The Covid-19 pandemic has had an intense impact on the global economy, which can be compared to the 2008 economic crisis. Lockdowns, illness, and the threat of economic hardship have combined to cause a genuine change in consumer behaviour—people are spending less. Blanchard gives the bankruptcy of the Lehman Brothers firm at the beginning of the 2008 crisis as an example of an event that rattled consumer confidence and caused a similar drop in consumption. In that example, the impending threat of economic disaster prompted consumers to lower their spending and instead try and save more to weather the storm. In economic terms, the marginal propensity to consumer lowered, which directly lowers equilibrium GDP as well. The Covid-19 pandemic is similar in that the economic effects were clearly visible to consumers, and similar strategies of increasing saving to brace for impact were undertaken. This time however, the government decided to pour significant amounts of money into the economy through stimulus checks. Due to the nature of transfers, however, the impact of the stimulus checks on GDP is moderated by the marginal propensity to consume—which struggled under the pressure of the pandemic.
According to the Penn Wharton Budget Model, the MPC is tilted such that the overwhelming majority—73% of the $1400 stimulus checks—is going directly into household savings rather than producing stimulative effects. The goal of the stimulus, to increase spending, is not being approached efficiently through this method at first glance. The Wharton analysis, like Blanchard, acknowledges the tendency of consumers to delay major purchases until after a recession. The low MPC of today can build the savings for tomorrow that allow someone to purchase the car they did not want to purchase during an economic disaster. Therefore, despite the apparent ineffectiveness of stimulus checks at the moment there are likely to be delayed benefits as the economy picks back up. Another critical component identified in the Wharton analysis is that the marginal propensity to consume is absolutely not equal across all consumers. In fact, it is much higher in poorer households than in wealthy households. Karger and Rajan take a deeper look at this for the April 2020 $1,200 stimulus checks, and find that recipients who live paycheck-to-paycheck spend 60% of the stimulus payment within two weeks, while recipients who already save much of their monthly income spent only 24% of it within two weeks (2021). They find that the most important indicator for MPC is prior spending or saving behaviour, and that by targeting the lower income households with higher amounts of spending the efficacy of the stimulus checks could be massively increased. The impact of transfers is reduced by the MPC, where government's direct spending is not. However, the government is often considered to have a responsibility to help its citizens in times of economic crisis. The key to influencing equilibrium GDP with stimulus checks is to closely examine what the Wharton analysis and Karger and Rajan pointed out. The MPC is not uniform, and carefully targeting the hardest hit groups allows the stimulus checks to be as efficient as they can be while still performing the function of transfer payments.
The Economist takes a more positive perspective on the impact of stimulus checks in America. While the MPC has dropped significantly, they identify that the generosity of the stimulus checks alongside unemployment benefits have resulted in a general increase in bank balances. This increase can be expected to result in that previously mentioned delayed impact of the stimulus, as people move towards buying things that they did not want to risk during the recession once they feel it is safe to do so.
This chart provides a useful overview of the situation. Once it was clear that economic tumult was approaching—after the national emergency was declared—just like in 2008, consumers' MPC dropped to begin saving in an effort to ride out the storm, and therefore equilibrium GDP plummeted as spending dropped. Since this chart is focusing on % changes from previous account balances, it does not reflect the tendency of poorer households to spend more of their stimulus money. While it looks like the poorer households are saving more than richer ones, this is only because the impact of the chunk of stimulus that does get saved is much more visible in the accounts of those poorer households. What this chart does reflect well is that the saving is very significant across every level of income. Like the Economist says in its title, consumers are sitting on piles of cash compared to what they had previously. The pandemic's impact on equilibrium GDP is due not only to its direct lowering of demand, but due to consumers identifying that it will do so and lowering their own MPC in order to save money to make it through. The stimulus checks are an effort to alleviate the damage to the economy done when people are justifiably worried about protecting themselves by encouraging further spending, and they do increase equilibrium GDP—just in a way that is hampered by the already reduced MPC. Careful targeting of the hardest hit, the households that are effectively forced to spend the stimulus checks, both alleviates their issues while maximizing the amount of the stimulus checks that makes its way back into the economy to increase equilibrium GDP. Even when the stimulus checks do not make their way back into the economy immediately, however, there is a significant amount of spending that will happen but is simply delayed. Since people are risk-averse, and do not want to make large purchases in uncertain economies, many expensive durable good purchases are being delayed. The stimulus checks that have been saved will help these purchases be made in the future, meaning that the stimulus has both an immediate, if mitigated, impact on equilibrium GDP as well as a delayed increase to equilibrium GDP.
Works Cited
Blanchard, Olivier. Macroeconomics. 7th ed., Pearson Education Inc., 2017.
The Economist Newspaper. (n.d.). The world's consumers are sitting on piles of cash. will they spend it? The Economist. Retrieved February 24, 2022, from https://www.economist.com/finance-and-economics/2021/03/09/the-worlds-consumers-are-sitting-on-piles-of-cash-will-they-spend-it
Karger, E., & Rajan, A. (2020). Heterogeneity in the marginal propensity to consume: Evidence from covid-19 stimulus payments. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.3612828
Paulson, M. (Ed.). (2021, February 3). Background: Marginal propensities to consume in the 2021 economy. Penn Wharton Budget Model. Retrieved February 24, 2022, from https://budgetmodel.wharton.upenn.edu/issues/2021/2/3/background-mpc-in-2021-economy
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