Stimulus Update: When a Recession Arrives, Economists Say More Stimulus Is the Answer

Economists argue that stimulus funds can help steady the financial ship in the event of a recession.

The stimulus checks that landed in bank accounts around the country during the height of the pandemic helped lift nearly 4 million children out of poverty. Still, there are those who have rallied against providing help, acting as though the federal government had never done such a thing.

Those folks may want to go back and check their history.

Stimulus during times of recession

As scary as recessions sound, they are part of the economic cycle. In fact, a Brookings Institution study calls recessions "a constant in the history of economics." Since World War II ended in 1945, the U.S. has gone through 13 recessions, the average lasting 10 months. And following each recession, the economy has bounced back bigger and stronger.

Still, it's no fun to be in the middle of a recession, worried about your job and paying bills. That's one reason the government sent stimulus checks during the 2001 and 2008 recessions. The biggest difference between those checks and the funds sent during COVID-19 is that households received only one check during each recession.

Updating an established idea

Economists and researchers like Claudia Sahm, Matt Fiedler, Jason Furman, Wilson Powell III, and many more have studied the impact stimulus payments have on the economy during recession.

In an interview with CNBC, Sahm said that stimulus checks have an advantage over other types of aid. Once stimulus payments are in the hands of the American people, research indicates that recipients spend approximately half the money quickly.

Quick spending offers the struggling economy a sudden cash infusion, helping to soften the fall that typically occurs during a recession.

Stimulus stabilizes employment

One need look no further than the pandemic to see how stimulus spending helped keep some Americans employed. Even with a record number of job losses, economists say it would have been much worse without federal stimulus payments. Without those payments, households would have had less money to spend, leading to even larger declines in employment.

By giving families money to spend on food, utilities, and other consumer goods, those industries were shored up and able to hold onto some of their staff.

Stimulus payments fill state gaps

Republican-led states tend to offer fewer benefits to their constituents. For example, a World Population Review study shows that Republican-led Florida, Alabama, Mississippi, Tennessee, and Missouri are among the stingiest with unemployment benefits. In addition, some of these states have also made it more difficult for residents to qualify for unemployment insurance.

In the event of a recession, states such as these are less likely to offer the kind of assistance needed to help stabilize the economy, leaving it up to the federal government again to stimulate the economy by stimulating family budgets.

A stumbling block

No matter how many economists sign on to the idea that checks should be distributed during the next recession, it's going to be next to impossible to get the current makeup of Congress on board. Simply put, there are too many lawmakers hoping to climb the ranks of their party by actively waging war against the other side of the aisle. Agreeing to work together might jeopardize their political brand.

Congressional support may also depend on what triggered the recession (and this one may make sense). Say it's triggered by the Federal Reserve's hike on interest rates. Because the rate hikes represent an effort to control inflation, it's not unusual to worry that sending cash to Americans would fuel greater inflation.

There are also those who blame current inflation on stimulus checks sent during the pandemic, forgetting perhaps that inflation is also part of the economic cycle. One of the primary goals of the Federal Reserve Board is to keep inflation under control.

One does not have to be Madame Cleo to predict that the U.S. will experience another recession. Tougher to predict is whether Congress will take the advice of economists and send another round of stimulus payments to help combat it when it comes.