Econ in the News: Stimulus Checks (and Debit Cards)

In early 2020, the CARES Act was passed in response to severe negative macroeconomic effects stemming from the COVID-19 pandemic affecting the United States. One of the biggest media talking points centered around the passage of a $1,200 stimulus payment, designed to be distributed over the coming months and help increase consumption. These stimulus payments will be a data goldmine for economists to evaluate over time.

I’ve previously discussed how the COVID-19 crisis is both a demand and supply shock on the economy. With stimulus payments, the government can theoretically mitigate some of the leftward shift in aggregate demand, and even generate a multiplier effect on consumption from the initial $1,200 payout.

The catch is that not everyone will receive $1,200; a means-based test is applied on 2018 or 2019 tax returns (whichever is the latest the IRS had on file for a particular person). For a single filer, you get the full $1,200 if you made below the $75,000 adjusted gross income (AGI) threshold, After that, the total amount you can receive decreases by $5 for every $100 more you made, until the program phases out at $99,000 (rules are slightly different for Head of Household and/or Married/Filing Jointly, but follow the same progression). Additionally, people who claim dependents (e.g. kids) on their tax return are entitled to up to $500 per dependent.

This means that several groups are excluded from the stimulus payment:

  • People who fall above the phase-out income threshold of ~$100k
    • A high bar for someone in Durham, North Carolina, but relatively low for someone living in the San Francisco, California
  • People who didn’t pay their taxes in 2018 or 2019
  • Dependents (the $500 goes to the person who claimed the dependent)
    • While this may not matter for little kids, there is likely a sizable chunk of college students in the Class of 2020 who were claimed as dependents on their latest tax return, and could have used that $1,200 as they graduate into uncertain times.

Even if you are eligible for some stimulus money, it can take considerable time for it to arrive. Three months after the initial allotment for stimulus checks was passed, an estimated 30-35 million people eligible for a payment still had not received anything. The fastest way to receive the stimulus payment is through direct deposit, which requires setting it up through the IRS website (or already having it established through previous tax returns). The standard distribution approach is still through paper checks, using the home address provided on tax returns. Finally, the IRS is also making use of prepaid debit cards, mailed to homes, as an updated to distribute the money.

Each of these approaches, however, have had their issues with distribution. Although direct deposit should be the fastest way to receive money, many people who filed through TurboTax or other sites had issues receiving or checking the status of their stimulus payments. Paper checks are slower, especially with a significant backlog in IRS processing, leading to significant delays in mailing out checks. This ironically hurts people who need stimulus payments sooner (if you don’t have a bank account, you’re more likely to be in worse financial shape). Although the prepaid debit cards sound like a good idea at first (they might encourage spending the stimulus check instead of holding onto it), many people tossed the cards out, thinking they were part of a scam.

These approaches create many natural experiments for economists to analyze, with a focus on how best to spend money to boost the economy in future downturns. Questions to answer include:

  • How did the different mediums in which stimulus checks were provided (mailed check, direct deposit, debit card) affect the likelihood of people to spend vs. save their stimulus checks?
    • One hypothesis is that direct deposits would lead to more saving, while debit cards would lead to more spending
  • Where was stimulus money spent?
  • Did the stimulus checks ultimately help the economy?
    • This is much harder to disentangle, but economists may look for longer-term stabilized consumer spending following receipt of stimulus checks as one key metric
    • There is also the debt tradeoff to consider, since these stimulus checks are going to be paid for by future taxation

Only time will tell the impact these specific stimulus checks will have had on our economy.


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