Stimulus Update: Researchers Find That Targeted Stimulus Payments Would Benefit Us All

As it turns out, making sure everyone has the money they need to survive is good for the economy.

Since the first stimulus checks were deposited into bank accounts around the country, researchers have studied how the funds were used and if they made a difference in the lives of those who needed them the most.

In response to the global pandemic, the U.S. pumped trillions of dollars into the economy. These funds came in the way of stimulus checks, expanded unemployment benefits, expanded Child Tax Credits, and other targeted spending. The goal was to prevent a deep, extended recession, and it worked. The recession ushered in by COVID-19 lasted only three months, the shortest in U.S. history.

The pre-pandemic picture

Even before COVID-19, there was talk of regular, targeted stimulus payments. MIT PhD students Joel P. Flynn and John Sturm, along with Christina Patterson of Chicago Booth, found that the most effective way to spur the economy while helping those who need it is to provide those Americans with regular stimulus payments of $2,000.

To understand how the researchers came to this conclusion, it helps to know the term "marginal propensity to consume," or MPC. MPC represents the amount of extra income a person spends buying goods and services. Someone with a low MPC is far more likely to invest or save extra money. Someone with a high MPC is more likely to spend extra money that comes their way.

As tempting as it may be to believe that people with a high MPC lack self control, the truth is far more nuanced. According to researchers, these are the folks with the least money in the bank. They're the ones who worry about how to pay for housing and food. They're the people most impacted by inflation and other changes to the economy.

Real world findings

It's no secret that the IRS was tasked with sending stimulus checks to all eligible recipients -- and to get those checks in the mail quickly. That means that all kinds of people received stimulus funds, including those with a high and a low MPC.

Scholars from Kellogg Graduate School of Management, Columbia Business School, the Booth School, and University of Southern Denmark found that households with $3,000 or more in their checking accounts tended to hold onto stimulus checks as they came in. In other words, they have a low MPC.

On the other hand, households with $500 or less in their checking accounts spent nearly half of their first stimulus check within 10 days. The funds went toward things like food, school supplies, daycare, and rent. Those with the greatest need almost immediately put the money back into the economy, helping to stave off a deep recession. In the meantime, more than 3 million American children were lifted out of poverty. This group had the highest MPC -- or propensity for spending.

What lawmakers must face

Unfortunately, looking out for the neediest among us is not what Congress is best known for. Even if 50% of lawmakers want to make life a bit more bearable for the poor, the other half will fight tooth and nail to stop progress.

As the divide between rich and poor becomes more pronounced in this country and more people are pressed into poverty, Congress will one day have to contend with how to best help those living without.

Researchers also found that offering help to those with high MPCs could nearly pay for itself. Their estimates suggest that government transfers of $2,000 to each worker with an above-median MPC would increase gross domestic product (GDP) by $0.96 for every dollar spent.

Further, policy makers must consider this: Expenditures in one industry and region reach not only the workers in that region, but also workers all along the supply chain.

Groups with the highest and lowest MPC scores

Those with the highest scores were the most vulnerable among us, the most likely to be impacted by economic catastrophes. Researchers found that many were younger than 35, did not have a college education, and earned less than $35,000 a year. Arkansas, Mississippi, and South Dakota had the highest MPC scores among states. Connecticut, the District of Columbia, and New Jersey had the lowest MPC scores.

As Americans, most of us grew up learning the importance of self-reliance and "pulling ourselves up by our bootstraps," but it may be time to reconsider those sentiments. Entire segments of our society have no access to generational wealth and very few prospects for "pulling themselves up."

If stimulus payments have shown us anything, it's how quickly millions of people can be raised out of poverty.