COVID-19 Stimulus Package – More Important to Move Fast than Precisely Correct

Yesterday, millions of Americans found government stimulus money deposited into their checking accounts. This is part of the CARES Act, the $2.2 trillion stimulus package to provide economic relief. Interestingly, many unexpecting Americans also received money.

To cover the basics: for a single filer, you qualify for a stimulus check of $1,200 if your adjusted gross income is less than $75,000. For every $100 above the income level, the stimulus check amount reduces by $5.

Misplaced Stimulus Money

So, if your annual salary is $120,000, you’d think you wouldn’t receive a stimulus check. Yet millions of Americans above the income threshold found a check in their bank account from the IRS. Why? Recent graduates.

The class of 2019 graduated in May/ June of 2019 and likely started working in the months that followed. Take an MBA graduate working in management consulting with an annual income of $150,000. Assuming they started their new job in July, their 2019 tax returns would show earnings of $75,000. Not $150,000 because they only worked half a year.

The stimulus check is based on adjusted gross income, not annual salary

What does this mean? In my view, it means stimulus money went into the pockets of recent graduates that are earning well above the intended income levels. However, the misplaced money to recent graduates is a small percentage of the total package.

There were 3.9M graduates in 2019 (according to Education Data) with a quarter getting associate degrees, half getting bachelor degrees, and a quarter getting masters and doctorate degrees. With a loose assumption that half Bachelors, all Masters, all Doctorate graduates have annual incomes above the threshold, that’s $2.3 billion of misplace stimulus money, representing 1% of the CARES stimulus package. If we loosely assumed all college and graduate students receive the stimulus check but don’t need it, that’s ~$10 billion misplaced.

Surgical vs Blunt Fiscal Policy

I’ve been thinking about this idea of surgical fiscal policy vs blunt fiscal policy. Surgical fiscal policy is getting money directly to the people and businesses that need it, which takes time and maximizes cash efficiency. Blunt fiscal policy is simply getting money into the economy quickly, which may result in money getting to the wrong places.

Let’s revisit the financial crisis of 2008. There was plenty of criticism about how the fed handled the crisis: notably that the tax payers bailed out the financial institutions that caused the crisis. But what people do not think about is the disaster they didn’t see. The fed was not thinking about every individual American home. Rather, the fed had to create market stability. To stabilize the market, money had to go directly to the financial system. And to mitigate foreclosures, the government nationalize Fannie Mae and Freddie Mac. While unpopular, we don’t know the disaster that was avoided.

Traditionally, government money requires heavy vetting first before getting the money. This time, the US government moved quickly on the SBA PPP loan and CARES Act. In about a week, almost all $350 billion of the initial loan program has been approved and spoken for. For the CARES Act, sure enough, billions of dollars went directly into people’s bank accounts. The government is deploying it first, then vetting after the fact.

The government is acting aggressively because the downside consequences of moving slow are severe.