How Americans actually spent their stimulus checks in 2008

Kozuch Director of the Purdue University Research Center in Economics Kevin Mumford joins Yahoo Finance’s Zack Guzman to discuss how Americans spent their stimulus checks in 2008 and his expectations for a stimulus package this year.

Video Transcript

ZACK GUZMAN: Meantime, Americans are getting prepared, some Americans, I should say-- are getting prepared for a stimulus check in the amount totaling potentially $1,200 for those making below $75,000 in 2018 or 2019 tax filing years. But when we look at that, a lot of questions are being raised about how many Americans are actually going to be spending that money rather than saving it.

And our next guest knows that well, and looking back into the 2008 stimulus checks as well. I want to bring on Kevin Mumford. He is the Kozuch Director of the Purdue University Research Center in Economics, as well as an economics professor.

Professor Mumford, thank you so much for joining us. When you look at this data, though, back in 2008, obviously, the stimulus checks were smaller than they are planned to be this time around. But what do you expect in regards to Americans spending some of that money in a lockdown situation?

KEVIN MUMFORD: This isn't the first time the government has sent out these types of checks. You're right. I mean, it wasn't just 2008. We also sent these same kinds of checks in 2001. That was the beginning of the Bush administration. So we have experience seeing the government try to stimulate the economy in this way. The experience from both of those previous episodes is that over the next initial three, four months, only about a quarter of the money the government sent out was spent.

And that was in a very different kind of economic situation. I mean, if you compare the 2008-2009 Great Recession to what we're experiencing now, the Great Recession looks really slow in coming. I mean, it was months and months of indications and unemployment rising really quite slowly, actually, over a long period of time. This is just so unusual in how rapid the-- certainly the unemployment indications coming in. And so when you think about what spending will be like, it's going to be different than what we learned about in 2001 and 2008.

ZACK GUZMAN: Yeah, I mean, we got those numbers last week, when we looked at the unemployment claims-- 3.28 million, and now, expected by some projections to be as high as 5.5 million. We'll see what happens tomorrow.

But when you look at that, I mean, the suddenness is what a lot of people are talking about. So how does that change things here? And how might it be better-- I mean, we talk about a record $2 trillion stimulus package here. How could that money be better spent and maybe getting it into the hands of Americans who might need it most, those who have lost their jobs or who already were unemployed to begin with?

KEVIN MUMFORD: Well, a big part of the stimulus, this $2 trillion stimulus, was the unemployment insurance increase. So that's already taking place right now. It's that there's an additional $600 of federal transfer to the states for each person that says, you know, we're going to increase unemployment benefits, weekly benefits by $600 per unemployed person.

And it's not just for the currently unemployed. It's for all those that are new, entering the system. And it's also for whole new categories of workers, right? This is going to start covering people who traditionally hadn't been covered in the past.

So that's a very effective way of getting the money to the people who are most likely to spend it because there's, you know, initial necessities that need to be purchased. That's a very effective way to do it.

Actually, sending out these blanket checks to just sort of wide swaths of Americans probably isn't the most effective way to get people to spend the money. It's not as if spending is declining right now primarily because of sort of a drop in aggregate demand. I mean, this is that we're all being asked to stay at home. And so it's harder to go out. It's just harder to spend money right now. And for many Americans, receiving the check is not going to be any sort of thing that makes a difference in their spending habits.

ZACK GUZMAN: Yeah, and we just heard from Dan Niles a little bit ago. I mean, he said that he was laughing at the prospect that we could get a V-shaped recovery here. Just listening to everything you're saying, it doesn't sound like you necessarily think that the measures being taken right now are going to do that much to make sure that we do get the economy back on track, as soon as people are allowed out of their homes to go spend more [INAUDIBLE]. So what are your projections in terms of how long it might take for the economy to rebound from some of these dire projections of-- if you listen to the St. Louis Fed-- potentially 30% unemployment.

KEVIN MUMFORD: Yeah, that's right. That is a pretty dire projection. So first of all, I would say that, you know, this kind of stimulus is really important to happen right now. I mean, think of the alternative if the federal government had done nothing and what that would be like so. I'm not at all trying to be critical in saying we shouldn't have done this type of stimulus.

I mean, the interest rates are historically low. This is a very inexpensive time to be borrowing $2 trillion. And if the federal government didn't borrow the money, our fiscal outlook in a few years would look much, much worse.

There's probably-- there probably would have been much better ways to have designed this stimulus package to make it more efficient. I mean, if we had been targeting-- instead of sending checks out to everybody, if we had been trying to send the money to businesses to encourage them to retain their workers, that is, incentivize them to keep people on the payroll, I think that would help us with a faster recovery period because rather than go back and try to rehire people, you'd already have everybody on the books. I mean, it's a more efficient way to reduce this increase in unemployment.

Yeah, but when it comes to what the recovery is going to look like, there's a lot of jobs that are not going to be coming back. We saw this in the last two recessions as well, that as you see the drop in employment, businesses are looking at this as a chance to rebalance the type of work that they do. And so some jobs just don't come back.

There are certain sectors of the economy that are more recession proof. I mean, if you look at things like professional sports, elective surgeries, if you're looking at, you know, dental, eye doctors, this type of thing, these things will all be coming right back because there's a lot of pent up demand. [INAUDIBLE] is going to take longer.

ZACK GUZMAN: Yeah, and unfortunately, you look at some of these other things too, some-- even though they might come back, you do expect that they won't be able to make up the lost time there that we've seen, depending on how long this plays out as well. But for now, Kevin Mumford, professor at Purdue, thank you so much for joining us. Appreciate it.

KEVIN MUMFORD: Thank you.