I mean, it’s not hard to understand. Give everyone a bunch of money and most of them will fix a bunch of problems in their life, feel less stressed, and be more optimistic.
On top of the federal stimulus, this housing bubble has a lot of people thinking “okay I can retire off the sale of my home now,” though I doubt they’re thinking through where they’ll live after that sale, nor how inflation may devalue what seems today like a vast accumulation of wealth on paper.
The current situation makes me (a) more convinced that policies like a negative income tax are a superior safety net to the bureaucratic means tested programs we use today, and (b) more concerned that zero interest rate policy and the incredible distortions in the financial markets are going to end very badly.
Giving everyone money makes sense as fiscal stimulus once the economy is back to normal. It does not make sense now because people are avoiding spending and many will not need the $1000 and not spend it.
One could argue stimulus inflates the bubble even more especially if it just goes to wealthy people. The worry there is that it seems to be the only way to prevent a crash; so if there’s another pandemic, war, series of natural disasters fueled by climate change, drought/famine they just print more money and inflate it even more. Just keep pulling the lever until it breaks.
Or maybe it never breaks and we should just pull the lever a bunch today and buy our way out of all the worlds problems.
The discussion also usually doesn't focus on the fact that the costs of the stimulus haven't been felt yet. It could just be higher taxes and higher interest rates. But it could also be that treasury bills are no longer purchased by foreign governments, and the shell game where the government essentially buys its own bonds will be harder to hide. That is much more serious problem than a crippled mortgage market. I'm looking forward to politicians justifying debasing the currency for "national security".
For example the stimulus money was used to buy stocks or pay off debt. Wealthy people get richer. People with college degrees are doing well financially. Water is wet. The Fed has been pursuing this strategy for more than a decade. Drive treasury yields down, people are desperate for investments. Everyone joins the stock market. If the less wealthy (middle class with good jobs) are joining the stock market you should be skeptical because that means even they don't know what to spend the money on.
What we really wanted to see is people spend that money on consumer goods to drive underemployment down. Inflation is a very good indicator for underemployment. If it's slightly above 2% that means lots of people are employed and looking for even better employment opportunities. Inflation did recover from the crash to 0% but it's still only back at 1.2%.
The only good news is that the economy doesn't have to care about viruses. Inequality is unsolved and still rising or at least staying the same.
As long as the government can keep spending more every year, everyone is happy. This will apparently work forever. Best not to ask questions about how this affects the poor that don't have inflation hedges such as real estate or stocks.
It isn’t just direct stimulus to private citizens.
It’s the near zero interest rate policy, the literally illegal purchasing of mortgage and corporate bonds by the fed and so much more that is flushing the entire economy with trillions of dollars.
Monetary policy isn't intended to steer the behavior of normal people[1] who have ~net-zero cash for most of their lives, it's intended to steer the behavior of investors who don't need to spend all their money on food and shelter and medicine, and who will happily choose to sit on their cash, instead of investing it, if that provides them with better returns.
Everyone bitches when the price of milk goes up 8%, but nobody seems to realize that it went up because wages did. On average, if you're a worker, and you aren't saving (or trying to save) a pile of cash, inflation is net-zero for you.
[1] Stimulus checks did steer the behavior of normal people, but they were fiscal, not monetary policy. They had knock-on monetary policy effects, but the juice was worth the squeeze - thanks to them and the PPP, the economy didn't entirely collapse.
It's also crazy to me that the whole framing is around providing money for investment when any stimulus to the end consumer is going to inevitably end up at the top (it's not like money flows many other directions in the long run in our current system).
I don't understand why there's so much support for stimulus checks right now. Isn't their effect the exact opposite of what you'd want during high inflation?
"Could you please elaborate? I think the way the US did it's COVID stimulus was outstanding and very close to the ideal way to actually address people's potential needs."
Many of the people who got the stimulus checks didn't need them. Same with the advanced child tax credits (increases spending when it looks like you have more money). This was true for myself and many coworkers. There were others who needed it. It was far from perfect though.
"What's exactly the problem? Aren't people free to spend their own money any way they feel like it?"
Yes they are free to do that. It causes problems when there's a disconnect between value and price. Many of the activities were trading or gambling, which are not beneficial. That gambling affects prices and the market, thus affecting others.
Think about what happens when's there's a rush on a bank. A bunch of people acting stupidly in large numbers can create a negative environment for everyone else.
Serious question: I keep seeing opinions about the inflation and supply chain problems being purely the result of the stimulus, and they feel, well, ideological. To what extent is this simply the effect of the pandemic? In my own family, we’ve spent way less on travel and more on things over the last couple of years.
