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A Savings Stimulus: Direct Payments Get Some Criticism From Economists

  • Some economists question whether a blanket distribution of stimulus checks is the best way to bolster the economy
  • Suggestions that targeted assistance to unemployed would encourage more immediate spending
  • Advisors often recommend that people use unexpected windfalls to pay down debt or bolster emergency savings accounts

Millions of Americans are set to receive a pleasant year-end surprise as the recently approved $900 billion stimulus package includes $600 direct payments. Yet some economists are criticizing the measure, suggesting that it will have a limited effect on boosting the U.S. economy.

While the bipartisan compromise originally did not include direct payments like the CARES Act passed at the start of the COVID-19 pandemic, the $600 checks were added at the suggestion of the White House. Direct payments also became an unexpected point of contention, as President Donald Trump initially demanded that the checks be increased to $2,000 before ultimately agreeing to the $600 checks. Democrats embraced the call for higher stimulus checks, but Senate Majority Leader Mitch McConnell blocked an a standalone bill to provide $2,000 checks.

Some economists have posited that stimulus checks would have been better directed at the unemployed or other struggling populations, since they would be more likely to quickly spend it on essential items or other expenses. These economists have also suggested that the further extension of unemployment benefits, beyond the 11-week extension of two federal unemployment programs with $300 a week benefits, would also be more effective.

The reasoning stands that people with more comfortable financial circumstances are more likely to save money than they are to spend it. While financial advisors say that spending on essential items or catching up on bills is one way to spend an unexpected windfall, they also recommend paying down high-interest debts or bolstering an emergency savings account as viable strategies.

Americans’ savings rates have increased as the opportunities to spend on travel, dining out, and other expenses dwindled during the pandemic. One study determined that only about 15 percent of Americans spent the $1,200 payments they received under the CARES Act. As companies struggle during the pandemic and layoffs remain common, directing money toward savings has also provided a safeguard for people who are uncertain about their job security.

The latest jobless numbers, released today, show that there were 787,000 new claims for the week ending Dec. 26 – down 19,00 from the previous week. A total of 5.2 million people were receiving continuing claims for the week ending Dec. 19, while about 19.6 million were receiving some form of unemployment assistance.

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