Stimulus Update: Why Stimulus Checks Could Come Back During Our Next Recession

Those payments may not be off the table permanently.

These days, a growing number of experts are sounding warnings about a potential recession. Now the reality is that we can't say with certainty if economic conditions will worsen substantially in the near term, and when a recession might hit. But there's reason to think we could be headed for a downturn in the not-so-distant future.

That's the bad news. The good news, however, is that if a recession does hit, lawmakers may fall back on a solution they've long employed -- stimulus checks.

A tried-and-true approach

Why are so many experts worried about a recession? It's simple. Inflation has been soaring, and so to combat it, the Federal Reserve is being aggressive with its interest rate hikes. That, in turn, is making it more expensive for consumers to borrow, whether in the form of a mortgage, a personal loan, or a credit card balance.

As borrowing costs rise, consumers are likely to cut back on spending due to affordability issues. But that could, in turn, lead to a period of economic decline. And if a recession hits, it could spur a notable uptick in unemployment numbers.

Now clearly, there are plenty of consequences that could ensue if the U.S. economy backslides. But if that were to happen, there's a good chance lawmakers would rely on stimulus checks to help dig the economy out of its hole.

Why so? Well, namely because they've done it before.

When economic conditions worsen, the quickest path to recovery is boosting consumer confidence and spending. Stimulus checks achieve both goals.

During the pandemic, there were three separate rounds of stimulus checks that hit Americans' bank accounts -- and all of those led to what wound up being a pretty quick recovery considering how bad economic conditions had gotten in the spring of 2020. Lawmakers also sent out stimulus checks during the Great Recession that lasted from 2007 to 2009.

One big upside of stimulus checks is their immediate impact. Many consumers who receive a windfall will inevitably opt to spend that money rather than save it, thereby boosting economic activity at a time it's sorely needed.

Because stimulus checks have long worked to help during periods of economic decline, there's a good chance lawmakers will turn to them again if things get bad enough. Whether that happens, though, is the big question.

Let's remember that not all recessions are created equal. Some can be fairly short-lived, in fact. And given the backlash that ensued after the last stimulus round, we should expect lawmakers to approach that decision somewhat conservatively.

Will stimulus checks make the problem worse?

The Biden administration has been criticized for sending out stimulus checks at a time when supply chains were struggling, thereby creating a gap between supply and demand that led to soaring inflation. If a recession hits at a time when living costs are finally starting to stabilize or drop, a stimulus round could reverse that progress. That's something lawmakers will need to be mindful of when making their decision.