Stimulus Cash Is Most Effective When Given to People Who Will Spend It.

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In response to the COVID-19 pandemic, the US Congress pumped trillions of dollars into the economy through stimulus checks, expanded unemployment benefits, and targeted spending to support specific industries such as airlines.

The massive package appears to have averted a long, deep recession. But, in the complicated, intertwined modern American economy, which elements were the most effective?

 

Stimulus Check

 

According to some research based on pre-pandemic data, stimulus directed to households is most effective when it is directed to the people who need it the most.

Researchers discovered in a new working paper that, to get the most bang for the buck in stimulating the economy, lawmakers should give stimulus money to people who will spend it rather than sock it away in savings, as many Americans did with COVID-19 relief checks.

These are the groups that have the highest marginal propensity to consume, or MPC.

“Our estimates suggest that government transfers of $1,000 to each employed worker increase GDP by 69 cents per dollar spent, whereas transfers of $2,000 to each worker with above-median MPC increase GDP by 96 cents per dollar spent,” writes Christina Patterson, an assistant professor at the University of Chicago’s Booth School of Business, with coauthors Joel P. Flynn and John Sturm, PhD students at MIT.

Patterson, a labor economist who studies how inequality among workers and firms affects the economy’s response to shocks, collaborated with Flynn and Sturm to develop a model that takes into account economic ties through supply chains, regional trade, and dramatic differences in household spending tendencies.

“Policymakers must consider the cascades of expenditure they set off,” they wrote, “as expenditures in one industry and region reach not only its workers but also those in its supply chain, those at firms where workers spend their marginal income, and so on.”

They fed the model data from 2012, which included data from all 50 US states plus the District of Columbia, 55 industry and business sectors, and 80 demographic groups. They then examined how each industry, region, and demographic group reacted to a $1 increase in income. They discovered that almost all of the differences were due to where households fell on the MPC continuum.

So, which groups had the highest MPC ratings? The researchers discovered that those who were younger than 35, did not have a college education, earned less than $35,000 per year, or were Black were the most vulnerable to economic disasters. The researchers discovered that relative poor Arkansas, Mississippi, and South Dakota had the highest MPCs among states. The lowest were in Connecticut, the District of Columbia, and New Jersey.

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“We show that concentrating transfers among households with the highest MPC can increase the policy’s effect on GDP by up to 130 percent,” the researchers write.

“Governments must understand the opportunity costs of untargeted fiscal spending…. [Such] policies in response to the Great Recession and COVID-19 may have left significant gains on the table—in the hundreds of billions of dollars.”

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