An economic stimulus is an action by a government to encourage private-sector economic activity. To stimulate the economy, the government adopts targeted, expansionary policies.

How an Economic Stimulus Works

Over the course of a normal business cycle, governments try to influence the pace and composition of 澳洲幸运5官方开奖结果体彩网:economic growth using various tools at their disposal. Central governments, including the U.S. federal government, use fiscal and monetary policy tools to stimulate growth. State and local gov꧟ernments can also engage in projects or policies that stimulate private-sector investment.

An economic stimulus is a targeted and conservative approach to expansionary economic policy. Instead of using monetary and fiscal policy to replace private-sector spending, an economic stimulus is supposed to direct government 澳洲幸运5官方开奖结果体彩网:deficit spending, tax cuts, lowered interest rates, or new credit creation toward key sectors of the economy to take advantage of powerful 澳洲幸运5官方开奖结果体彩网:multiplier effects that will indirectly increꦅase private-sector consumption and investment🎀 spending.

Policy tools for implementing an economic stimulus include 澳洲幸运5官方开奖结果体彩网:lowering interest rates, increasing government spending, and the purchase of assets by the central bank in a process known as 澳洲幸运5官方开奖结果体彩网:quantitative easing.

Supporters of economic stimulus plans believe that increased private-sector spending can boost an economy out of a recession. The goal is to achieve this stimulus response effect so that the private sector can do most of the work to fight the recession and to avoid risks such as 澳洲幸运5官方开奖结果体彩网:hyperinflation or 澳洲幸运5官方开奖结果体彩网:government defaults that might come with massive government deficits. By stimulating private-sector growth, stimulus deficit spending could potentially even pay for itself through higher 澳洲幸运5官方开奖结果体彩网:tax revenues resulting from faster growth.

Fiscal Stimulus vs. Monetary Stimulus

An economic stimulus in the United States may be related to 澳洲幸运5官方开奖结果体彩网:monetary policy carried out by the Federal Reserve. Other forms of economic stimulus are driven by 澳洲幸运5官方开奖结果体彩网:fiscal policy, with lawmakers directing tax policies and government spending toward areas that they believe will jump-start the ec🐻onomy.

Fiscal stimulus refers to policy measures undertaken by a 澳洲幸运5官方开奖结果体彩网:government that typically reduce taxes or regulations—or increase government spending—to boost economic activity. Monetary stimulus, on the other hand, refers to 澳洲幸运5官方开奖结果体彩网:central bank actions, such as lowering interest rates or purchasing securities in the market, to make it easier or cheaper to borrow and invest. A 澳洲幸运5官方开奖结果体彩网:stimulus package is a coordinated combination of fiscal and monetary measures put together by a government to stimulate a floundering economy.

Risks

There are several counterarguments regarding the efficiency and long-term benefits of economic stimulus plans. Some theorists believe that an economic stimulus can actually delay or prevent a private-sector recovery from the actual cause of a recession. According to this viewpoint, it is misguided to target an economic stimulus toward industries that are hardest hit by the recession, because these are precis💎ely the areas of the economy that may n꧒eed to be cut back to adjust to real economic conditions.

Other critiques about the effectiveness of economic stimulus plans revolve around how people respond to economic incentives. 澳洲幸运5官方开奖结果体彩网:Economists h👍ave argued that consumers and businesses adjust their behavior in ways that offset the stimulus policy. The response to the stimulus will n💦ot be a simple multiplier effect but will also include these offsetting behaviors.

One such theory is 澳洲幸运5官方开奖结果体彩网:Ricardian equivalence, named for David Ricardo’s work dating back to the early 1800s, which suggests that consumers internalize government spending decisions in a way that counterbalances stimulus measures. In other words, Ricardo argued that consumers will spend less today if they believe they will pay higher future taxes to cover government deficits.

Other critics of economic stimulus plans point to the 澳洲幸运5官方开奖结果体彩网:crowding out of private investment. 澳洲幸运5官方开奖结果体彩网:The crowding-out critique suggests that government deficit spending will reduce pℱrivate investment in two ways:

1. The rising 澳洲幸运5官方开奖结果体彩网:demand for labor will increase wages, which hurts business profits.
2. Deficits must be funded in the short run by debt, which will cause a marginal increase in 澳洲幸运5官方开奖结果体彩网:interest rates, making it more costly for businesses to obtain the financing necessary for their own investments.

Examples of Economic Stimulus Programs

The economic shockwaves from the 澳洲幸运5官方开奖结果体彩网:financial crisis of 2007–2009 and the 澳洲幸运5官方开奖结果体彩网:COVID-19 pandemic prompted fiscal and monetary policymakers to take action.

Cash for Clunkers

Policymakers often attempt to direct the benefits of an economic stimulus toward specific industries or sectors. When the U.S. auto industry struggled during the 澳洲幸运5官方开奖结果体彩网:Great Recession, the government instituted the 澳洲幸运5官方开奖结果体彩网:Cash for Clunkers program, which incentivized consumers to buy new, fuel-efficient vehicles to replace their old cars. Signed into law by then-President Barack Obama and lasting for a short time frame in the summer of 2009 until its allocated funding was depleted, Cash for Clunkers was intended to be a win-win by stimulating a critical industry during the recession while also reducing pollution.

However, critics argued that Cash for Clunkers led to a used vehicle shortage and higher car prices, with much of the benefit going to foreign car manufacturers. The program succeeded in nudging consumers to trade in their gas guzzlers, but it may have simply pushed forward a transaction that was going to happen anyway, and the economic effect was short-lived. Even the environmental impact was mixed, as the discarded clunkers generated hazardous waste from metal shredding, and the program did not represent a cost-effective way to cut emissions.

Coronavirus Aid, Relief, and Econom꧙ic Security (CARES) Act

The Coronavirus Aid, Rel𝓰ief, and Economic Security (CARES) Act, signed into law by then-President Donald Trump on March 27, 2020, aimed to counteract the economic turmoil set into motion by the global COVID-19 pandemic. With concerns that the U.S. economy was heading into a recession, policymakers passed a record $2.2 trillion stimulus bill to support large and small businesses, industries, individuals, families, gig workers, independent contractors, and the healthcare system.

The CARES Act took a multifaceted approach to stimulate the ailing economy during the early stages of the pandemic. The legislation put money directly into the pockets of U.S. consumers, authorizing direct stimulus payments of $1,200 per adult plus $500 per child for households making up to $75,000, with additional tax rebates for families with children. The stimulus package also boosted unemployment benefits and helped small businesses hold onto their employees. As far as targeting individual hard-hit industries and sectors, the CARES Act directed billions toward airlines to keep planes in the skies throughout the pandemic.

In addition to standing out for its massive price tag, the CARES Act pushed the boundaries of economic stimulus by directly replacing large swaths of private-sector spending that🤡 had been destroyed by the coronavirus. While the CARES Act may have been a needed response to the unprecedented economic shock of the pandemic, the long-term impact of the stimulus package remains difficult to quantify.

The Bottom Line

An economic stimulus is a monetary and/or fiscal policy that a government 𝕴puts in place to energize economic activity i𓂃n the private sector. Policymakers aim stimulus efforts at critical areas of the economy with the hope that the multiplier effect will provoke broader economic growth.

There is still plenty of debate surrounding the long-term impact of economic stimulus programs. Proponents argue that a targeted economic stimulus can be a vital recession-fighting tool that avoids the risks associated with more drastic measures. Meanwhile, critics say that economic stimulus packages may have unpredictable and negative impacts in the long term.