Biden should know better: No more stimulus

After last week’s positive employment report, which showed the U.S. adding more jobs than predicted, President Joe Biden issued a statement praising his own administration for taking “decisive action” in 2021 to “pass the American Rescue Plan to get our economy back on track.”

Few Americans would agree about the economy: A stunning 88% say it is only fair or poor. More specifically, the very policy the president cited – the $1.9 trillion American Rescue Plan, which included stimulus checks of $1,400 to low – and middle-income families – is now being called into question as never before.

In 2021, the administration argued that the American Rescue Plan would benefit the economy in at least three ways: It would boost the overall rate of growth; provide much-needed relief for state budgets; and improve the lives of middle and low-income families through direct payments.

From the beginning, prominent left-ofcenter economists such as former Treasury Secretary Larry Summers argued that overall spending in the economy was already high and further stimulus would lead to inflation rather than growth. Olivier Blanchard, former chair of the American Economic Association, warned that the stimulus would backfire as increases in inflation forced the Federal Reserve to raise interest rates and thereby reduce growth.

Sadly, these warnings proved prescient. Rather than acknowledge this fact, Biden has blamed inflation on Russian President Vladimir Putin’s invasion of Ukraine.

The second argument, that states would need extra assistance in the wake of the pandemic, was dubious when Democrats first started making it in the summer of 2020. By the start of Biden’s tenure, it was clear that most states were headed for a surplus, and over the last year those surpluses have hit record levels. The additional aid wasn’t needed then, and if states do the prudent thing now and top up their rainy-day funds, it won’t be needed anytime soon.

The last argument – that, if nothing else, direct checks help middle and low-income families – has always been the stimulus’s saving grace. Even if those checks boosted spending to unsustainable levels and helped produce a painful surge in inflation, they were a lifeline for many during the pandemic. Or so the story goes.

New research now suggests that even the direct payments to lower-income households may have been less beneficial – and in some cases potentially harmful – than economists expected.

In early 2020, researchers at Harvard and the University of Exeter randomly assigned 5,000 low-income individuals to receive either a one-time payment of $500, a one-time payment of $2,000, or no payment at all. The researchers collected bank data from the participants and surveyed them several times both before and after the payments were made to measure both objective and subjective effects.

The results were stunning. On objective measures, those who received the payments were no better off. On subjective measures, they were worse.

When the checks were first sent out, the account balances of those who received money (particularly the group that received $2,000) soared. Yet after just 30 days, that difference had almost vanished. Over the next 150 days, the small remaining difference between the groups disappeared completely.

Spending patterns bear this out. In the first two weeks after the payments, the group that received $500 spent an average of $26 more per day, while the group that received $2,000 spent about $82 more. By the second two weeks, however, that difference had dropped to $3 and $12 per day, respectively. In both cases, the majority of the money was spent within the first two weeks.

Interestingly, average bank balances in the control group rose steadily over the entire 180 days of follow-up observation, while for the group that received $2,000, bank balances fell. That could help explain the surprising subjective results.

It’s worth noting that the researchers surveyed economists and policy makers before the study was conducted and asked them to predict the results. On average, those experts expected large increases in subjective well-being. What the study revealed were robust declines. By implication, the benefits to lower-income households from stimulus checks are far less than many hoped and, as difficult as it is to accept, possibly even negative.