The Democrats have the right idea over the stimulus payments – even if there are risks

President Joe Biden’s latest stimulus plan has sparked a fierce debate about who should be "targeted" to see the benefit.

The Democrats are determined to ensure that $1,400 stimulus checks reach most Americans in the face of Republican objections that they should be restricted to those most in need, citing cost among other things.

The Republican argument seems, on the face of it, to be sensible, which these days counts as a somewhat controversial statement given the dark road down which that party has travelled.

It isn’t just the political right that has raised concerns about the plan’s $1.9tn cost, either. Larry Summers, a top economic adviser to Barack Obama and treasury secretary under Bill Clinton, said the plan had the potential to trigger “inflationary pressures of a kind we have not seen in a generation”, hitting the dollar and dealing a damaging blow to financial stability. If he’s right on the latter point, the impact would be global.

Limiting payments to the poorest Americans would reduce the risk and the cost while yielding the most stimulus bang for every federal buck because low to middle income groups spend a higher proportion of what they make than those who are better off. There is data to back that up.

When a trio of economists tracked the effects of last set of $600 checks, they found that households in the low-middle income bracket immediately spent a significant portion of the money they received.

The picture was different higher up the income scale. Writing in the New York Times, the economists said their early estimates showed that households making more than about $75,000 per year spent had spent less than $45 of their payments.

“Based on our analysis of the impacts of the $600 checks, we predict that sending higher-income households $1,400 would cost the government $200 billion — but generate only $15bn in economy activity,” they concluded.

The case for restricting payments to those most in need would therefore seem to be compelling – although Democrats have been discussing the idea of one change to the previous checks, individuals earning more than $100,000 and couples earning more than $200,000 would not get a check.

However, the economic case for greater targeting misses a key point: When it comes to government largesse universalism is good politics and especially so far as parities like the Democrats are concerned.

Spreading stimulus payments and/or benefits as widely as possible helps to hammer home the message that everybody has a stake in the state and in society.

Wait, hang on a sec, critics would say. The wealthy already do a lot better out of government than they care to admit. Their schools are superior. Their neighbourhoods are better cared for and, likely, more secure. They have access to a range of tax breaks that aren’t available to the poor.

All true. But it’s an unfortunate fact that those benefits aren’t always recognised for what they are; the government's support isn’t always seen for what it is. A payment of cold hard cash is different and it could help make the case for more targeted support when the economy has recovered because it serves as a demonstration that government can and will help when help is needed. That it is capable of doing good things and – crucially – that it is an institution worth paying for.

In an ideal situation, people on higher incomes would of course recognise that they could afford to pay a little more in tax to help those who are worse off – and that the state is the best placed to level up an unequal playing field.

But that’s a bit like saying the world would be a better place if people were nicer to each other. We don’t live in a perfect world.

The more widely Biden distributes the stimulus cheques, the more risky and costly his plan becomes, the harder it is to justify on the basis of economic costs/benefits. However, it is smart politics and the Democrats’ stance is the right one.

It’s something Labour should think carefully about.

Similar debates have been held here, for example, over the Conservatives’ decision to remove child benefit from top-rate taxpayers. It was also economically sensible but might have served to reduce their tolerance for paying a little more to help those in need, something the more cynical among the Tories were quite relaxed about.