You might have been hearing rumblings from neighbors or friends about the economic stimulus package. But what exactly does the term mean? What kind of impact is it going to have on the economy?
How the Stimulus Package Works
The reason for an economic stimulus package is never precisely the same. When the bottom fell out of the housing market in 2007, for instance, it led to homes being foreclosed on by the banks. Banks and credit unions had fallen into the habit of letting families or individuals get mortgages for properties at rates that were simply unrealistic. The salaries of the people living in the houses weren’t nearly enough to cover their monthly payments.
This led to many citizens suddenly being in dire financial straits. The government decided to act unilaterally, sending out a one-time payment to qualifying adults to boost the economy and slow the economic downturn.
In a sense, that is the same thing that is happening now. The only difference is that the cause of the sharp decline in spending and the plunge in the stock market is the coronavirus rather than shortsighted lending practices. The action the federal government is taking is much the same, though. They have approved a massive stimulus bill that is intended to jump-start the economy through a one-time, unilateral payment to many American adults.
What Effect Will the Stimulus Package Have?
Congress is hoping that these payments will encourage spending during a time when many Americans have closed their wallets due to pressing financial concerns. Those concerns are well-founded. Lots of people are losing their jobs. Some small businesses are shuttering, unable to pay their rent while being forced to remain closed. This is especially true in states where there is a “shelter in place” order for the populace. Businesses that are deemed to be nonessential must stay closed to slow the spread of Covid-19.
What this means is that the economy is at a virtual standstill, which is what is causing the sharp stock market dive. Since people can’t earn, they can’t spend. That is why Congress had little choice but to approve the stimulus package, the largest in US history.
As for what effect it will have, the answer to that is not entirely clear yet. There’s no denying that people need money, since many had very little savings, and those are now being rapidly depleted. However, the idea that spending on nonessentials is going to pick up as a result of the stimulus is most likely inaccurate. Most people are going to have to spend that money on back rent, food, and utilities once it shows up.
The size of this stimulus package is unprecedented because what is happening has never taken place before. America is navigating uncharted waters, as is the rest of the world. The stimulus package may seem like an imperfect or inelegant solution to this problem. However, as of right now, it’s probably the best weapon we have to stave off financial ruin for many.
