Can stimulus checks that go directly to savings accounts or pay debts still boost the economy? That is one of the main issues behind Covid-19’s $ 1.9 trillion emergency relief project that is currently being debated by lawmakers as they consider limiting eligibility requirements for direct payments to up to $ 1,400 for families. low and middle income.
In recent days, President Joe Biden and the left wing of Congressional Democrats have faced resistance from Republicans and some centrist Democrats who argue that proposed payments should have a lower income eligibility limit than in previous iterations.
But dollars diverted to savings accounts or to pay off debts still contribute to strengthening household balance sheets and broader economic stability, economists say.
A recent National Bureau of Economic Research working paper examined what people did with the $ 1,200 per person stimulus payments distributed last April. He found that only about 15 percent of recipients said they spent mainly. One in three said they saved and the rest said the money was to pay debts. On average, people said they spent or planned to spend about 40% of the total dollar amount they received, with the remaining 60% of the money split almost equally between saving and paying off debts.
“This is the short view versus the long view. In the short term, stimulus money put into savings or used to pay debts may not give an immediate boost to the economy, but families with more savings and less debt are in a better position to spend consistently going forward, “said Greg McBride, chief financial analyst at Bankrate.
Wendy Edelberg, director of The Hamilton Project and senior economics researcher at the Brookings Institution, argued that the comprehensive nature of direct stimulus payments is its greatest benefit, as it provides a foundation of financial stability for families who would not otherwise meet criteria for, say, unemployment insurance or food stamps, but they are still in financial difficulty as a result of the pandemic.
The comprehensive nature of stimulus checks is its greatest benefit, as it can help families that do not meet the criteria for unemployment insurance or food stamps.
“A lot of people are experiencing economic difficulties, but they are working – they may have seen cuts in working hours, maybe they normally receive financial assistance from the family,” she said. “Many of the other tax supports we have can be very complicated for people to access,” said Edelberg, like SNAP, and she noted that many unemployed workers faced obstacles to process their claims for compensation in time due to state backups at unemployment offices. .
Bankrate data shows that only about six out of ten Americans could pay for an emergency expense of $ 1,000 using their existing savings in full. Many would be forced to borrow and the costs of servicing that debt would undermine other future spending, said McBride. “Even among people who have no immediate plans to spend that money, it does not mean that it will not be spent,” he said. “This is what there is to absorb the next time an unplanned expense arises. This is a better bet for families than incurring high interest debt, ”he said.
And if people use their stimulus dollars to pay high-interest debts, such as revolving credit card balances, they will release the money they previously allocated to pay for servicing that debt, McBride pointed out. With the average credit card interest rate at around 16 percent, that money adds up: a person who makes minimum payments for a credit card balance of $ 1,200 in the average APR would pay around $ 500 in interest for more than six years it would take to pay that debt off.
Part of the propensity to save or reduce debt at the start of the pandemic may also be due to the high degree of anxiety and uncertainty faced by the American public last spring, with blocking orders in some areas being repeatedly extended and no sense of what a new normal is. it may seem – or when it will arrive. Even many people who still had jobs feared what the future held and were motivated to support their finances.
“During a recession, families prefer to retain more money as a precaution against an uncertain future and falling income,” noted economists at Berenberg Economics in Germany in a recent analysis.
Americans whose jobs were unaffected and could be willing to spend, on the other hand, were hampered by a lack of places to spend. With the closure of the service sector and non-essential retailers, even the willing and financially able to spend people were limited by the closed economy, which Berenberg characterized as “involuntary” savings activity. Data for the first nine months of last year show that households’ aggregate economy grew by just over 100%.
If people use their stimulus dollars to pay high-interest credit card balances, they will release the money they previously allocated to pay off debt service.
The authors of the NBER article recognized that the pandemic that restricts people’s ability to spend may have been a key factor in maintaining the percentage of stimulus dollars spent in the first few months after distribution. “As the pandemic will end, this suggests that future stimulus payments to families may be more effective in future crises,” they wrote.
The limitations imposed externally on people’s spending suggest that pent-up demand may increase later this year. The savings that consumers have accumulated in previous months could serve as fuel for an economic rocket, once the vaccine implantation spreads and collective immunity is closer to being achieved, economists suggested. “It is not so much that it is able to finance, it is that it reflects a lot of postponed consumer spending. This reflects a large amount of pent-up demand, simply sitting and waiting to finance these expenses, ”said Edelberg.
Berenberg analysts also saw an increase in retail spending in the second half of the year, especially in the e-commerce space, along with strong activity in the housing sector. Both factors, they said, point to the likelihood of strong consumer demand waiting to be tapped. “Despite the weaker confidence, the underlying fundamentals are positive,” they wrote.