This Is An Experiment. And Nobody Knows Anything.

Over the course of the pandemic, I’ve variously insisted that the debate around stimulus checks in the US almost always missed the point.

While it was generally understood during the early days of the crisis that “stimulus” was a misnomer (you can’t “stimulate” an economy that isn’t open), we quickly moved into a kind of gray area.

Once the initial, nationwide lockdown was lifted, states attempted to reopen parts of the local economy in a piecemeal fashion. This led to confusion, as frustrated business owners struggled to navigate constantly shifting guidelines around what precautions were and weren’t necessary. Sometimes, businesses which had only just reopened were forced to close again.

But in-person spending was possible starting last summer, and even during the lockdown, Americans could still spend online and shop for necessities at Walmart, Target and the like. Over the same period, stock prices were rising rapidly and reports of increased retail investor activity and the substitution of “gamified” investing for sports gambling stoked concerns that federal aid was finding its way into the equity of bankrupt companies like Hertz, or shares of Apple or call options on Tesla.

At that point, a vociferous debate ensued around who really “needed” free money. This was a confused discussion that often found lawmakers and pundits arguing in circles.

Were elevated savings rates good news to the extent they suggested a notoriously spendthrift society had learned a lesson and was keen to squirrel away funds for a rainy day? Or were they bad news to the extent elevated savings rates were evidence that people didn’t actually “need” the money the government sent them?

Similarly, was it good news that some Americans were seemingly predisposed to paying down debt with their government handout (figure below), as that suggested households would come out of the crisis with better balance sheets? Or was that just another sign that people didn’t really “need” the money?

To what extent was the collapse shown in the figure (above) just indicative of the dramatic impact lockdowns and containment protocols had on consumer spending? Or were Americans just shy about effectively taking out high-interest loans during a period characterized by mass layoffs and extreme economic uncertainty? “Credit card balances are $108 billion lower than they had been at the end of 2019, the largest yearly decline seen since the series begins in 1999, consistent with continued weakness in consumer spending as well as paydowns by card holders,” the New York Fed said, in its latest quarterly household debt and credit report.

And what about stocks? For years, pundits have bemoaned the extent to which stock ownership is, by percentages anyway, the sole purview of the wealthy (figure below). While speculating in shares of bankrupt enterprises was clearly an example of misallocated capital, was it really bad news if a late twentysomething bought, say, a low-cost passive ETF tracking an index of dividend stocks with her stimulus check?

Nobody really had any answers for those questions, and when they did, those answers often tripped over one another.

In order to solve the overarching quandary I argued it was best to abandon the fruitless quest to determine “need” thresholds. It made no sense at all during the first lockdown when the country faced economic oblivion, and not much more sense once a total meltdown was averted.

Initially, in March and April of 2020, so many people needed help that the benefits of delivering trillions in fiscal support right away with almost no questions asked clearly outweighed the risks. When the economy sheds 20 million jobs in a single month, the idea of sitting around and debating the correct way to determine who “needs” help and who doesn’t is obviously absurd, as it risks sending voters and businesses the message that not even a pandemic is capable of breaking the Beltway permafrost. Almost all lawmakers understood that.

After the first rescue effort, the focus turned to stimulus. For our purposes here, I’ll ignore the fact that, for many hard-hit sectors, families and citizens, the rescue effort is ongoing and the idea of “stimulating” anything is still at least a few months out.

Once you begin to talk about stimulating an economy, the idea of “need” isn’t really relevant. Sure, you want to keep delivering aid to those who need it, but they’ll be captured (by definition) in subsequent efforts to stimulate. Those efforts aren’t about determining “need,” they’re about determining the marginal propensity to consume. I explained this at length in “Free Money And What To Do With It.”

This is the context for new research from The New York Fed which painted a picture every bit as ambiguous as the discussion itself.

