Was the Stimulus Check Really Keynesian?

There's been some talk in the media about "How even Trump is Keynesian" and what not regarding this stimulus bill. Unfortunately, modern-day American media is all BS with almost 0 substance. So, let's take a crack at analyzing and understanding this stimulus bill.

Indeed, the typical Keynesian view is that fiscal policies can have short-term impacts to "stimulate" the economy during downturns because putting more money into people's hands = more spending. (If you think about it, the stimulus check is effectively a reduced tax rate).

But, while I consider myself a pragmatist, my macroeconomic views more closely align with the neo-classical views (I mean look my username). With some doubts on this rather Keynesian stimulus bill, I'm gonna make 3 claims. Hope we can have some thoughtful and emotion-free discussions.

1) The stimulus bill wasn't really a "stimulus" bill.
As we know, the stimulus targeted people with low to middle income taxpayers. The stimulus, which maxed out at $1200 per individual was either wired to people's bank accounts or sent as checks that people can cash in. Supposedly, this bill targeted people who were most impacted by this virus - either through being laid-off or through having emergency financial needs to take care of.

But what do we actually know about the financial standing of the people who received these stimulus checks? How many among this group are newly unemployed? How many have enough money saved up to last couple months? Essentially, the question we want to answer is, by how much the aggregate demand (or colloquially spending) decreased? And how much will it increase with this stimulus bill?

Surely, lots of people probably already have enough money to pay their rents, buy food, etc... Understanding the decrease in total spending offset by the stimulus bill would help us understand how effective the stimulus bill was. But as good neo-classical person, I doubt that this stimulus bill will significantly impact spending. Rather, most of it is gonna go into savings account and what not.

2) Small and medium sized businesses are hurt the most. There is no guarantee that the stimulus money will end up being used to pay for services and goods that these SMBs offer.
How do you control people's spending if you just give them money with no strings attached? You can't. Even if the stimulus checks turns into spending, who knows how they'll be spent. For all we know, this money can be used to buy products and services offered by resilient and financially stable companies and not those offered by enterprises most vulnerable to this crisis.

3) We can make sure that people spend their stimulus checks within a year.
Consider S.Korea's new stimulus bill (A friend of mine told me about this). Instead of sending in checks of wiring money into savings accounts, S.Korean government delivered pre-paid cards that can only be used to purchase goods and services offered by small and medium sized businesses. To me, this is Keynesian fiscal stimulus done right.

By literally giving people fiat money with usage limited to purchase goods and services (and with an expiration date) from the enterprises that were hurt the most, S.Koreans have no choice but to spend that money.

There is absolutely no evidence that fiscal stimulus will turn into spending, but these Koreans engineered a way to do so. Jerome Powell is a very capable person and I believe he is doing a good job and will continue to do so. But he's the head of the monetary authority. He has no influence over fiscal policies. Regardless of what people think, Mnuchin is also a capable person. But he doesn't seem to be the most creative.

Think we should all take a page from what the Koreans did - not just their COVID containment approach but also their rather "creative" spin on a typical fiscal policy.

Comments (3)

Most Helpful
May 22, 2020

in theory, absolutely. the issues are execution and logistics. our SBA couldn't even get the PPP rules to lenders until maybe 8 hours before the program went live. also, when the legislation was introduced, the initial goal was getting money out to people quickly, rather than getting it to the right people and putting controls over how it's spent. the thought was "this will be over quickly, but people need cash to pay rent and utilities, so let's get them cash ASAP, the businesses will be fine with PPP loans." so since expediency was the priority, much easier to just direct deposit for everyone, instead of mailing out the cards (and who knows how long that would've taken if it took them months to send a paper check). further, I think you wade into dangerous ethical territory by trying to only focus on those who haven't prepared for the crisis versus those who had. if you go for only the unemployed, you risk moral hazard because then it incentivizes people not to work and you miss the underemployed who have kept their jobs but seen their hours cut, you also miss the service industry workers, going from waiter to takeout jockey and likely seen their tips fall by 75%, yet they're still employed. if you go for only those who didn't have savings, it'd be difficult to prove and it'd incentivize people to not prepare.

I think the CARES act will go down like most govt stimulus packages, noble idea but fraught with imperfections, as it's nearly impossible to make a great decision during a crisis with 538 cooks in the kitchen. the RMD waiver for retirees was good, charitable deductions above the line was good, stimulus payments, meh. what I wondered was is there something we could've done more directly to ensure people don't get evicted/are late on mortgage payments. $1200 is great if your rent is less than that, but I'm betting lots of folks have a mortgage above that amount, so maybe the Fed could've given some slack on capital ratios and create some sort of incentive for banks to restructure loans, waiving payments for 90-120 days and just adding the payments at the end of the loan. I have a suspicion that much of the stimulus payments went to landlords and banks so people could keep their mortgage/rent status current. when you're teetering on the edge, you can go without supporting your local business brethren, you can't go without shelter.

and finally Trump's economic policies baffle me, I just know he's not keyenesian. I was always taught that keynes believed in expanding the fiscal budget during times of crisis, but promptly returning to running a surplus after the fact. in this regard, perhaps we haven't had a keynesian in office aside from bill clinton. so yes, keynes may have agreed with the CARES act or other forms of stimulus, but he most certainly would not have agreed with a broad tax cut during an economic boom.

I don't worry about much in America, except for the way we spend money and the magnitude of money spent.

May 25, 2020

Thanks for this. Definitely offers a fuller perspective on this issue.

I get that getting the money to people ASAP was a priority, which is reasonable. But I'm not sure if the federal gov't will ever be better at executing things through leveraging creativity and technological advances. I'm not sure if it's even capable of having that conversation. I also wonder how much in-depth thinking the federal government has done.

I try not to worry about America, but I can't stop thinking how "irresponsible", "uncivilized", and "narrow-minded" many people have become and are becoming (not just in the US but in what's generally considered the 'West'). From what I can tell, how the general public have been responding to a crisis like COVID is strikingly different and the way that most of the 'West' has been responding worries me greatly about the future potential of not only America, but the entire Western civilization.

The 21st century as the "Asian Century" seems more realistic than ever as the West "implodes" or decays from the inside, starting with its people, then political systems, ending with economic drive and innovation that put the West in the lead for the last couple hundred years.

Financial Data Science

May 26, 2020
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