Round 2 of Cash vs. Covid-19

By Megan E. Jenkins Ellie Willard

Published:

What can we learn from the first stimulus checks?

August recess is set to begin this week for the House and next week for the Senate, and lawmakers are still negotiating on an aid package meant to help businesses, states, and individuals cope with the economic effects of the ongoing COVID-19 pandemic. While they may disagree about the specifics of unemployment benefits and aid to states, policymakers seem to have reached agreement on an additional round of direct payments to Americans.

The CARES Act provided the first round of direct payments to 150 million Americans, with the goal of providing “emergency assistance and health care response for individuals, families, and businesses affected by the 2020 coronavirus pandemic.” Unlike previous federal aid meant to combat financial crises, the CARES Act was not designed to kickstart the economy. Instead, financial assistance was meant to keep the United States in a “medically induced coma.” The idea was to help individuals and families cover their basic expenses while much of the economy was shut down to help slow the spread of COVID-19.

During early debates on the CARES Act, critics argued the checks were a way to buy votes, that they were ineffective at bolstering the economy, or simply a band-aid on a bullet hole. Now, 16 weeks after the first stimulus checks reached Americans’ bank accounts, we can evaluate whether the stimulus checks had their desired effects.

What can we learn from the first round of direct payments?

The Household Pulse Survey conducted by the US Census Bureau is designed to “produce data on the economic and social effects of COVID 19 on American Households.” The Census Bureau began gathering weekly data on how households were using their stimulus checks in June of 2020. The survey also includes questions about employment, education, housing costs, food scarcity, insurance, and physical and mental health.

So far, the survey has collected data from June 11 to July 14. Over this period, the overwhelming majority, an average of 62 percent, used their increased personal funds to cover basic expenses like food, clothing, and shelter (rather than for debt or savings), as shown in Figure 1.

Figure 1

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Source: Data taken from Household Pulse Survey Data Tables

The survey also examines the specific types of expenses being covered by the stimulus check. This allows us to determine if people are using the stimulus check to purchase unnecessary items or if they are being used to keep Americans afloat. Spending categories were divided into essential purchases, nonessential purchases, paying off debt (excluding home loans or mortgages), and those who “did not report.”

Across the 5 weeks of data shown in Figure 2, 77 percent of respondents used their funds to cover essential weekly expenses. In fact, the number of people using their stimulus checks to cover nonessential purchases including household furniture, recreation, or other goods has yet to exceed 8 percent for any of the weeks in the survey. These data suggest that Americans overwhelmingly used the stimulus checks to meet their monthly expenses and not for casual spending.

Figure 2

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Source: Data taken from Household Pulse Survey Data Tables

With an average of 62 percent of Americans using stimulus checks to afford basic needs, the CARES Act seems to have been successful in offering emergency assistance to millions of people. The direct cash payments aspect of the CARES Act provided a quick-release program where the majority of recipients received necessary and timely aid amidst a pandemic.

Although some argue the stimulus checks took too long to enter American wallets, they began appearing in bank accounts within 2.5 weeks of the bill being passed, months faster than the economic stimulus offered in 2008. Now that the infrastructure is built to provide the checks faster, round two wouldn’t be subject to the same delays. With no semblance of pre-COVID life insight, another round of stimulus checks could be an important policy tool in prolonging this dazed economic state until markets can adequately adjust to the new normal.

What’s different about round 2?

In a year that has kept everyone on their toes, things have changed drastically since the first round of stimulus checks were issued. In March of 2020, the average unemployment rate in the U.S. was 4.4 percent — almost a one percentage point increase from February. April, however, saw the largest spike to almost 15 percent unemployment as states took action to slow the spread of COVID-19 through social distancing guidelines and restrictions on the operation of non-essential businesses. May and June have seen that number decline to 13 and 11 percent respectively, but unemployment levels remain historically high.

Image for postSource: Statista

According to the New York Times, all 50 states have begun the process of reopening. Yet many are now pressing pause or reversing their reopening plans entirely. Western states like Arizona and California were hit particularly hard with rapidly growing caseloads after the restrictions were lifted. Both have reinstated restrictions on the operation of bars and indoor entertainment venues like movie theaters. Other states have reenacted mask requirements and limited the size of gatherings.

The end of July also brought the end of additional unemployment benefits that were part of the original CARES Act. Under that program unemployed Americans were eligible for an additional $600 per week in supplemental federal unemployment benefits on top of what they would already receive at the state level. Negotiations around whether to extend those benefits as well as how large they should be are ongoing. Some say that outsized unemployment benefits disincentive Americans from going back to work by paying them more than they would earn in a job. Others claim that the evidence so far has not borne that out because many have chosen to return to work even if they might have received more from unemployment.

Although much has changed since the first round of checks were issued, economic uncertainty is still high. With unemployment claims ticking up again at the end of July and many states beginning to reverse their reopening plans, another round of federal aid seems likely if lawmakers can come to an agreement on just what that should look like.

Primetime for round 2

The clock is ticking for lawmakers to come to an agreement on additional economic aid to help Americans weather the economic storm of COVID-19. The first round of stimulus checks helped households and individuals do just that by covering basic expenses and keeping the economy in hibernation mode. As we continue to ride out the pandemic through the second half of 2020, another round of payments will help to reduce financial uncertainty for millions of people by giving them funds to use where they’re most urgently needed.

CGO scholars and fellows frequently comment on a variety of topics for the popular press. The views expressed therein are those of the authors and do not necessarily reflect the views of the Center for Growth and Opportunity or the views of Utah State University.