Section 2201 of the CARES (Coronavirus Aid, Relief, and Economic Security) Act authorizes direct payments, “Recovery Rebates,” to individual households and families. The Section is called the “2020 Recovery Rebates for Individuals” and is estimated to total $300 billion–the sum of $1,200 to individuals ($2,400 for joint returns) plus $500 for each qualifying child. The amount is reduced for taxpayers earning over $75,000 annually (or $150,000 for joint returns) with no payments for individual taxpayers earning over $90,000. The useful Stimulus Check Calculator from Kiplinger’s gives more details.
While understandable on pure humanitarian grounds, these payments should be expedited it they are to benefit the economy as it is hit by negative shocks during the pandemic. It is good that taxpayers will get the funds faster if they have filed a 2018 or 2019 tax return, and if their bank accounts are on file at the IRS so the money can be directly deposited. It is even good that he law requires that “No refund or credit shall be made…after December 31, 2020.” Most important, the payments can be advanced to people before they file income tax returns.
This “advanced payments” approach was followed in 2008 rebate under the Economic Stimulus Act of 2008 which was signed into law on February 13, 2008 by President Bush. Even with that action, most of the payments did not go out until three month later in May, June and July. We can only hope the Treasury can work faster than it did a dozen years ago. Of course, Secretary Mnuchin should talk to former Secretary Paulson about that.
However, it is not simply a matter of getting the payments out faster. If the Act is to stimulate the economy, and, at least partially offset the severe negative impact of the shelter-in-place, social-distancing, and business-closing restrictions, it is important that a large fraction of the payment be spent on goods and services and not simply saved.
Here the experience of the 2008 rebate payments is instructive. Many economists have researched these rebates, including me in this 2009 Wall Street Journal op-ed and longer articles back in 2009 and more recently 2018. But this straight-forward chart of total disposable personal income, with and without the rebate, and personal consumption expenditures shows vividly that the one-time payments had virtually no stimulus impact on economy. Consumption was not affected and continued on its path. Regression analysis supports the graphical illustration.In other words, income rose with the rebate, but there was no noticeable impact on people’s demand for consumption. The results may seem surprising, but they are not. The famous models of consumption–the permanent income model of Milton Friedman and the life cycle model of Franco Modigliani–both predict that a temporary increases in income, like these one-time payments, have little effect on spending.
If this happens again, the Section 2201 payments will not stimulate the economy. They won’t fill the hole caused by the forced reductions in spending elsewhere. One can wish that history won’t repeat itself, or that the vivid graphical-empirical analysis is wrong. But why take that chance? Why not find ways to make the payments work? But how, especially now that the limits on personal economic interaction are to continue through the month of April (as announced yesterday)?
One answer is simply for public officials to encourage people and firms to get around–not relax or remove–shelter-in-place and social-distancing restrictions. Why not explicitly encourage spending on such things as on-line gift card purchases for specific products, on-line dance classes, lego classics or a desk chair from Costco on-line. It is easy to order paint, wall-paper, shovels, or mops from Home depot, hand calculators and desks from Staples, and coffee makers and writing tablets from Office Depot, which all have extensive online operations. All these business have ways and incentives to make such purchases more available. But thus far, there has been little such discussion
It would also help if the Treasury could be explicit about the timing of when the checks will go out or direct deposits will be made. Treasury economists could provide a chart like the one for income shown above, but more expedited, and then keep to that in practice in order to reduce uncertainty. This would help show the way. None of this is easy. It takes ingenuity, especially from those with expertise in merchandising, transportation, computers and the internet.