The roughly $5 trillion in stimulus spending for COVID-19 was one of the most daring experiments in the history of the US social safety net. Proponents of the legislation authorizing the aid said an immediate and massive cash deposit was needed to keep the economy afloat during one of the most destructive public health crises in modern times. Its opponents called it a waste of money that would put the country in debt, foster a culture of dependency, cause high inflation and make recession more likely.
Stimulus 2023: updates to know now
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The opposing sides still disagree on the wisdom of post-pandemic stimulus spending, but one thing is not in dispute: its impact on individuals, households and the economy as a whole has been as great as its price tag.
A deluge of cash supported but overheated the economy
The pandemic stimulus packages had macroeconomic effects that affected everything from the stock market and national GDP to unemployment and inflation.
The first payments have revived a scholarship on living expenses
The fear and uncertainty that defined the early days of the pandemic manifested itself in extreme volatility in stock markets. Between February 20 and April 7, 2020, the Dow lost 37% of its value and the S&P 500 lost 34%. On the three worst days of the market, March 9, 12 and 16, the Dow lost 7.79%, 9.9% and 12.9% respectively.
The sell-off was severe enough to trigger NYSE emergency circuit breakers that halted all trading, a safeguard the SEC put in place after the 1987 crash to prevent a market collapse.
But then came the first stimulus measures, which made investors optimistic again. By November, the market had recovered to January levels and by early 2021 had driven what Reuters called “stimulus euphoria” to new all-time highs.
But those same support payments soon caused the pendulum to swing the other way.
“A potential downside is that these measures may have indirectly inflated asset prices as people invested their stimulus checks, leading to concerns about potential market bubbles,” said Branson Knowles, certified financial analyst and current head of US digital banking at Top. Mobile Banks.
Those stimulus-inflated securities would soon plummet from their new heights. A recession welcomed the start of 2022 and in June last year the market was officially in bear territory, where it languished until last month.
See: 6 things millionaires do with their money to prepare for an economic downturn
Entrepreneurs used public money to keep their doors open
US GDP plummeted 32.9% in the second quarter of 2020, the fastest and strongest economic downturn in US history, including the Great Depression. As businesses closed and demand collapsed, unemployment peaked at 14.7%, a post-depression high.
However, the US economy held up thanks to $1.7 trillion in government stimulus spending for business recovery, including:
Salary Protection Program (PPP): $835 billion
Disaster Economic Damage Program (EIDL): $349 billion
Relaxed limits on business losses: $193 billion
Postponement of employer’s payroll taxes: $85 billion
Airlines: $80 billion
Restaurants: $29 billion
EIDL advances: $27 billion
Employee retention payroll tax credit: $26 billion
Loans from the Federal Reserve: $25 billion
Interest deduction: $13 billion
Paid leave credit: $11 billion
Miscellaneous tax benefits: $9 billion
According to the New York Times, hundreds of thousands of entrepreneurs who would have been doomed without the spending kept their doors open. More than 9 million businesses – most with fewer than 500 employees – received PPP loans. The National Restaurant Association estimated that the fund alone saved 900,000 service sector jobs. In the end, the economy has regained 90% of the 22 million jobs it lost in the first weeks of the pandemic.
But in terms of success, the results have been mixed. The government spent $4.13 in public funds for every dollar of lost wages it avoided.
A deluge of unexpected revenues contributed to inflation
Inflation peaked at 9.1% in June 2022, the highest rate in 40 years. Gas was at $5 a gallon for the first time in history, and the price of everything from eggs to energy skyrocketed, straining budgets and wiping out household savings.
“At the macroeconomic level, there’s the concern about inflation,” said Dennis Shirshikov, a professor of finance, economics and accounting at the City University of New York and chief of growth at Awning. “As we pump more money into the economy, there is a risk that prices will rise and our national debt will increase. One small business owner I advise saw an unusual increase in demand during the stimulus payout periods, but also experienced higher prices for supplies, a typical sign of inflation.”
