When the United States was hit by COVID-19, Congress passed the $2.2 trillion Coronavirus Aid, Relief, and Economic Security Act in an effort to soften the blow from the widespread lockdowns and business closures that led to rising unemployment.
The CARES Act — which included one-time cash payments of $1,200 or more to households in April — boosted incomes and boosted spending as promised, though the effect was uneven, research by Scott R. Baker of Northwestern, Columbia’s RA Farrokhnia, suggests. University of Steffen Meyer from Southern Denmark, Michaela Pagel from Columbia and Constantine Yannelis from Chicago Booth. The researchers conducted a near real-time assessment of how a significant portion of the population used direct payments.
The stimulus led to an immediate, overall increase in household spending, the researchers find, but households with cash tended to save their stimulus checks, while those without cash spent nearly half of their checks within 10 days.
The researchers used newly accessible data from SaverLife, a nonprofit that helps families develop long-term savings habits. The SaverLife data provided detailed, high-frequency information, including the daily inflows, outflows and balances of anonymized individual bank accounts. This enabled the researchers to analyze the impact of the CARES payments on households, taking into account changes in general income levels, cash flow and existing liquidity.
Using data on more than 6,000 U.S. households for April, the researchers calculated households’ marginal propensity to consume: the portion of every dollar received they’ve spent since they received the CARES payments.
“We wanted to understand the multiplier effect of CARES payments — how when the government gives you a dollar, you spend it and effectively give someone else a dollar, who then spends it, gives someone else a dollar, and so on,” Jannelis says. is how tax incentives work, so you have to look at people’s marginal propensity to consume to assess the multiplier effect.”
The researchers find a sharp and immediate response when payments started flowing into bank accounts. Within the first 10 days, households spent an average of 29 cents of every dollar received. The bulk of this spending went on food, rent and bills, most likely in response to on-site shelter guidelines and supply chain restrictions. The spending failed to significantly benefit the restaurant, services and hospitality industries as they were largely shut down to slow the spread of the pandemic.