rewarding people for not working. If you think the economy needs stimulus, give people tax cuts for participating in the labor market, rather than giving them payments to stay out of the labor market."
This story was originally published @ 12:32 p.m. ET on Friday, March 5, 2021.