Midterm election ads placed the blame solely on President Biden for his administration’s massive stimulus spending; but according to FactCheck.org, that doesn’t tell the whole story. While the US bailout’s $1.9 trillion cash injection certainly contributed to a spike in demand that pushed prices higher, a report from the St. Louis Fed found that stimulus payments likely amounted to only 2.6 percentage points of the peak inflation rate. made up.
But the trade-off was that the cash injection prevented millions of households from suffering a fate far worse than rising prices.
Payments kept families afloat and prevented economic collapse
A rapid and massive deluge of direct payments empowered households to use their dollars where they needed them most.
Suddenly, America was a land of cash-strapped households
The most direct and immediate impact of pandemic stimulus came from the $1.8 trillion paid to individuals and families, including:
Stimulus Checks: $817 billion
Unemployment benefits: $678 billion
Extended tax credit for children: $93 billion
SNAP and other food aid: $71 billion
Deferred student finance: $39 billion
Childcare blocks: $28 billion
Subsidy childcare allowance: $24 billion
Pension scheme rules: $14 billion
Other tax benefits and miscellaneous expenses: $34 billion
The first round of payments gave $1,200 to each adult and $500 per child. The second netted $600 each. The third and final round was for $1,400 per adult and $1,400 per child.
Nearly 150 million households received direct payments. The fired and fired masses received $600 a week on top of the standard unemployment benefits they received from their states. Food stamp recipients had at least $95 more per month to spend on groceries.
For the average American, the impact was immediate and dramatic.
“With more money in their pockets, individuals can buy essential goods and services, pay off debt or even invest, helping to keep the economy afloat,” Shirshikov said.
Those with the least benefited the most
A University of Michigan study found that relief from “material hardship” was evident across the income spectrum; but for low-income households, the stimulus packages were the largest poverty reduction program in modern history.
“Stimulative payments and student loan deferrals have undoubtedly provided an economic lifeline for many households, especially those hardest hit by the financial impact of the pandemic,” said Shirshikov.
Food insecurity decreased by more than 40%. Financial instability fell by more than 45%. The stimulus prevented 5.2 million children from going hungry. The sudden reduction in financial stress led to a dramatic drop in depression and other mental health problems.
The Census Bureau estimates that stimulus measures will lift 45.4 million people out of poverty in 2021, up from 29.6 million in 2020.
Savings accounts swelled – until inflation robbed them
Research from the Peterson Foundation shows that people spent their stimulus payments differently during each of the three rounds. The first, from the CARES Act, came at the start of the crisis during peak unemployment. Recipients with little money immediately spent 74% of it on household necessities – catching up on bills, fixing cars, buying food and paying rent.
The second round saw a shift to paying off debt. By the time the third round came along, people had the luxury of saving – and they invested nearly one in three dollars.
“The size of the check, coupled with reduced spending opportunities during lockdowns, resulted in a similar or even smaller spending response compared to previous discount checks,” said Knowles.
The result was an unprecedented $2.1 trillion in accumulated excess savings. For many, it was more money than they’d ever had in their lives – but it didn’t last long.
From September to December 2021, Americans began deducting an average of $34 billion a month from their savings accounts, according to the Federal Reserve Bank of San Francisco. After that, searing inflation took its toll and average monthly withdrawals soared to $100 billion a month. . As inflation cooled, national savings cooled with it, and by the first quarter of 2023, Americans are depleting their once mighty savings by $85 billion a month.
“The economic landscape in the post-pandemic era has been fascinating and complex, significantly influenced by a variety of factors, including stimulus payments, student loan deferrals and other sources of unexpected income,” said Knowles. “The post-pandemic era has shown us the powerful tools we have at our disposal to deal with economic downturns.
“However, it has also underlined the need for more focused approaches and technology investments to ensure these tools are deployed effectively. To end on an optimistic note, one thing is clear: the lessons we are learning now will undoubtedly shape our future responses, leaving us better equipped to navigate such economic storms.”
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This article originally appeared on GOBankingRates.com: How stimulus checks, student loan deferrals and other unexpected earnings have affected the economy
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