Do stimulus checks work?

By Investopedia AAA
A:

In theory, stimulus checks are intended to increase the amount of capital in the economy. By giving back tax dollars in the form of a stimulus check, governments hope that consumers will make purchases that will in turn provide business the capital they need to keep functioning. Even if the check is put in the bank, the logic goes, then the bank will have more deposited capital and will be able to lend more freely to businesses and individuals.

However, there are some problems with this theory. Banks may need to deleverage and will choose to hold on to deposited capital rather than loosen lending, as they have during credit crises. Similarly, companies may choose to hold onto profits to form a war chest in anticipation of an economic downturn rather than increase production and hire more workers. And lastly, the people getting the checks may also choose to use them against debt or hold them in guaranteed government securities, stimulating nothing, but improving their personal situation. In short, all parties will look to their own self-interests over that of the economy.

That doesn't mean that the principle of stimulus checks is completely without value. If, instead of a temporary measure in a single check, permanent tax cuts at corporate and individual levels allowed both parties to keep more of their earned income, there is a good chance that the flow of capital would eventually increase. The long-term cut would mean that all the players in the economy could recapitalize, that is eliminate debts and increase savings, on ongoing basis. A stimulus check tries to reduce this long-term treatment down to a quick shot-in-the-arm and consequently has the potential to fail from a long run perspective.

For more, see How do government-issued stimulus checks affect the economy? and Do Tax Cuts Stimulate The Economy?

RELATED FAQS

  1. How are net exports influenced by the crowding out effect?

    Discover how an increase in U.S. government borrowing to finance deficits can influence the net exports of U.S. companies ...
  2. How are investment banks regulated in the United States?

    Read about the extensive regulations placed on investment banks in the United States, beginning with the Glass-Steagall Act ...
  3. Why is the crowding out effect less likely to occur during a deep recession?

    Learn more about the crowding-out effect of government fiscal policy on private investment markets and whether it changes ...
  4. What is GDP and why is it so important to investors?

    The gross domestic product (GDP) is one the primary indicators used to gauge the health of a country's economy. It represents ...
RELATED TERMS
  1. Separation Of Powers

    An organizational structure in which responsibilities, authorities, ...
  2. Nordic Model

    The social welfare and economic systems adopted by Nordic countries.
  3. Economic Justice

    Economic justice is a component of social justice. It's a set ...
  4. Social Justice

    Social Justice is the idea that all members of society deserve ...
  5. Eurasian Economic Union (EEU)

    An economic union created in 2014 by a treaty signed by Russia, ...
  6. Direct Bidder

    An entity that purchases Treasury securities at auction for a ...

You May Also Like

Related Articles
  1. Trading Strategies

    Rules and Strategies For Profitable ...

  2. Stock Analysis

    5 Reasons Sirius XM Haters Are Gone

  3. Stock Analysis

    A New Economic Threat: State-Sponsored ...

  4. Technical Indicators

    This Indicator Should Always Be Part ...

  5. Credit & Loans

    What Is Sallie Mae And How Does It Work?

Trading Center