Uncharted territory. That’s how I would describe life these days. I’m not sure if any of us knows quite what to do with today’s climate. Not to mention, the financial setting most of us are in. Speaking from a personal finance perspective, I want to explore this newfound phenomenon we’re all experiencing. More specifically, the Covid-19 stimulus package, aka the CARES Act.
The CARES Act, Coronavirus Aid, Relief and Economic Security, launched in March 2020, was discussed in a recent article by the Federal Reserve. The article expounded on the two main components of the stimulus package: increased unemployment benefits (UI), and the stimulus checks. Read it here:(https://www.federalreserve.gov/econres/notes/feds-notes/acts-of-congress-and-covid-19-unemployment-insurance-benefits-and-stimulus-checks-20210224.htm)
How effective were the stimulus packages at improving each family’s personal financial picture? Well, based on this same article released by the Federal Reserve, “these two components have been effective at providing stimulus and lowering poverty.” The article goes on to say, “that UI benefits are successful at stimulating consumption, leading to an increase in GDP.”
So basically, mission accomplished, right?
Not exactly. Let me explain.
The Problem
The problem here is the stimulus package’s one-sided nature. There is one true beneficiary in this entire scenario, and spoiler-alert, it’s not the American family. All political stances aside, the stimulus package was inherently effective at doing what it was created for. The creation of the CARES Act, ultimately did provide funding to Americans.
The same article referenced earlier noted the funding offered the most support to individuals and families who earned the lowest wages. And those who qualified for the stimulus payments successfully spent the money on consumer products, thus increasing the nation’s GDP, according to the article.
So yes, based on that angle, the funding increased consumption, with borrowed, tax-payer-funded money. And as a result, the country’s debt soared to new levels.
My Concern
Here’s where I get concerned as someone in the personal finance niche. The stimulus package and UI benefits came to the rescue, but as a result, consumption increased, and the US gross domestic product increased. If the goal was to influence individual spending, rather than saving, who really benefitted?
Of course a stimulus package isn’t designed to encourage saving. The outcome would look entirely different. Where I see an issue is how many low-waged families actually improved their financial situation by spending borrowed money on material things? The money spent on those products favored the nations economy more so than the lower class American family. Furthermore, most small business were forced to close during the pandemic, so which companies actually experienced the increase in sales? Many mega-corporations disclosed sky-rocketing revenue on their income statement during the pandemic.
My Response
Maybe I’m an outlier here, but my first reaction to the stimulus money was to handle it opposite from it’s desired intention. I would argue that those who managed the money differently, perhaps by saving it or investing it, rather than impulsively buying a bunch of stuff, may just be sitting a little more financially favorable at this point in time.
Some are still wondering if all the stimulus money will backfire, bursting this ever-expanding bubble, because of the mere fact of the extreme load it’s placed on the nation’s increasing deficit. At what point does the USA become bankrupt? In my opinion, it’s only a matter of time.
To answer my own question, in the short-term, yes, the stimulus payments did work. Overall, the economy didn’t suffer as it would have without the aid. However, I believe the long-term ramifications will show themselves. In fact, there are factors already in play such as increased labor shortages and rising inflation.
My Encouragement
To sum it up, my view tends to lean toward calculated caution rather than compulsive consumption. My encouragement is that you would do the same. Especially because of the unpredictable season we’re in, borrowing more money on already borrowed money isn’t wise. At some point, something’s got to give. Don’t spend everything you get. The last place you’d want to find yourself in is in a bad financial situation within a volatile financial climate.