Temporary Cash Transfers Are a Poor Stimulus Tool

By Veronique de Rugy. Excerpts:

"Governments often turn to temporary cash transfers as a quick fix during economic downturns, believing that putting money in people’s pockets will boost consumption and jumpstart growth. A new paper by Valerie A. Ramey presents compelling evidence that this approach does not work.

Here is the context for the work:

Temporary cash transfers were widely used by governments to stimulate their macroeconomies during the Global Financial Crisis and again during COVID. Most policymakers and economists believe that temporary cash transfers are effective macro stimulus tools. . . .

My coauthors and I argue that researchers and policymakers should subject the evidence and models to what we call historical plausibility analysis. It creates a rigorous basis for choosing between models and estimates so that one is not tempted to choose the estimate and/or model that is the most convenient for the present purpose.

Ramey examines four major episodes: the 2001 and 2008 U.S. tax rebates, a 2011 Singapore cash transfer program, and Australia’s 2008–09 stimulus payments.

Across all four cases she studied, the pattern is clear: Cash transfers raised household income, but they did not meaningfully raise consumption or GDP. This finding contradicts claims that such transfers are an effective countercyclical tool."

"The same pattern appeared with the 2008 U.S. tax rebates, when the government distributed $100 billion in stimulus checks, amounting to 11 percent of monthly personal income. Again, income spiked while consumption hardly budged. Even studies claiming high marginal propensities to consume (MPC) — some suggesting households spent nearly all of the transfer — failed to explain why aggregate spending remained flat."

" In every case she looked at, household saving rates surged when transfers were issued. (Incidentally, the same thing was true of transfer to the states during the Great Depression.) Consumers do not treat one-time checks as permanent income, so they store the money rather than spend it. This aligns with Milton Friedman’s Permanent Income Hypothesis, which predicts that temporary income shocks have minimal effects on consumption."

"Stimulus transfers are deficit-financed, adding to public debt without any long-term growth benefits."