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Gridlock in Washington over further coronavirus relief means that a second round of Economic Impact Payments (or stimulus checks) may be in jeopardy.
But if the experience of the first round is any lesson, another check may be critical to helping families and stimulating the economy amid mounting concerns over a second wave.
Federal Reserve Chairman Jay Powell told Congress that the $1,200 checks from the original Coronavirus Aid, Relief, and Economic Security (CARES) Act are supporting the millions of Americans who lost their jobs and have not been able to find work again.
“Those people are able to spend now because of the checks that they got and because of the unemployment insurance they got,” Powell said in testimony to the Senate Banking Committee on September 24.
Who used the stimulus checks?
Unlike the enhanced unemployment insurance ($600-a-week benefit), the stimulus checks were disbursed to most Americans, regardless of whether that person was employed or not.
Data from the Federal Reserve Bank of Philadelphia’s Consumer Finance Institute shows that lower-income stimulus check recipients were less likely to put the money into savings compared to higher earners.
Although 60.3% of those making over $125,000 a year said they put some of the stimulus check into the bank, only 18.9% of those making less than $40,000 a year said they stashed away the free money.
Instead, those lower-income households spent the money on food, medicine, and rent. A good chunk of them also paid down debt.
Who did the stimulus checks help the most?
Those who actually spent the stimulus money were more likely to have been in a financial situation where they had income cut or saw expenses (i.e. health care costs) rise.
Data from the Fed shows that 39% of households making less than $40,000 a year ended up losing a job by March.
Among all that lost income (through either job loss or reduced hours), Census Bureau data from the Household Pulse Survey shows that 81% said they mostly spent the stimulus checks. For comparison, only 60% of those who did not experience any job loss said they mostly spent the money.
Those who were sick were also more likely to have spent the stimulus money. About 81% of those who were ill — either with COVID-19 or something else reported that they mostly spent their Economic Impact Payments.
The stimulus money may have been critical for those who were sick but remained on payroll, since having a job would make that person ineligible for the bonus unemployment benefits.
How helpful was that spending to the economy at large?
With the recovery still underway, it is hard to quantify the exact benefit of the stimulus checks.
But any money spent back into the economy, largely driven by lower-income households, are likely to have supported local grocery stores, pharmacies, etc.
Goldman Sachs noted on September 25 that “several studies agree that the CARES Act’s stimulus payments boosted spending substantially, particularly among lower-income consumers.”
Their report pointed to one University of Chicago paper which concludes that spending would have been ever higher if it weren’t for across-the-board business closures due to health reasons.
Federal Reserve officials have also pointed to the Economic Impact Payments as a major supporter of household spending, which ramped up in mid-April.
“With unemployment and reduced hours likely to persist, many of these households are unlikely to be able to sustain recent levels of consumption without additional fiscal support as well as extended loan forbearance and eviction moratoriums,” said Fed Governor Lael Brainard on October 21.
The message: A broad fiscal package, perhaps including a new round of stimulus checks, would be helpful as the economic recovery continues.
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