Should the Next Stimulus Target Our Wallets or Our Fears?

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Although recounts and post-election anxiety dominate the news cycle, getting a second coronavirus stimulus bill to the congressional negotiating table still ranks near the top of the list of growing Washington concerns. As we debate how to hatch a meaningful federal response, let’s remember that something more than money is needed.

Indeed, removing as much fear and uncertainty as possible until a reliable vaccine arrives may be more important. To paraphrase a famous FDR quote, perhaps our greatest fear is fear itself. Data suggest this is the case.

First, a little background on the matter. There is still serious support for renewing generous supplemental unemployment benefits and mailing out $1,200 checks to a broad cross-section of American citizens. Prior to the election, President Trump challenged House Speaker Nancy Pelosi to whittle down her then-$2.2 trillion stimulus, and indicated that he would quickly sign a slimmer $1.6 trillion bill into law. Senate Majority Leader Mitch McConnell was less agreeable, but still willing to work with the House to provide financial assistance to a coronavirus-troubled nation.

Then came the election and a temporary shift in priorities. More to the point, better economic data emerged, the unemployment rate headed south, and third-quarter GDP growth flew toward the ceiling. On the other hand, the virus surged, more families were affected, and a tougher winter may be in store. A growing number of states and cities are calling for curfews and other crowd-activity cutbacks, which could bring a renewed financial challenge. House Speaker Pelosi raised her voice again, calling for federal action.

All of this leaves little doubt that another full-throated congressional stimulus debate is called for. Just not the same debate we began with.

Consider the following chart, which uses Federal Reserve data. Covering one year, it plots in blue a weekly measure of uncertainty as reflected in the well-known Economic Policy Uncertainty Index.

Notice how the index heads north in March and April during the coronavirus shutdown and then eases south before setting at a higher-than-usual level once the economy began to reopen over the summer. It’s also easy to see the spikes preceding the November 5 election.

The blue line reflects fear. Now, let’s get to money. I include in red the level of savings in all U.S. depository institutions. Here we can see the April-May surge in savings associated with the first stimulus, as well as the PPP program for small businesses. There is no doubt that a large part of the federally funded stimulus for many people went into savings, not to shopping. They were fearful and eager to expand their precautionary cash balances.

The money is still sitting there. We should acknowledge that there are plenty of people who quickly spent their stimulus check on food, rent, and health care. Some of them are hanging on by their fingertips. In any case, the national data shown in the chart strongly suggest that easing uncertainty could lead to a much more powerful type of stimulus: greater willingness on the part of more Americans to spend some of what they have.

So, what can we now say about a second stimulus effort? Sure, all of us will welcome another federal check, and many of us may be desperate to get some money to spend. But the overall level of savings in America means any stimulus should be targeted to those who are actually hurting. Sending $1,200 checks to practically everyone is not called for.

Second, we should take action to ease anxiety about the coronavirus — to remove the fear that causes people to hold onto unusually large cash balances, put off hiring another employee, or otherwise resist putting their money to work in ways that contribute to a thriving economy.

This means accelerating the approval and delivery of virus vaccines, further supplementing public health services across cities and states — perhaps by enlisting unemployed young people in support roles — and telegraphing good news about coronavirus progress with the same enthusiasm that bad news is currently delivered.

By and large, Americans still have money. Confidence about the next few months is another story.

Bruce Yandle is a distinguished adjunct fellow with the Mercatus Center at George Mason University, dean emeritus of the Clemson College of Business and Behavioral Sciences, and a former executive director of the Federal Trade Commission.

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