What Should You Do With a Check Out of the Blue?
The USA government is sending out checks to taxpayers in an effort to encourage spending which in turn will provide stimulus to the economy in the very short term. First, this is bad policy in my opinion. Second, if you support this policy the precondition is you run surpluses in order to pay for it when you want to carry out such a policy. They have not, instead they have run huge deficits. What they have chosen to do is spend huge amounts and have the taxes paid by the children and grandchildren of those the politicians are spending the money on today. I would support Keynesian government spending in a serious recession or depression - just not for a country already with enormous debts and in a very mild recession.
But ok, so the government chooses to spend your children’s taxes foolishly, what should you do now? This is very easy. Whatever is the wisest move for your personal financial situation for any windfall you receive, regardless of the source of that windfall. If all your savings needs are met there is nothing wrong with buying some toy. But most people need to pay off debt, build an emergency fund, save for retirement or something similar not get another toy. Of course would be nothing wrong with donating it Kiva, Trickle Up, the Concord Coalition or your favorite charity.
The politicians are acting like a 5 year old that wants a new toy. I can too get the new toy now :-O, Mommy you can use your credit card. So what if you already bought me so many toys you couldn’t afford by using your other credit cards and they won’t lend you any more money. Just get another one. Similar to how congress recently yet again increased the allowable federal debt limit to over $9,000,000,000,000.
The stimulus effect of spending is that if you actually purchase a new toy (say a TV), then the store needs to replace that TV so the factory makes another TV… The store, shipper, factory, supplier to the factory all pay staff to carry this out, those staff can buy new books, dishwasher… and the business may buy a new forklift or computer to keep up…
If you just sit the check on your dresser nothing happens. If thousands of us do that maybe the store cuts the hours of a staff person, they then don’t buy a air conditioner or go out to eat and then…
If you pay down debt initially very little happens. However, two things are possible (both good), in addition to your financial position improving. Either the financial institution will lend the money to someone else who can then buy a TV (which may be a personal finance mistake but would help the economy grow) or the financial institution firms up there shaky foundation (a small bit). Given the huge problems they face this is a good thing. However it doesn’t contribute to immediate economic activity and growth (no paying the store, and factory and…). So an impatient 5 year old or a politician might not see this as wise.
But those that promote the spend your government check on new toys, even though the consumer debt is now $2.54 trillion in the USA, are fools (and not the motley kind). It is just like someone saying the way you improve your current trouble is get another credit card and then you can afford the new iPhone. What we need to improve the economy is not short term appearance of improvement but fixes to the weaknesses we have. And to do that we need more paying down of debt - not the opposite.
If you insist on stimulating the economy with any check you receive - give it to a charity that will spend it. That will gain the stimulative effect and do good for society. But most people should pay down debt or save it.
Related: More Government Waste - USA Federal Debt Now $516,348 Per Household (factoring in obligations the government has but has not accounted for) - Saving for Retirement - The Great Risk Shift - What Do Unemployment Stats Mean?