BERKELEY, Calif. (Project Syndicate) – With the staggering sweep of Democrats in Georgia’s two second-round Senate elections giving them control of both houses of Congress next week, the idea of $ 2,000 stimulus checks for each household is sure to make a comeback. the United States on the agenda. But while targeted relief for the unemployed should certainly be a priority, it’s not clear that the $ 2,000 checks for everyone will actually help sustain America’s economic recovery.
“Having reminded Americans of the precariousness of their world, the pandemic is precisely the kind of painful experience that induces fundamental changes in behavior. ”
So when it’s safe to get out again, the spending floodgates will open, supercharging the recovery. The Fed has already vowed to “look through,” that is, ignore, any temporary inflation that results from this euphoria. Bullish Case: ‘Trillion on Trillion’ in Stimulus Will Push 10-Year Treasury Yields to 2% by Year-End, Says Best Forecaster People Save More After Traumatic Events But We Shouldn’t Rule Out the Possibility From an alternative scenario, consumers, on the other hand, show a continuous moderation, which caused the high savings rates of last year to persist. Before the COVID-19 crisis, about two-thirds of American households lacked the savings to replace six weeks of take-home pay. Having reminded Americans of the precariousness of their world, the pandemic is precisely the kind of painful experience that induces fundamental changes in behavior. We know that experiencing a major economic shock, especially in young adulthood, can have a lasting impact on people’s beliefs, including beliefs about the prevalence of future shocks. Such shifts in perspective are consistent with psychological research showing that people rely on “availability heuristics,” intellectual shortcuts based on recalled experience, when assessing the probability of an event. For those parents who are unable to put food on the table during the pandemic, experience will establish a heuristic that will be hard to forget. In addition, neurological research shows that financial stress, even due to large shocks, increases the levels of anabolic steroid hormones in the blood, making individuals more risk averse. Neuroscientists have also documented that traumatic stress can cause permanent synaptic changes in the brain that further shape attitudes and behavior, in this case plausibly in the direction of increased risk aversion. Although the pandemic looks more like a natural disaster than an economic shock, natural disasters can also affect saving patterns: saving rates tend to be higher in countries with a higher incidence of earthquakes and hurricanes. This behavioral response is greatest in developing countries, where weak building standards amplify the impact of such disasters. A study from Indonesia, for example, found large increases in both perceived risk of a future disaster and risk-averse behavior among people who had recently experienced an earthquake or flood. While the response to natural disasters may be more moderate in advanced economies, where people expect their government to compensate them, a lasting impact is almost certain to remain. Public Spending Needed The upshot is that we cannot count on an explosion of American consumer spending to fuel the recovery once the rollout of COVID-19 vaccines is complete. And if private spending remains subdued, continued support from public spending will be necessary to sustain the recovery. But putting checks for $ 2,000 in people’s bank accounts won’t solve this problem, because unspent money doesn’t stimulate demand. With interest rates close to zero, the availability of additional funds will not even encourage investment. Sending $ 2,000 checks around the world would be the tax equivalent of pulling a string. Fortunately, there is an alternative: President-elect Joe Biden‘s $ 2 trillion infrastructure plan would mean additional jobs and spending, which is what the post-pandemic economy really needs. Better still, with the prevailing low interest rates, this option would stimulate job creation without crowding out private investment. Although Biden’s plan will require more government loans, infrastructure spending that has a 2% rate of return will more than pay off when the yield on 10-year Treasury notes TMUBMUSD10Y, 1.079% is 1.15%. By increasing production, these expenses reduce rather than increase the burden on future generations. The International Monetary Fund estimates that, under current circumstances, a well-targeted infrastructure investment pays for itself in just two years. Obviously, the “well-run” part is important. President Donald Trump was right that the Coronavirus Relief, Relief and Economic Security Act (CARES) was loaded with pork, not least his own “three martini lunch tax deduction.” ” for the companies. There are many reasons to question whether Congress can do better in crafting an infrastructure bill. In response to this problem, countries like New Zealand have established independent commissions to design and monitor infrastructure spending initiatives. If COVID-19 changes everything, then perhaps it can change the way the United States government organizes infrastructure spending. The creation of an independent infrastructure commission with real powers would go a long way towards reassuring skeptics and ensuring recovery from the risks posed by the lingering behavioral effects of the pandemic. This comment was posted with permission from Project Syndicate: An Infrastructure Vaccination for America’s Recovery. Barry Eichengreen is a professor of economics at the University of California, Berkeley, and a former senior policy advisor to the International Monetary Fund. His latest book is “The populist temptation: economic grievance and political reaction in the modern era. ”More from MarketWatch: Democrat-controlled Senate could restore weekly unemployment to an additional $ 600. COVID-19 will cause twice as many homeless people as the Great Recession, researchers say. still