Stimulus (economics)
Stimulus in economics refers to government efforts to boost economic activity during periods of recession or economic downturn. By increasing the spending power of consumers and businesses, governments aim to encourage spending rather than saving, thereby fostering recovery. Stimulus packages can take various forms, including tax cuts, direct payments to individuals, and increased government spending on infrastructure and public services. Historically significant examples include the New Deal during the Great Depression and the multiple stimulus efforts in the U.S. in response to the COVID-19 pandemic, such as the CARES Act.
Economic theories suggest that capitalist economies experience natural cycles of expansion and contraction, often influenced by investor psychology. During contractions, such as recessions, job losses and wage stagnation can lead to decreased consumer spending, further exacerbating economic decline. To counteract this, stimulus measures are categorized into fiscal stimulus (via tax cuts and increased spending), quantitative easing (purchasing financial assets to increase bank reserves), and monetary stimulus (lowering interest rates to encourage borrowing). While many view stimulus packages as effective tools for economic recovery, critics express concerns about potential inflation and the risk of perpetuating poor business practices by bailing out struggling companies.
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Stimulus (economics)
Stimulus packages occur when a government attempts to manipulate the economy by increasing the spending power of businesses and consumers. By instituting stimulus packages, governments hope to move the economy away from recessions and depressions by encouraging people to spend money instead of saving it. Stimulus packages come in a variety of forms, including tax cuts, reduced interest on loans, and direct payments to consumers. One of the most famous was the New Deal, which was issued to combat the Great Depression, which began in 1929 and persisted through much of the next decade. In 2020, the US government instituted expansive stimulus packages to help the economy recover from the harsh restrictions necessary to fight the COVID-19 pandemic. In December 2024, an additional stimulus package was issued, aimed at people who had missed the original economic impact payments during the pandemic.
Background
Capitalist economies naturally move through repeated cycles of expansion and contraction. This pattern may also be referred to as a boom or bust cycle, or a business cycle. During periods of economic expansion, the market brings high returns to investors. The number of jobs available for workers grows, as does the average pay for workers and the number of products available for consumers. Because workers make more money, they are able to reinvest that money into the economy through consumption. This leads to continual economic growth.
However, when this system is upset by some force or shock, the economy transitions to a period of contraction. During a contraction, investors make less money, the number of jobs available shrinks, and the average wage stagnates or lowers. Many economic theorists argue that boom and bust cycles are driven by investor psychology. If investors and consumers panic, drastically reducing the amount of funds they invest into the economy, then the economy may suffer.
A business cycle (expansion or contraction) tends to last from several months to several years. Longer cycles exist but are rare. Economists assert that the study of world economies throughout the last century shows that the average length of a boom or bust cycle is roughly five years. They also argue that boom and bust cycles vary significantly in severity.
Overview
In some cases, an economy will move beyond a contraction and enter into a recession. When this happens, the number of jobs shrinks, and wages decrease, which causes consumers to invest less money into the economy. This harms businesses, resulting in more job loss and a further decrease in wages. If continued unchecked, the recession may worsen into a depression.
To help an economy break out of a recession, governments may intervene and offer a stimulus package. Stimulus packages are collections of legislation designed to increase employment and consumer spending.
Most stimulus packages fall into one of three categories: fiscal stimulus, quantitative easing, and monetary stimulus. Fiscal stimulus packages involve tax cuts or increases in government spending as their primary method of assisting the economy. By cutting taxes, the government increases the amount of capital immediately available to businesses and consumers in the hope that they will quickly spend. When the government increases its own spending, it decreases the unemployment rate by creating more jobs.
Quantitative easing occurs when the federal government purchases a large number of financial assets from commercial banks or other financial institutions. This swells the cash reserves of financial institutions, lowering interest rates. It also encourages financial institutions to provide better loan conditions for consumers, who will hopefully then make larger purchases.
Governments may also opt for a direct monetary stimulus. This involves reducing interest rates and allowing individuals and businesses to borrow large amounts of money. Monetary stimuli reduce incentives to save and increase incentives to borrow and spend.
Two of the most famous stimulus packages in American history were designed to reduce the impact of the Great Depression, which began in 1929. The First New Deal, which took effect between 1933 and 1934 under President Franklin D. Roosevelt, included the Emergency Banking Act and the Banking Act of 1933. This legislation helped stabilize the American banking system.
However, when the First New Deal failed to solve all the challenges caused by the Great Depression, the US government opted for additional federal intervention. The Second New Deal, another stimulus package, was rolled out in 1935 and 1936, and included an even wider range of programs and reforms. It created the Federal Housing Administration, the Social Security Act, aid programs for farmers and migrant workers, and the Securities and Exchange Commission. The federal government also passed a series of bills ordering the construction and repair of infrastructure across the nation, providing jobs for countless workers.
In early 2020, the COVID-19 pandemic spread to the United States. To stop the spread of the COVID-19, many Americans were asked to obey stay-at-home orders. The onset of the pandemic, combined with these restrictions, devastated the economy; businesses closed, and unemployment skyrocketed to levels unseen since the Great Depression. To stimulate the economy and help Americans, Congress passed several stimulus packages, including the CARES Act, which providing direct cash payments to many Americans, along with forgivable loans to businesses throughout the country to help keep people employed during the crisis. These stimulus packages mandated temporary increases in unemployment benefits, as well as temporary bans on evictions and foreclosures. In late 2024, the Internal Revenue Service announced plans to distribute approximately $2.4 billion in special stimulus payments to around one million taxpayers who had missed receiving economic impact payments during the early 2020s.
In most cases, stimulus packages are an effective method for regulating the economy. However, critics argue that they hurt the economy. These critics believe that providing industry bailouts to struggling companies promotes irresponsible business practices and stops newer, more successful businesses from taking the place of older, struggling ones. Critics also worry that large amounts of federal stimulus money applied in a short time might cause sudden spikes of inflation, which decreases the relative value of assets held by consumers.
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