Which way do stimulus cheque cut?

On 27 March 2020, President Trump signed into law the CARES Act, a historic $2 trillion economic stimulus package aimed as a fiscal response to the nation’s economic slowdown triggered by the COVID-19 pandemic. While the announcement of a stimulus package in times like this does not come as a surprise, the sheer size of the package itself has caught the world’s attention. At $2 trillion, America’s stimulus is one of the largest fiscal response in the world announced to-date, eclipsing its very own stimulus package during the Great Recession caused by the 2008 Global Financial Crisis by more than double the amount.

 

Out of the $2 trillion allocation, the component that draws the most headlines recently is the $1,200 direct cheque payments to Americans. Direct reliefs to individuals and households are in fact a common inclusion for almost every economic stimulus package across the globe. For instance, the Malaysian government has set aside RM10 billion of its stimulus package for direct one-off payments to the nation’s lower and middle class. Thailand, Vietnam and the Philippines are among nations that have also adopted similar measures, mainly targeted at the nation’s financially vulnerable communities which are at risk during times of crisis. America’s cash handouts in comparison are more far-reaching, with stimulus cheques only phasing out completely for individuals earning more than $99,000 a year. The objective in mind certainly extends beyond just addressing financial difficulty – i.e. to spur consumer spending as America braces itself for a sharp decline in economic activity given the nationwide quarantine.

 

However, the effectiveness of direct cash handouts in spurring consumer spending has long been debated. Critics argue that stimulus cheque recipients do not put money back into the economy – a 2009 study on the effectiveness of President Bush’s tax rebates in 2008 reveals that less than 20% of recipients spent the money, while one-thirds of recipients put the money back into savings and almost half of the recipients use the money to pay off existing debts. Consumer spending largely depends on the confidence level of future outlook, wherein current indicators are not pointing to a positive outlook at all. According to The Conference Board, the consumer confidence index slid to 120.0 in March from 132.6 in February, with an estimated sharp decline in consumer spending of 40% and GDP contraction of 33.3% for the second quarter of the year. Other analysts are predicting up to a 40% contraction in America’s economy for the current quarter.

 

Regardless of the economic objectives, the stimulus cheques are certainly a welcome sight for most Americans as the cheques arrive at a time when unemployment is rising at an alarming rate in the US – although the official unemployment rate stands at only 4.4% as at March, a staggering 22 million unemployment claim applications were filed between mid-March to mid-April, putting approximately 13.5% of America’s workforce out of job in just 4 weeks. This also comes at a backdrop of household debts reaching an all-time high of $14.15 trillion as at the fourth quarter of 2019. It is also estimated that 11% of Americans can only afford their household expenses for up to a week under quarantine, and another 15% can only afford those expenses up to 3 weeks.

 

Whichever way the stimulus cheques cut, it is without a doubt a populist move by the incumbent government. The lasting effect of alleviating one’s financial difficulty in times of crisis can’t be any more profound than having a cheque appear directly in one’s mailbox. More so when President Trump cheekily inscribed his own name and signature onto every stimulus cheque that Americans will be receiving this month, despite the stimulus payments being a bipartisan Congressional response to the current crisis.

 

In any case, the stimulus payments – and the overall stimulus package – is expected to be a costly endeavour to the US government, with the Congressional Budget Office estimating that the overall stimulus to add over $1.8 trillion to the federal deficit over the next decade, at a time when the US government is already over $24 trillion in debt. Notwithstanding that the stimulus payments don’t necessarily guarantee an improvement to overall consumer spending, the stimulus cheques are certainly expected given the upcoming presidential election in November – neither party would want to be caught denying Americans of a cash handout in times of crisis. Regardless of the government’s ability to afford it, Americans can certainly expect more populist fiscal responses to the COVID-19 pandemic to come in the coming months under the leadership of President Trump as he scrambles to cover his recent missteps in a bid to secure his re-election in November.