taylor14_JJ GouinGetty Images_UScovidstimuluscheck JJ Gouin/Getty Images

The Stimulus Didn’t Work, Again

Since the onset of the pandemic in March 2020, the US government has provided tens of millions of households with direct injections of cash. But insofar as these policies are intended to stimulate the overall economy, there is no evidence to suggest that they actually work.

STANFORD – Between March 2020 and March 2021, the United States enacted three fiscal packages to stimulate the economy and support businesses and households following the economic shock caused by COVID-19. President Donald Trump signed the Coronavirus Aid, Relief, and Economic Security (CARES) Act on March 27, 2020, and the Coronavirus Response and Relief Supplemental Appropriations Act on December 27, and these were followed by President Joe Biden’s American Rescue Plan on March 11, 2021.

With each round of legislation, an “economic impact payment” (EIP) was paid out to people through direct deposit, a check, or with a special prepaid debit card, and in each case, the idea was that the funds would be spent on consumption to support aggregate demand and thereby stimulate the overall economy. The EIPs came in specific dollar amounts ranging from $600 to $1,400 for an individual and from $1,200 to $2,800 for married taxpayers up to a certain income threshold.

The rationale for these temporary payments was based on the Keynesian consumption function, according to which an increase in income increases spending and thereby boosts the economy. But alternative views, such as the permanent income hypothesis that Milton Friedman first articulated in the 1950s, hold that such increases in income lead to only small increases in consumption – if any at all – precisely because they are temporary.

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