Where does the stimulus go?

One of the key questions for the time after the pandemic will be how fast households will start to consume again, once the uncertainty has been removed. A major driving force behind the anaemic recovery and low inflation after the Financial Crisis of 2008 was that households were overleveraged and were struggling to pay down their debt. Since then, many households have reduced their mortgages or sold their houses and became renters again and banks have been much more conservative in lending to new buyers. All that has helped delever households, so that when we come out of this crisis, consumers should be in a much better position to ramp up consumption again.

But will they? 

A group of researchers from Chicago, Berkeley, and Austin have surveyed recipients of the US stimulus checks and asked them how receiving stimulus money changed their behaviour. Their responses provide some insights that are interesting in three ways: 

  1. It is another data point in the impact of Universal Basic Income (even though technically the stimulus checks weren’t a UBI).

  2. It is an experiment if economists are right if they assume households are likely to spend “helicopter money” rather than save it.

  3. It provides some first insights into how households will use their income in the immediate aftermath of the crisis.

Let’s look at how US households that received a stimulus check used the money and what that means for these three points.

How US households used the stimulus checks

A screenshot of a cell phone

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Source: Coibion et al. (2020).

Of course, all households used the money for different purposes, but the main purpose is given in the above chart. Only 15% of households used the stimulus money to predominantly to increase consumption and spending. 33% used it mostly to increase their savings and more than half (52%) used it to mostly to pay down debt. Looking at the actual spending across all groups shows that about 42% of the money from the stimulus checks was spent while 58% was either saved or used to pay down debt.

There are obvious limitations in how to extrapolate from that data to the three points above. It was a one-time payment, so it only gives limited insights in the impact a UBI would have, but it confirms what we know from experiments with UBI. It would not lead to people working less and consuming more. Instead, it leads to people using the income to create a safety buffer or a rainy-day fund. Further data in the study also showed that the stimulus check acts as a significant motivation to increase the job search. The little income of the stimulus check gave unemployed people the extra safety and resources to actively look for a job. Of the unemployed people who received a stimulus check, 21% said they were putting more efforts into finding a job after receiving the money and 8% said they were starting to look for a job, while only 7% said they would put less effort in their job search or stop looking altogether.

On the second point it shows that while helicopter money works, its impact is limited. Yes, 42% of the stimulus money got spent, but more than half of it never made it back into the economy. Instead, it was saved or used to pay down debt. That’s not great if you want to stimulate growth with helicopter money.

Third, and in my view most important, it shows that households don’t feel like they can just go out and spend, spend, spend. Most households in the United States still feel they have too much debt and not enough savings. So, when the situation gets better and the uncertainty of the pandemic is removed, they will use their income predominantly to repair their finances. This means that we should expect another slow recovery in consumer spending and thus a slow recovery in the demand for loans. And, of course, that means that in it will take quite some time before consumer spending will contribute to higher inflation. Rather, it looks more like a repeat of the 2009 to 2012 period.