Is more economic stimulus the solution?

Dr. Martin Blank

The COVID-19 Recession is approaching its one-year mark. And in that time, the government has provided unprecedented economic support, including government grants and loans, extended unemployment benefits, student loan relief, and economic stimulus.

The grants, loans, and relief packages have undoubtedly been of great benefit to recipients, but the actual benefit of the stimulus to the economy is far less certain.

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Government intervention

Governments attempt to fight recessions, in part, through economic stimulus packages intended to increase demand for goods and services and ensure the availability of money for struggling businesses.

After the Great Recession of 2007–2008, the U.S. federal government provided $787 billion in economic stimulus. With similar intent, the federal government has responded to the COVID-19 Recession with massive stimulus packages reaching three times the amount of support provided during the Great Recession.

In light of the tremendous economic support already provided by the government, we must ask whether more stimulus is really the solution to the COVID-19 Recession.

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Causes and effects of recent recessions

The causes and effects of the COVID-19 Recession are different from those of the Great Recession of 2007–2008. The Great Recession was due in large part to excessive corporate borrowing and risk taking. When banks were unable to cover their debts, there was, essentially, a run on the banks.

The federal government provided the financial resources necessary to salvage many of those banks, as well as rescuing many struggling non-financial corporations. The economy gradually recovered. But the  economy, then, was better positioned to recover than the economy now.

The COVID-19 Recession was due to a massive economic shock to both supply and demand. And compared to the Great Recession, economic output and unemployment were much harder hit and will be much slower to recover. The extent of business closures and an uncertain economic future prevent the remaining businesses from reinvesting and rehiring, and new businesses from opening.

Recovery from the COVID-19 Recession, unfortunately, will be slower and more arduous than after the Great Recession.

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Is stimulus the solution?

Will more stimulus speed the recovery? The sad answer is no, more stimulus is not the solution. That is not to say that the government should not support American businesses and families who have been financially devastated by the pandemic. We absolutely should help Americans through these difficult times. But we should not confuse support for fellow Americans with economic stimulus. They are not the same.

The economy cannot be stimulated into recovery until we get past the COVID-19 pandemic. Once the pandemic is behind us, which eventually it will be, the demand desperately needed to restart the economy will be there. But, until then, surviving businesses will not rehire laid-off employees, and new businesses will not open.

Banks, though with plenty of money to lend, will not do so until the economic future is more certain. And businesses, equally concerned about the future, will not borrow. Stimulus will not help.

Still, money is needed to fight the pandemic and support American businesses and families through this period. However, money spent should be targeted to those who really need it and not given as a blanket payment to every American. That is unnecessary and will not help the economy recover. And in the long run, unnecessary spending places our economic future at further risk.

Let’s fight the pandemic and help fellow Americans. Together, we will get through this.

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Dr. Martin Blank is a retired Colonel in the United States Army Reserve. He lives in Swan Creek, Michigan. The opinions contained within this column do not represent an endorsement by the Department of Defense, the United States Army or the United States Army Reserve.