Coronavirus cash stimulus must be accompanied by a consumer psychological stimulus

The soon-to-be-signed stimulus bill provides consumers $500 billion in cash to use as they please. Normally, cash would be a sure way to stimulate the economy, because consumers would be inclined to spend most of it on goods and services.

But in our coronavirus economy, many consumers may not be driven to spend this manna from government. The cash stimulus must be accompanied by a consumer psychological stimulus (CPS) to motivate consumers to spend the cash and so grow the economy.

This need for CPS is critical, since total consumer spending on goods and services accounts for 70 percent of our gross national product. Without it, many will continue to sit on their couches, making a recession more likely.

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According to both Congress and the Department of Treasury, $500 billion in cash would be given to consumers as soon as the bill is signed, because they recognize the dire need to revive the economy. The bill would also provide about $1 trillion in loans to small and large businesses to continue their operations.

Cash stimulus to consumers would vary according to income and family size. At the time of this writing, people making $75,000 or less would receive $1,200, and a family of four would receive as much as $3,000. All told, people would have an extra half a trillion dollars to pump into the economy.

This is a large sum, though it may not be large enough to avert a recession, especially in view of the rapid increases in the number of unemployed. And without CPS to motivate consumers to spend the cash, it would have a weaker punch.

In pre-coronavirus times, consumers would spend the $500 billion on goods and services in accordance with their tendency to spend extra money. This is known as the marginal propensity to consume (MPC). 

In the U.S. the MPC is very high, especially in comparison to other countries, because Americans prefer to spend most of their extra income than save it. The MPC vary by income level and employment situation. Consumers with low incomes, and the millions who lost or are about to lose their jobs, would spend most, if not all, of the money they would receive just to survive. Money spent creates additional rounds of spending, known as the multiplier effect (ME).

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The higher the MPC, the bigger the ME. For example, when the MPC is 90 percent, ME is 10, meaning that the $500 billion would increase GDP by ten times this amount, or by a total of $10 trillion. When MPC is 80 percent, ME is 5, and total GDP is $5 trillion. Such numbers reflect impressive GDP increases in normal, pre-coronavirus times. 

But there is nothing normal about how the U.S. economy and consumers behave as they face a pandemic. 

The coronavirus has struck consumers with heavy doses of fear, uncertainty and bewilderment and frozen their behavior. As a result, consumers would be inclined to spend much less of the government-provided cash. 

Furthermore, even if they wanted to spend all this cash, they won’t have many ways to do so, because most malls, restaurants, coffee shops, bars, theaters and cinemas are not available until further notice. Assuming the corona-time MPC goes down to 20 percent, ME becomes 1.25, resulting in GDP increase of only $625 billion, a far cry from the total GDP increase when the MPC is 90 percent, or 80 percent.

Bottom line: The GDP impact of the $500 billion given to consumers to spend will be far less than in normal times. How much less is anyone’s guess. But the longer the fear and uncertainty last, and the longer the voluntary and semi-mandated isolation continue, the less consumers will spend, and the smaller the effects of the free cash on reviving the economy.

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Using CPS, Americans can be motivated to spend the free cash and thus grow the economy, that is, to continue to spend the money like in pre-coronavirus times. Such motivation is akin to lifting people’s spirits during wartime, like what Winston Churchill provided in his speeches to his fellow Brits during WWII.           

U.S. leadership is needed to develop and use CPS to motivate consumers. Such leadership must start by acknowledging the devastating effects of the coronavirus and the severity of the situation. No denials, no excuses, no spin. The leadership must then understand and accept people’s anger and frustration and be honest and empathetic. It must instill hope and optimism for a better future — a future that can be realized through spending the cash given to them, and so improving everyone’s economic situation. 

Such leadership must be knowledgeable and trusted by consumers to be effective. This is not the time for blaming anyone, any country, or any party. Everyone is in the same boat, which could sink at any moment.

So far, the leadership has shown resolve in designing a big monetary stimulus plan. It must now rise to the occasion and come up with a consumer psychological stimulus to spur consumer spending in order to revive the economy. Can it? Hope springs eternal. 

Avraham Shama is the former dean of the College of Business at the University of Texas, The Pan-American. His book, “Dawn of The Cyberwars,” is forthcoming.