Meaning of "Stimulus Check"

When the economy gets tough, people cut back on spending, which only makes the problem worse. If consumers don’t spend, businesses start to shut down, which further hurts the country’s finances. One way to get things going again is to provide a little extra spending money to every taxpayer and encourage them to spend it with the many businesses they love. Those businesses, in turn, will have extra money to hire workers and spend locally, further stimulating a lagging economy. But this measure comes at a cost to a government’s funds, possibly even leading to an increase in the national deficit.

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A stimulus check is an amount issued to taxpayers by a government to boost the economy.

What Is a Stimulus Check?

A stimulus check is a payment issued by the government to every citizen for the purpose of stimulating the economy. In the U.S., the most recent use of stimulus payments was during the 2008 financial crisis. In 2009, the U.S. government sent checks totaling $300-$600 per person, as well as an additional $300 for each qualifying child. Citizens making $3,000 or more in qualifying income received the checks with the encouragement that they should use the money to stimulate the economy.

There’s nothing forcing a taxpayer to use a stimulus check right away. In fact, one study found that only one-third of Americans spent the money, with the rest opting to save it for a rainy day. In turbulent economic times, that’s no surprise, but the government is hoping that the minority who do spend it will be enough. Additionally, if some of those who save it spend even a portion of the money, it may be enough to give the economy a jump-start.

Qualifying for a Stimulus Payment

Stimulus payments aren’t automatically mailed to every person living in America. There are requirements attached to receiving them, and those requirements can vary from one year to the next. But 2009’s requirements can serve as a good guideline for how future stimulus payments will work. A taxpayer’s status was based on his 2007 tax return since the payment was processed in 2008 and mailed in early 2009. If a taxpayer didn’t meet the requirements based on his 2007 return, he simply had to try again in 2008 and, if approved, received the check the next year.

Taxpayers must also have a Social Security number and earned income of at least $3,000. They can’t have qualified as a dependent on someone else’s tax return in order to get the payment. Unfortunately, payments like Social Security income don’t count toward that income requirement, so many retired taxpayers were left out of the program. If a couple filed a return and only one had a Social Security number, neither qualified for a stimulus check, unless the taxpayer with a Social Security number was a member of the military. Also not qualified to receive a stimulus check? Those who earned $100,000 or more during the tax year in question.

Stimulus Checks and Unpaid Taxes

A stimulus check means money in the bank for many taxpayers. However, those who had unpaid taxes never saw those funds, assuming the amount overdue exceeds the stimulus amount. The amount of the stimulus payment was applied to the taxpayer’s balance due, which could be a relief in itself. For those who owe $300 or less, having that debt completely wiped out could be an incentive in itself to buy that item they’ve been putting off.

Another thing that could prevent a stimulus check from arriving in a taxpayer’s mailbox was past-due child support or student loan payments. With the 2009 mailings, the Office of Child Support notified all relevant state agencies that the money was coming and that an “offset” would be issued to collect that debt. In other words, the amount of the stimulus check was to be automatically applied to the taxpayer’s government debt first, with the remainder then being mailed to that person.

Judging the Success of Stimulus Programs

Although the very mention of the stimulus check definition brings questions of its effectiveness, studies actually showed it worked. After reviewing nine different studies, The Washington Post found that overall, the stimulus had a positive effect on the economy. In six of the studies, they were able to see measurable improvements in employment and growth, but three showed undetectable results.

According to the Congressional Budget Office, the checks, along with other efforts, created between 1.6 million and 4.6 million new jobs, reducing unemployment by at least 0.6 percent. They also concluded that the stimulus program improved the gross domestic product by 1.1 to 3.1 percent. However, part of that improvement came from other parts of the stimulus program, including initiatives that raised Medicaid matching funds and increased financing for education and transportation projects.

History of Stimulus Programs

To fully understand the pros and cons of stimulus programs, it can help to look into their history. The first initiatives designed to stimulate the economy happened in the 1930s under Presidents Herbert Hoover and Franklin Roosevelt. But the success of those programs is in doubt, considering the Great Depression continued for the remainder of the 1930s. Roosevelt’s treasury secretary expressed frustration over the program in 1939, saying the government had overspent and it wasn’t working.

But the stimulus of the 1930s included more than issuing checks to taxpayers. The New Deal under Roosevelt created the Works Progress Administration, which employed millions of unemployed Americans to take care of government programs like building roads. Total spending on New Deal programs was $41.7 billion which, when adjusted for inflation, puts it well above spending on the 2009 stimulus package. In both cases, though, the economy eventually made its way out of its slump and remained stable in the years that followed.