Put another way, isn’t this the product of a combination of factors and not just because of the stimulus? I’m not convinced supporting people out of work through no fault of their own is a bad idea.
Ok, although IANASS (not a social scientist) (edited to add: and sorry anamax for the uncivil tone, long day):
Economic activity has benefits for society at large -- we get stuff out of it, and there's a feedback loop where more people with money in their pocket means more demand, which means more people employed, which means money in their pocket, etc.
Recessions are when the economy gets out of balance (historically inventory oversupply, more recently it tends to be financial meltdowns) and that feedback loop goes negative -- less money in pocket, so less spending, so less production.
Counter-cyclical spending is, according to economic theory, the one point in the cycle where the government should be encouraged to spend money like they're in vegas, up 50k and hanging at the strip club. Breaking this negative feedback loop is priority #1 -- debt can be paid back later, and if you've been breaking out your counter-cyclical toolkit, you've already lowered interest rates to near-zero so this is really cheap debt, 1% interest or lower -- if you produce any return at all, you've got a win in addition to the counter-cyclical effects.
Once you've decided to spend, you've got to decide how. Giving money to people in lump sums (which was in fact about 40% of the bill, the bill was 40% tax cuts) is fast and simple, so it certainly has a place, but keeping people in a job is far more effective because you create externalities. That job is producing something of value to the economy, that person is gaining skills/experience leading to future employability, and assuming that business is ok, their labor might lead to additional job openings at the same company later. These are all sustainable improvements that build on themselves and contribute back towards that positive feedback loop. Just spewing money out to people without any targeting whatsoever can only be a brake on recession -- it doesn't really help lay the foundations for the bounceback.
> you could see a drastic effect as soon as the $600 started hitting people's checking accounts
I think it's interesting how true it is that some people just can't stand the feeling of money burning a hole in their pockets.
Based on the furniture set sitting out on the curb at my neighbor's house, they decided a free $1800 was as good a reason as any to get some new furniture.
I guess that's the theory behind stimulus checks, so I suppose it makes sense.
>The only valid reason for people to be mad is because tax-payer money was used to provide them with liquidity during the financial crisis. That money has since been paid back (with interest),
Was the $800B stimulus paid back? What about the two (and counting) rounds of QE the Fed has implemented (there will be consequences to such huge intervention, it's just not clear exactly what yet)? The financial crisis cost us a great deal more than just TARP.
As long as the money is given to folks who need and/or will spend it, it feels like this is the exact situation where the federal government steps in for stimulus.
There’s no pull yourself up by your bootstraps talk right now and there shouldn’t be.
I know the single parent working a couple of jobs will spend every dime they’re given in a time like this, just to survive. A yuppie like me would just park it in my savings account until I feel we hit bottom, then invest it.
I’m not the type of person you want to give money like this to. Save it for folks who are really living hand-to-mouth and don’t shortchange them.
Alot of people really didn't pay their rent with their stimmy's and were able to "afford a jet ski" and experiences and have done that.
This isn't meant to be a conservative talking piece, a lot of people just reacted to the lack of consequences and futility of their prior aspirations.
Also, Congress acted haphazardly and sent some forms of stimulus to anyone with an AGI below like $75k. AGI is influenced by how many deductions you make, not "income", as widely reported. Many people that were not cash poor but had or rolled forward deductions had $0 or negative AGI and automatically received stimulus payments.
And we all know how the Paycheck Protection Program went. That was an anything goes lottery.
It all are factors. I'm going to go with Ray Dalio on the weighting of the factors. Disruptions, readjusted priorities by individuals, and capital misallocations from what people want to do and how the capital entered the market.
There’s a presumption that this is isolated to low-skill workers enjoying high unemployment benefits. However, stimulus has also greatly benefitted anyone owning assets which are more often high skilled workers.
The incentives are the same. If you have enough money you can quit working if you want.
A little pay bump isn’t going to bring someone out of early retirement and a high skill job can’t be filled by anyone.
On top of the federal stimulus, this housing bubble has a lot of people thinking “okay I can retire off the sale of my home now,” though I doubt they’re thinking through where they’ll live after that sale, nor how inflation may devalue what seems today like a vast accumulation of wealth on paper.
The current situation makes me (a) more convinced that policies like a negative income tax are a superior safety net to the bureaucratic means tested programs we use today, and (b) more concerned that zero interest rate policy and the incredible distortions in the financial markets are going to end very badly.
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