In March of 2020, as the pandemic took hold,
unemployment in the US began to spike.
The federal government passed a $2.2 trillion stimulus bill:
money for the unemployed, loans for businesses...
and $1,200 stimulus checks, sent to millions of Americans.
In December, the government sent out even more checks.
And then, in March 2021… even more.
All this government spending made this guy very concerned.
"Seems to me we're taking very substantial risks."
"What was kindling is now igniting."
Larry Summers:
He used to be Bill Clinton’s Treasury Secretary and Barack Obama’s top economic advisor.
And he thought the checks were a mistake.
"We're going to set ourselves up for inflation."
You know, inflation — when prices increase, and money is worth less and less.
Like the US had in the 70s.
Or, in the extreme, in places like Venezuela,
where money is so worthless, it’s used to make purses.
So are these checks actually something to worry about?
And could they lead to this?
First we have to talk about how inflation works.
Think of the economy as a fish tank.
When one fish spends their money, like out at a fish concert,
that keeps other fish, like the venue workers, employed,
so they can go spend their money on things, too:
like their mortgage,
or a car. Because fish need cars.
Stick with me.
It’s a cycle — employed fish spend money, which keeps other fish employed.
Some of that money also goes into their savings, to spend later.
And think of all the water in the tank as all the money being spent out in the economy.
In an ideal economy, fish unemployment is low and there’s lots of money being spent,
and so there’s a comfortable amount of water in the tank.
But in a recession, lots of fish lose their jobs and stop spending money.
And other fish get scared that they might be next, so they stop spending and start saving.
And with less money being spent in the economy, the water level falls.
When that happens, the government can pump more money — water — into the economy.
It can be through things like investments in infrastructure, or unemployment benefits.
But in the last 20 years, one policy that’s been used more and more frequently,
is stimulus checks:
Giving people cash, directly, to go and spend.
"Checks are definitely something that many economists think are useful
because it bypasses the traditional channels."
The first stimulus check, as we know it, came in 2001.
It was really more like an early tax refund.
It gave adults who had paid at least $6,000 in income taxes a $300 check.
Studies found that it went swimmingly. People did spend the money.
And the checks were credited with helping to end the 2001 recession.
This approach was so popular that in the next recession, in 2008, the government did it again.
This time they sent out twice as much money in tax rebates.
It was phased out for higher-income Americans, but expanded in other ways:
Most families got a bit extra for each child.
People with less income got a check too, though smaller.
It was just a part of a larger stimulus package, but studies found that it worked again:
this time even more people quickly spent their checks.
"They get money to people fast, and it helps the economy. Which then in turn helps more families."
But here’s the problem:
Normally, businesses raise their prices a little bit each year,
but it’s not very noticeable, since people usually make a little bit more each year.
This is inflation: prices going up.
And we can measure it as the water level in the tank:
Higher prices mean more money being spent, so, a higher water level.
But if, suddenly, these fish have way more money to spend,
businesses can raise their prices a lot.
Drastically higher prices mean too much water in the tank, and it could overflow.
This is the bad inflation.
But economists actually want a little inflation each year.
Spending is a sign of a growing economy.
"It's not a bad thing.
In fact, if prices aren't rising, it tells you that something is really wrong in the economy."
This is what inflation has looked like in the US the last 40 years.
Zero means prices haven’t changed from the year before.
4% means things cost 4% more than last year.
And here, these gray bars, are when the economy was in a recession.
Notice anything?
A recession almost always comes with a substantial dip in inflation.
When people lose their jobs, or are afraid they’re next, they don’t spend like usual.
Businesses can’t raise their prices like they usually would.
When this line falls below zero,
meaning things actually cost less than they did a year ago, that’s bad.
"Falling prices is a sign of an economy in crisis.
And frankly, an economy in a downward spiral."
And for the last ten years, the US has aimed for 2% inflation.
"And you can say, well, why 2%? And the argument is, we want a little bit of a buffer."
But the US, leading up to the pandemic, didn’t have much of that buffer.
We weren’t consistently hitting that 2%.
And then...
"Our fish tank was under attack.
We lost a lot of that water very suddenly.
We saw the federal government slap some tape on the fish bowl, throw some more water in...
One thing they did that was really popular was to send checks to people."
And this time, stimulus checks were sent out to even more people than the ones in 2001 and 2008:
Basically anyone with a social security number.
Plus extra for children.
And it worked then, too.
You can see here, in a chart of Americans' bank accounts,
people’s balances went up with the stimulus checks,
and down as they spent them. It put more water into the tank.
But then the government sent out more, and even more.
This is what worried some economists. If the government pours in all this water,
and then people start going out and spending again, including what they'd saved,
that’s a lot of water. Wouldn’t it make the tank overflow?
Most economists say eh, probably not.
"It's really important to remember that we lost a lot of water.
The risk right now is doing too little."
"It would have to be a sudden explosion of spending."
Most economists, including the ones trying to steer the US economy, agree:
Not to worry. We could see a little inflation as the economy reopens,
but not at overflow levels.
There is debate around stimulus checks, but it’s in the details:
who should get them, and how much should they be.
Many economists even want them to go out automatically,
when the economy shows signs of a recession starting:
"Having a rule in place, that automatically adjusts the water level,
without the political headaches of getting it passed through Congress."
"When the unemployment rate rises just a little bit, we're in a recession.
Bad news. Bad stuff is coming. Send the checks."
But as for inflation, economists today want a little.
And aren’t really concerned about overflowing the tank.
Sorry Larry.
"Doing too little right now, listening to the people who are so afraid of the fish tank overflowing:
I think that would be a big mistake."