Over the past two decades, the United States government enacted “Economic Impact Payments” in response to a series of economic shocks. These payments were enacted as part of the fiscal package in response to the recession in 2001, financial crisis in 2008, and the coronavirus pandemic in 2020-2022. The term “Economic Impact Payments” was introduced in 2020 to replace what previously had been called “stimulus checks” and “recovery rebates.”
The rationale for “Economic Impact Payments” is grounded in Keynesian macroeconomic theory. Keynes argued that during recessions the government should use deficit spending to boost consumption spending and aggregate demand to restore full employment.
The Keynesian paradigm was first challenged in the work of Friedman (1957) and Modigliani (1976), and more recently by Taylor (2022) among others. There is now an extensive literature on rules-based fiscal and monetary policy challenging the Keynesian paradigm. These economists argue that temporary government transfer payments may increase household savings (or reduce household debt), but have little, if any, impact on household consumption or aggregate demand. In short, they argue that attempting to stimulate the economy with temporary government transfers has failed.
Economic Impact Payments have also been defended on equity grounds because the payments are linked to income. For example, the payments in response to the coronavirus pandemic ranged from $600 to $1,400 for individuals, from $1,200 to $2,800 for married taxpayers filing jointly, and from $500 to $1,400 additionally for dependents. These payments had an income threshold above which the payment was reduced and phased out for people with incomes above $150,000 or $160,000 for taxpayers filing jointly. Thus, Economic Impact Payments are progressive because the amount paid decreases at higher income levels.
To understand the impact of Economic Impact Payments on household income over the long term, however, we must understand the concept of “Ricardian Equivalence.” Two centuries ago, David Ricardo argued that it makes no difference whether the government chooses to finance expenditures through taxation or borrowing. If the government chooses to borrow, then households will increase private savings in anticipation of the higher future taxes needed to repay the public debt.
There is extensive theoretical and empirical literature testing the Ricardian Equivalence hypothesis. Studies of household savings relative to household income show that low-income families consume most of their disposable income, whereas families below the poverty line consume virtually all their disposable income and tend to dissave. Middle- and upper-income families save a larger share of their disposable incomes, and the highest income groups account for the bulk of total household savings.
The empirical literature also suggests that Ricardian Equivalence holds for middle- and upper-income families, but not for low-income families. Middle- and upper-income families are likely to use the Economic Impact Payments to increase savings (or reduce debt). Their consumption spending is linked to lifetime income, so the Economic Impact Payments have little or no impact on their consumption spending. Low-income families, on the other hand, are credit constrained to the extent that they are precluded from formal credit markets. For low-income families, the money they receive from Economic Impact Payments allows them to maintain consumption spending that they would likely forgo in the absence of government transfers or borrowing. Thus, for low-income families Economic Impact Payments substitute for borrowing in an imperfect capital market.
A dynamic analysis of the impact of Economic Impact Payments on household income must consider these long-term effects. All families inherit the burden of government debt in the long term. The U.S. Treasury estimates official government debt in February 2023 at $31.5 trillion. That works out to about $94,000 per capita, or $240,000 per household.
All U.S. families are liable for the principal and interest on this debt over the long term. Middle- and upper-income families are likely to inherit both the liabilities incurred by the federal government, and assets accumulated by their families through private savings and investment. For this group, Ricardian Equivalence holds to the extent that the government liabilities they inherit are offset by the private assets they inherit from their families.
Even if strict Ricardian Equivalence does not hold, the inegalitarian impact of Economic Impact Payments in the long term is clear. The heirs of low-income families will make principal and interest payments to the heirs of middle- and upper income families whose forebearers were prudent enough to save and invest government transfers in government securities.
It is fair to say that the long-term impact of Economic Impact Payments is inegalitarian to the extent that Ricardian Equivalence holds for middle- and upper-income families, but not for low-income families. Of course, this assumes that the government repays public debt in the long term; If the government chooses not to repay public debt it will default in the long term, in which case all families lose regardless of household income.
Barry Poulson (think@heartland.org) is a policy advisor with The Heartland Institute.
