What is a Stimulus Check?
A stimulus check is a check sent to taxpaying consumers by a government. Stimulus checks are given to boost the economy by providing consumers with funds to spend. Consumer spending is an essential component of a healthy economy and, in times of economic uncertainty, it usually contracts. Therefore, the government will provide stimulus checks to keep the consumer outlook strong and to encourage spending.
Stimulus Check Explained
A stimulus check will be either mailed out to taxpayers or provided as an equivalent tax credit. People with unpaid taxes will usually see the checks automatically applied to their outstanding amount owed.
Stimulus checks are a form of fiscal policy, which means it is a policy used by the government to try and influence the economic conditions of a country.
Fiscal policy refers to government spending and taxation policies used to influence the overall economic conditions of a country. In contrast to monetary policy, fiscal policy is not associated with the central bank of a country. Instead, it is a policy enacted by the government itself. The government uses fiscal policy in several ways, such as:
- Increasing or decreasing government spending on projects
- Increasing or decreasing tax rates
A government may resort to a few measures in certain economic situations to prevent the economy from overheating or falling into recession. In the case of an overheating economy, a government can act through contractionary fiscal policy, where it decreases government spending and increases taxes to cool off an economy.
In a recession, a government can act through expansionary fiscal policy, where it increases government spending and decreases taxes to stimulate the economy.
A stimulus check can be considered a form of decreasing taxes in order to boost consumption.
Impact of Stimulus Checks
As mentioned earlier, a stimulus check can be considered a form of decreasing taxes. The government can lower taxes to boost consumption and saving among businesses and consumers.
In a recession, a stimulus check can encourage businesses and individuals to invest or spend more with their higher disposable income. With higher consumption, demand will increase and, in turn, businesses will employ more workers. With higher demand for labor, wages will increase, which, in turn, boosts consumption in a virtuous cycle.
Stimulus Checks in Practice
The U.S. government used stimulus checks during the 2008 Global Financial Crisis. It distributed the checks to keep the unemployment rate below 8%. The checks were sent out to individuals with at least $3,000 of qualifying income.
In 2020, with the outbreak of COVID-19 and the subsequent shutdown of many economic activities, the U.S. once again presented a stimulus check to consumer households.
Effectiveness of Stimulus Checks
In 2008, various studies found that the stimulus checks, in conjunction with other fiscal and monetary policy measures, effectively reduced the unemployment rate and increased GDP. However, it was not conclusive as to how much of the positive effect can be attributed to the checks themselves.
The stimulus checks are given out with the assumption that they will be used for spending or to encourage consumers to spend more. It may not always be the case, though, and consumers may choose to save the money or use it in such a way that does not directly contribute to increased employment or GDP.
Moreover, the government that issues a stimulus check will need to assume a large amount of debt to issue the checks. For example, in the U.S., the 2020 COVID-19 stimulus check was a part of a $2.2 trillion economic relief bill. It poses a risk going forward for governments with already extremely high debt levels or unstable economies.
Governments can enact several alternatives to stimulus checks that are potentially more effective, such as:
- Allowing tax deferrals
- Loan deferrals
- Increasing spending on government projects
- Support for specific hard-hit industries
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