The start of the coronavirus pandemic was fast and furious. The first recorded case outside of China was reported in mid-January 2020, and by the end of March much of the world was under control. With many workers staying at home and most businesses limited to online operations at best, the US Congress passed the first of many stimulus packages to help slow the country’s economic deterioration.
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Ultimately, more than $5 trillion in stimulus funds flooded the US economy, including $817 billion in stimulus checks paid directly to Americans. While the general consensus is that a stimulus package was appropriate at the time, there have also been negative ramifications of its size and scope. Here’s a look at the good and bad sides of pandemic stimulus checks.
Pros: Kept the economy out of a deep recession
The best effect of the pandemic stimulus checks is that they kept the US economy out of a deep recession. In the early days of the pandemic, there was panic in the air. The unemployment rate soared to 14.8% from January 2020 to March, the highest levels since recording began in 1948, and the Dow Jones Industrial Average fell 37% in just over a year. month.
Without prompt action, the economic effects could have been disastrous. In the words of the San Francisco Federal Reserve, without stimulus “…the economy could have tipped into outright deflation and slowing economic growth, the consequences of which would have been more difficult to manage.”
Disadvantage: probably contributed to the rise in inflation
In a classic inflationary cycle, prices rise because of too much money for too few goods. While the pandemic-induced economic contraction helped stifle the supply chain, resulting in “too few goods,” the flood of stimulus payments likely helped create “too much money.”
Although difficult to quantify exactly, an estimate from the Federal Reserve Bank of San Francisco suggested that by the end of 2021, up to three percentage points had been added to the inflation rate due to plans to economic recovery. And, as it stands, inflation is at 8.6% – a high since 1981 – with no telling where it goes from here.
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Pros: 11 million people lifted out of poverty
With soaring unemployment rates and nationwide business closures, a significant increase in American poverty seemed possible or even likely at the start of the pandemic. But the stimulus payments not only prevented that from happening, they actually helped reduce the poverty rate.
According to data from the US Census Bureau, 11.7 million people were lifted out of poverty in 2020 thanks to the stimulus. The Department of Health and Human Services agreed, noting that “the most effective programs for reducing poverty were Economic Impact Payments under the American Rescue Plan (ARP) and compensation for the unemployment”.
Another study by researchers at Columbia University’s Center on Poverty and Social Policy noted that while the poverty rate reached 16.3% by the end of 2020, when some pandemic stimulus programs ended, this rate had fallen to 9.3% by March 2021, when new economic measures of impact payments, child tax credits and tax refunds were issued.
Disadvantage: may have taken millions out of the workforce
Some believe the scale of the economic stimulus has had the unintended consequence of keeping millions of Americans out of the workforce. According to the St. Louis Fed, unfilled job openings have more than doubled since the second quarter of 2020, to a near-record 11 million.
A number of factors have contributed to this surge, including the reluctance of some to return to work while COVID-19 still exists and early retirement packages offered to older workers. However, the influx of economic impact payments, expanding child tax credits, extending unemployment benefits, canceling student loans and other forms of stimulus have undoubtedly slowed the return of some Americans to the labor market.
Benefit: Increased bank savings and reduced credit card debt levels
According to data from the National Bureau of Economic Research, about 60% of initial stimulus checks were used to pay down debt or to save. Data from the New York Fed’s monthly Consumer Expectations Survey suggests that up to 74% of second and third stimulus checks have been used for the same purpose. This had a double beneficial effect of reducing consumer debt and increasing US savings balances.
In addition to reducing consumer credit card debt, US bank balances have soared. And while credit card debt has come back strong, as some Americans view the coronavirus as being in the rearview mirror, bank account levels remain above pre-pandemic levels, according to the Washington Post and JPMorgan. Chase Institute.
Con: The government has taken on trillions in new debt
To fund the estimated $5.3 trillion in total stimulus paid out during the pandemic, the United States had to issue massive amounts of new debt. In fact, since March 2020, the US Treasury has borrowed approximately $6 trillion.
On the positive side, the rate on three-month Treasury bills as recently as February 24, 2022 was just 0.4%, making them very low-cost borrowing. But as the Fed has embarked on an inflation-fighting mission with higher interest rates, those costs could skyrocket.
If current and future presidential administrations do not find a way to repay this debt, it could be a major drag on the economy. Only time will tell.
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