Carney: Congress Should Not Have Cut Stimulus Payments

Getting money out to the American people was one of the most prudent things Congress did to stave off economic disaster when the pandemic took hold this spring.

The Cares Act authorized $1200 per adult and $500 per child for individuals earning up to $75,000. Beyond that figure, the stimulus payments scaled-down and cut off altogether at $100,000.

This worked so well in preventing the economy from collapsing — contributing to much stronger than expected consumer confidence and household spending — that Congress decided to cut the payments to adults in half. If at first you succeed, why try as hard next time?

The direct stimulus payments will be just $600 per adult under the new bill. This will lower the cost of this portion of the bill to around $166 billion from around $218 billion spent under the Cares Act. But if the smaller payments wind up being too small to support consumer spending while we lock down businesses and incomes fall, the cost to the economy could swamp the $52 billion in budget savings.

And, surely some Americans are going to notice that there were plenty of other places Congress could have turned to cut costs if it wanted to. There is around $20 billion of spending for colleges and universities in the bill. Transportation infrastructure and highway funding increases combine for $24 billion. The business meals deduction is estimated to cost around $5 billion. The broader appropriations bill has billions for aid to foreign countries.

Keep in mind that while economic stimulus is one goal of the payments, they are also a kind of reparations the government owes us for shutting down the economy. And $1,200 is a pittance compared to the economic devastation this has wrought for working-class people who lost their jobs, their health care coverage, and had their children shut out of schools.

Conservatives have traditionally argued that individuals are better than bureaucrats at choosing how to spend our money. Direct payments do just that: empower individuals, enable market processes, and keep the bureaucracy’s reach limited.

On the other hand, the lower figure for the payment is both less random and less miserly than it seems. And the bill raises the per-child amount from $500 to $600, which is a step in the right direction.

Let’s start with the reduction of the payments for adults. According to a Fed survey of consumers, the median payment per household in the last round of stimulus was $2,400. Around 36 percent of that was saved rather than spent, donated, or used to reduce debt. While it is possible having a larger savings amount can boost consumer confidence, most economists think saved stimulus does not stimulate much at all. It means the government is borrowing from savers to send a check to people who just put the money back into savings. It’s a silly circle that makes some money for bankers, who get to skim some vig for arranging the process but doesn’t do much for the economy.

The Fed survey suggested an even larger portion — 45 percent — of a second round of $1,200 stimulus payments would have gone to savings. If that’s the case, it might make some sense to reduce the amount paid out — except a blanket reduction probably is the wrong way to go about it. Not everyone is equally likely to save rather than spend or pay down debt. The wealthier a household is, the more likely it is to save a larger portion of the stimulus payment. So a better reshuffle would likely have been to keep the payments high — or even increase them — for everyone earning less than $50,000 and begin scaling them down earlier.

Even then, however, we are risking a lot for the sake of avoiding having people save too much. And it’s not clear people would save as much as the Fed survey indicated. The data comes from questions asked of consumers in August, much closer to the date of the first stimulus and when many Americans did not understand we were headed for a second virus surge and another round of lockdowns. It seems likely that payments arriving in January would be spent a lot more than payments arriving over the summer.

To put it differently, people probably have more need for extra cash now than they did in August when the economy was growing, unemployment falling rapidly, and they had just received a big payment a few months earlier. What’s more, enhanced unemployment payments were allowing many jobless Americans to collect more in benefits than they had been earning in wages. That was its own form of stimulus. The new bill provides for just $300 in enhanced benefits, half of the Cares Act boost, which will mean far fewer people will receive benefits in excess of their wages.

Increasing the amount of the payments for each child is a genuinely good idea. Larger families are more likely to spend the money and more likely to have economic needs created by the shutdown. And economic deprivation in childhood has long-lasting and well-documented costs. We should do everything we can to keep families with children financially healthy in the pandemic.

We cannot avoid all of the costs of the pandemic. It will weigh on economic growth in the coming months, just as it did in the first half of 2019. But we can ease the weight by making sure more of the costs are borne by the U.S. government, which can borrow money for next to nothing, instead of financially strapped U.S. households.

Together the American people have built the most credit-worthy institution the world has ever seen — our constitutional Republic. One of the advantages that gives us is the ability to direct the government to increase the incomes of Americans by spending it into the economy when we face a crisis. And there’s no better way to do that than payments that go directly to the American people. We do not need anyone’s permission to do this. It’s within our power because of what we have accomplished as a nation.

Six-hundred bucks is better than nothing. But before Congress decided to cut the payments in half, it might have at least asked what it thought it was getting for the $52 billion in budget savings and what it was risking to get that.