Future Stimulus Checks

Every now and then, talk of a new stimulus program occurs, although less often when the economy is thriving. But the government is constantly looking for ways to stimulate the economy, even when they aren’t discussing stimulus checks to taxpayers as a way to do it. Also known as deficit spending, these measures direct money into certain areas of the economy to move things forward.

Experts are critical of deficit spending in general, especially when the economy is stable. But the theory of “you have to spend money to make money” pushes some administrations to invest heavily in various programs designed to stimulate spending. At the same time, legislators will push out tax cuts in the hopes that more money in each paycheck will encourage employees to spend more money, supporting businesses that will then hire employees, further reducing the unemployment rate. But all of that extra spending comes at a cost to the government and, unless the budget is already in place, it often means increasing the national deficit.

Other Stimulus Efforts

Even if the government doesn’t cut a check, it finds small ways to put more money in taxpayer pockets. The Tax Cuts and Jobs Act is designed to offer relief to earners at all income levels. It not only adjusts the tax brackets in a way that reduces most people’s tax burden, but it increases the standard deduction by almost double. This means that taxpayers get to keep more of the income they work hard to earn, making it more likely they’ll spend on items like houses, cars, clothing and dining out, helping businesses and keeping unemployment rates down.

Parents also see relief in the form of child tax credits, which issue a certain amount of credit to households based on the number of children they have. These vary in amount over the years, but for the current tax year, the amount doubles to $2,000 per qualifying child. The new tax laws also make the credit refundable, which means that taxpayers can get $1,400 of the credit back if they owe no money. In previous years, the child tax credit was nonrefundable, which meant that if you owed money for taxes, it would reduce the amount due until you reached $0. Once you reached $0 due, you wouldn’t get credit for any amount left over.

Criticisms of Stimulus Checks

When you ask what's a stimulus check, it’s important to also understand how the government pays for all of that money it hands out. The 2009 stimulus program cost $836 billion, which totaled $1 trillion by the time interest was paid on that money. Believe it or not, the U.S. government doesn’t have billions of dollars in the budget just waiting to be spent. That means the government must go into debt to pay for these programs.

The problem is, today the U.S. is $20 trillion in debt, a product of overspending dating all the way back to the Reagan tax cuts in 1981. Although each side likes to cast blame, both parties are responsible for pushing that debt upward over the years. The problem with all of this debt is that it can drive up interest rates on bonds, potentially increasing the rates for corporate bonds and hurting the economy in other ways. Still, there are experts who believe the deficit is not a problem that will affect the U.S. in the foreseeable future.

Temporary Income Issues

Another interesting criticism came out of the stimulus program in the form of a study from researchers at Columbia University and the University of Pennsylvania. Researchers reviewed data and found that in the 23 weeks after stimulus payments were issued, emergency room visits increased by 1.1 percent, on average. Although the natural conclusion might be that people merely had money so they went to the emergency room rather than an urgent care facility, the researchers had another hypothesis.

With more disposable income, the researchers concluded, consumers were more likely to engage in risky behavior, health-wise, specific to alcohol and narcotics. In their report, the researchers showed complementary evidence that with money in hand, people increase their need for care by causing adverse health events through their behavior. They cite previous studies supporting their hypothesis, which demonstrate a connection between short-term income infusions and adverse health situations.

Non-U.S. Stimulus Programs

The U.S. doesn’t hold exclusive rights to stimulus programs. In fact, the European Central Bank recently ended its own stimulus program, which saw the central bank buying $2.9 trillion in bonds to help stimulate the economy. Through its effort, the bank was able to keep borrowing costs low for the residents and businesses that wanted to make major purchases. The program has been praised as a success, with officials saying the economy is strong and inflation levels are stable.

Argentina also had a stimulus program in 2008, labeled anti-crisis measures. The law granted incentives to small businesses to move employees who are paid under the table to official employees. Australia had two large-scale stimulus programs before the U.S.’s 2009 program, including one in 2009 designed to invest $27 billion in education, housing, energy, community infrastructure and small businesses. The plan also included $12.7AUS as bonuses paid to low- and moderate-income residents. These are just two examples of many economic stimulus programs throughout the world.

About the Author

Stephanie Faris is a novelist and finance writer whose work has appeared on The Motley Fool, MoneyGeek, and Ecommerce Insiders.


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