At some level, common sense dictates that subsequent rounds of stimulus checks would exhibit shifts in allocation patterns, but that apparently wasn’t (and isn’t likely to be) the case. “We find remarkable stability in how stimulus checks are used over the three rounds, with a slight decline in the share dedicated to consumption and a proportional increase in the share saved,” the study, released Wednesday, said, noting that “the average share of stimulus payments that households set aside for consumption—what economists call the marginal propensity to consume —declined from 29% in the first round to 26% in the second and to 25% in the third.”

While the visual (above) does suggest that subsequent rounds of stimulus payments are subject to the law of diminishing returns vis-à-vis their capacity to catalyze increased spending, the evolution of the allocation decisions doesn’t suggest America is anywhere near the point beyond which the vast majority of recipients exhibit little to no interest in spending extra money.

Why does that matter? Well, because on an admittedly (and intentionally) simplistic read, the only way to know when people literally don’t need any more money, is when the average percent of free money received spent drops near zero. Clearly, we’ll never get to that point, because Americans can always find something else to buy with free money, but conceivably (i.e., theoretically) there is such a threshold. If everyone had everything they could possibly want or need, the only thing left to do with free money would be to save it or pay down debt.

At the same time, the same figure suggests there’s clearly enough “superfluous” free money floating around that many stimulus recipients feel comfortable diverting the money to savings or to debt payments. But the motivation for that preference is wholly ambiguous. Are people saving more because they don’t need the money? Or are they saving more because they’re still terrified? Are they paying down debt because they have $1,400 and nothing else to do with it? Or are they paying down debt because they’re scared that a new virus variant will plunge the economy back into recession and they may need that spare revolving credit capacity?

The New York Fed study offers some numbers to support the self-evident conclusion that lower-income households are more likely to pay down debt or spend, versus higher-income groups who exhibit less in the way of a desire to deleverage, presumably because they don’t have as much debt in the first place. Here’s another excerpt from the study:

Households making less than $40,000 report using or expecting to use 44% of their stimulus checks to pay down debt, while those making more than $75,000 would use or expect to use only 32%. Further, lower-income households are spending or expect to spend 27% of their stimulus payments, while higher-income households making more than $75,000 would spend 24%. The difference in spending on essentials is larger for the lower- and higher-income groups, 20% versus 12%.

Again, that doesn’t tell us much. About the only thing we can say with any amount of conviction is that people making $75,000 (or more) have most of what they need in terms of “essentials” compared to lower-income households. Not exactly a revelation.

None of this is to say that the stimulus checks didn’t have an impact. They clearly did, especially when you look at personal income and outlays data for last summer and, then, for January versus February this year (figure below).

The punchline (and this underscores the sheer, blatant futility of the entire debate), is that we won’t really know the answers to the myriad crucial questions posed both implicitly and explicitly above until the US reaches something like herd immunity and the services sector reopens.

The figures for saving and paying down debt may be wholly misleading to the extent they have more to do with uncertainty than they do with any actual economic considerations. At the extremes, that wouldn’t matter. If I’m a single mother living in poverty, I won’t save my stimulus check precisely because I can’t — doing so might mean my child doesn’t have enough to eat or can’t have a pair of shoes. But it’s not difficult (at all) to imagine that someone making, say, $50,000 might be saving or paying down debt now due to lingering anxiety from last year’s shock, but once the all-clear is given on the public health front and once the economy starts roaring, that same person might suddenly drain the “unnecessary” money from their liquid savings and/or go shopping with a credit card which suddenly carries a zero balance.

The truth is, we have no idea. Which speaks to some of the points made here on Tuesday in “The Summer Bonanza Scenario.”

The New York Fed admits how indeterminate this situation really is. “Our findings indicate that in an environment that continues to be characterized by constraints on many activities and by high unemployment, as well as high uncertainty about the duration and continued economic impact of the pandemic (including elevated uncertainty about future inflation), fiscal support continues to impact predominantly savings instead of consumption, with households planning to use the third relief payments mostly to pay off debt and save,” the same Wednesday study said. “As the economy reopens and fear and uncertainty recede, the high levels of saving should facilitate more spending in the future [but] a great deal of uncertainty and discussion exists about the pace of this spending increase and the extent of pent-up demand.”

This is an experiment. And nobody knows anything.

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