Want to secure a re-election? Stimulate the economy. What’s the quickest way to stimulate the economy? Increase the GDP. And what’s the quickest way to increase the GDP? Accelerate consumption. There is your answer on why the current political class is hellbent on rolling out stimulus checks. The thing with stimulus checks is that they work well in theory. In a recession, these checks can encourage people to invest or spend in consumer goods. This in turn increases the revenue of companies which improve conditions for more employment. The demand for more employment increases the wage which then cycles through to increasing disposable income for more spending.
Anticipating a Stimulus defeats the purpose of Stimulating the Economy
The ultimate point of stimulus checks is to improve employment (increase spending > improve revenue > hire more employees). But the policy only works if people don’t anticipate it. Under normal circumstances, an increase in employment happens when high demand of consumer spending encourages companies to hire and expand on their goods and services output. But when a stimulus check is announced by the government, companies instantly raise the prices on their good and services. They also raise the wages accordingly. They do this because they know the stimulus checks alleviate short term conditions only and that disposable income will reduce back to normal. So they capitalize on the stimulus checks by raising the prices on their goods and services and offset it with a wage increase, with hiring remaining unchanged. Once the stimulus round fades, all we are left with is inflation.
So stimulus checks only work when unannounced; i.e. when everyone is busy getting paid for contributing to an organic economic growth, where the rationale behind hiring employees is justified by a long-term, gradual demand for goods and services. And all this is assuming that companies can actually hire given the COVID pandemic we are in.
Stimulus that fails to increase employment output leads to inflation
What happens when you have too many apples? The value of apples drop. What happens when you have too much printed money? The value of printed money drops. Inflation is an inevitable consequence of most stimulus packages that derive from fiscal policies. Sometimes this consequence is worth the price. For example there are certain company bailouts that are absolutely necessary for the economy to continue functioning. And the cost of inflation is insignificant relative to the cost of not bailing out companies entrenched in the economy. But fueling inflation for the purpose of artificially stimulating employment through stimulus checks that inevitably fail because the initiative has been announced and everyone expects it (see first problem) is nothing but detrimental to the economy.
Stimulus checks won’t reopen locked down businesses
Obviously this COVID-19 recession is not exactly like other recessions. There are businesses in lockdown everywhere. It makes sense to roll out stimulus checks (at least for politicians) in a economic recession with no restrictions imposed by a health crisis hanging over its head. But this recession caused by the pandemic is a different game that needs to be played with different rules. Stimulus checks do nothing to address the core problem of this recession; alleviating businesses suffering from the pandemic. Relief is achieved when steps are taken towards business restrictions. How they go about it while maintaining safety measures against COVID is a different topic altogether. But stimulus checks are not the answer.
Keep in mind that stimulus checks derive from policies that inevitably increases the national debt. Debt that will have to be paid by taxpayers. Taking measures that increases the national debt should lead to higher standards of living. That’s a scenario most would be willing to live with; contributing to the nation in the form of tax, in exchange for the nation to raise standard of living. That is not what is happening here. Also keep in mind who inflation benefits. Inflation improves the financial position of equity owners and rich people. Because the rich and business owners largely hold non-cash assets. Inflation primarily hurts people who are in debt and those who earn a wage and save cash.
I read a tweet from Corporate Machiavelli which I found to be very important. It went along the lines of something like this:
Everyone needs to know:
- How much tax revenue the US government gets each year
- How much spending the US government does each year
- What the deficit the US government has in each year
- How much the US government borrows each year
- How much the US government prints each year
This level of transparency will never substantiate. But the significance of needing to know this information should raise questions whether governments are acting correctly in trying to stimulate the economy through stimulus checks. The modern era of economic stability depends on two policies; monetary and fiscal. Monetary policy focuses on increasing and decreasing money supply in order to affect interest rates for the purpose of stimulating the economy. Fiscal policy focuses on government spending and the tax code to stimulate the economy. Stimulus checks derive from taxpayer money. And in a pandemic, it’s simply scooping up a bucket of a water from one end of a leaking pool, and pouring it at the other end.