Nearly one week ago, the president signed a $2.3 trillion bill that combines a continuing funding resolution necessary for the federal government to keep paying its bills and $908 billion for COVID relief. A component of the COVID relief bill includes a $600 payment to households. Treasury Secretary Mnuchin announced that direct payments began this week. An odd alliance comprised of the Democrat controlled House of Representatives and the president favors a larger payment.
The more Populist House passed a bill, but the Republican led Senate refused to take a vote on the Cash Act that would increase the federal government payout to $2,000 for many households. So, it appears certain that $600 payments are forthcoming. There is, of course, the possibility that Congress may revisit the issue in January, regardless of whom is sworn in as president, especially if Democrats win two Senate seats in Georgia.
Ten months have passed since the federal government started distributing $1,200 checks to individuals as part of a $2.2 trillion dollar CARES Act intended to soften the adverse economic effects of federal, state, and local government restrictions in response to the Coronavirus pandemic.
According to the Bureau of Labor Statistics, the unemployment rate increased to 14.7% in April compared to 4.4% in March, so it was no surprise in June that the National Bureau of Economic Research (NBER) confirmed that the longest expansion in US history (128 months) ended a few months earlier in February — the economy was officially in a recession.
The Federal Reserve immediately lowered short-term interest rates (twice), essentially to zero, to encourage economic activity, but the economy contracted modestly in the first quarter of 2020 and then collapsed in the second quarter as output decreased 31.4%. An unprecedented increase in production of 33.4% in the third quarter effectively offset the declines of the two previous quarters and contributed to a decrease in the unemployment rate to 6.7% as of November. With interest rates at zero, the Fed has no effective means of accelerating the economy, so Congress and the President have approved a fiscal stimulus intended to spark economic activity and employment. The $600 payments are intended to encourage spending, ignite investment in inventories, accelerate production and increase employment.
The fiscal stimulus is intended to affect the overall economy, and it is very likely that increased consumption will result from the federal stimulus. It is worth noting that Federal policy focusses on the overall economy and ignores variation in effects across regions, states, and communities. Economists and policy makers don’t really care who benefits or how the benefits are distributed. The political genius of the direct payments to households is that recipients tend to review themselves as beneficiaries of government largess. Suppose, however, that every recipient spent the $600 buying goods on Amazon.com. To be sure, sellers would receive an infusion of cash, Amazon would skim its share, and parcel delivery services would experience a sudden increase in traffic. So while households welcomed $600 worth of new merchandise, the subsequent benefits associated with the increase in income will accrue primarily in the communities where producers, sellers and fulfillment centers exist. This description is an oversimplification, but the point is to demonstrate that the impact of the stimulus will not be distributed evenly throughout the country.
So how can Lima benefit more and increase its share?
In anticipation of the president signing the bill, numerous media outlets have featured articles and segments pertaining to the “best” or “smartest” ways to use the bounty. While needs and preferences vary across individuals, I offer the following for consideration: The unearned payment we are about to receive is intended to be spent so spend it and, moreover, spend it in your local community. Whenever possible buy from commercial enterprises that are owned and operated locally.
By spending the proceeds locally, income rises in the local communities. As the new income is spent and spent again locally, income rises more. This mantra especially applies to the owners and landlords. For the benefit to be realized the money needs to be spent again and again locally. So while it is likely that inventory arrives from elsewhere, it is possible to invest in repairs and upgrades.
It is possible to hire tradesmen to do work at homes or at a places of business. The key is for as much of the government stimulus to be spent and retained locally knowing full well that much, perhaps all, of the money will depart our communities and end up elsewhere eventually. Let’s make ‘em wait a bit longer than usual.
David McClough is an associate professor of economics in the James F. Dicke College of Business Administration at Ohio Northern University. Reach him at email@example.com