How Are The Stimulus Checks Linked To A Recession? Could Relief Payments Avoid Another Downturn?


It is bad news for the economy on all fronts as US inflation reaches a 4 decade high leading to a surge in borrowing costs and pushing down the price of stocks. The federal administration is trying to undo the rise in prices and the high demand for goods, partially blamed on the successive stimulus checks.

Analysts fear that the decision to aggressively raise rates could push the US into a deep recession, worse than the one the country experienced in 2009. A contraction of economic output for two successive quarters could nudge the economy towards a significant decline that could lead to a recession.

The pandemic-driven recession in 2020 was thankfully short-lived and did not have the effect that was initially feared. Economists fear that there is a 75% chance that the nation will experience a period of recession, with experts claiming that one will develop in the middle of 2023. Both Deutsche Bank AG and Wells Fargo & Co. have predicted along the same lines.

With gasoline prices continuing to rise and the Federal Reserve going for a massive 75 basis point rate hike this July, the likelihood of a recession is higher than ever before.

How Much Did The Stimulus Check Contribute To The Inflation Hike

The stimulus checks had universal support during the extended economic downturn fuelled by the pandemic. While 80% of voters support direct payments to American families, politicians on both sides of the divide unanimously supported the move, something extremely rare in Washington politics unless it is a war.

But the third stimulus check was considered an economic blunder due to the sheer size of the amount. Many analysts believed that the pressure of staying true to an election promise made newly elected president Joe Biden decide on a move that would come to haunt him less than a year later.

The Economic Impact Payment, or the third stimulus check, was signed under the American Rescue Plan Act and gave a $1,400 stimulus check to Americans with earnings of $75,000 or less for individuals and $150,000 for married couples filing jointly.

But critics pointed out that there were too many rounds of payment and the third stimulus check should have been paired down to a smaller amount. They say that the huge amount pumped directly into the economy was one of the reasons for the runaway inflation rate that threatens to lead to another recession within 12 years.

A section of lawmakers and economists believe that the stimulus checks prevented a recession and have even called for more stimulus support during the high inflation that is plaguing the nation.

They believe that the successive stimulus checks during the pandemic may instead of contributing to have helped to contain it and prevented a deep period of recession, perhaps even an economic depression.

But lawmakers on either side of the political spectrum in Washington are unlikely to renew demands for a stimulus check for now. Thus, it has been left to the states to come up with measures to send inflation relief payments to residents and help them sink again into a period of extreme poverty.

Even moderate-income groups are severely feeling the pressure of the rise in prices of gasoline, essential goods, and utilities, with no immediate signs of remission.

Around a dozen states have already taken measures to support their residents during the difficult times through various forms of stimulus checks including tax rebates, gas and transit cards, direct bank transfers, and sales tax waivers on essential items and gasoline.

Stimulus Checks Were The Only Solution During The Pandemic

Analysis realize that the stimulus checks were the only source of succor for low and moderate-income earning citizens during the pandemic and people lost jobs abruptly as the complete economic shutdown for several months.

Businesses shut down completely or had to severely cut back on workers to stay afloat. Under these circumstances, it was the stimulus checks which were the only source of income for people. The first two payments helped 11.7M people avoid the debilitating effect of poverty. Among the beneficiaries were 3M children and 2M seniors, the two most vulnerable sections of society.

Experts point out that in the absence of the stimulus checks, consumer demand would have fallen dreadfully low, laying off large sections of the workforce. Families spent the greater part of the stimulus amount on food and utilities. Some also saved a substantial part of the money while others cleared off their debt.

This was a period when national debts were at their lowest, especially high-interest debts such as credit card loans.

The Stimulus Checks  Were The Best Option To Get Money Fast To People Surmounting The Red Tape

While some people thought that the money should have reached only the people who were hurting badly. But given the urgency of the circumstances, the stimulus checks were the only way to send money quickly to people without getting mired in bureaucratic delays. Some states made the mistake of undermining their unemployment support by making the eligibility narrow and underfunding the government system.

If the paycheck protection programs and the unemployment checks had been prompt in reaching the deserving, the stimulus check could have been avoided.

Whether the stimulus checks are a solution to such sudden economic downturns will depend in the future on the reason behind the downturn. The all-out attack on the stimulus check and the blame it has taken for the high inflation rate is a strong signal that future stimulus checks will be difficult under vitiated circumstances.

But considering various factors, it appears that none has come up with a better option to counter the severe economic downturn that took place thanks to the pandemic.

One thing of importance about stimulus checks was that they had an immediate impact as they hit the bank account. Americans used the money almost immediately in most cases. And it helped them avert starvation and homelessness, a certainty without stimulus support, given the state of the economy in the initial months following the lockdown.

Like all major decisions, the stimulus check payments had their side effects on the economy, though the extent of them is debatable at this stage. But there is every indication that the quick influx of money directly into the hands of Americans saved the nation from another cycle of deep recession.