Governments often turn to temporary cash transfers as a quick fix during economic downturns, believing that putting money in people’s pockets will boost consumption and jumpstart growth. A new paper by Valerie A. Ramey presents compelling evidence that this approach does not work.

Here is the context for the work:

Temporary cash transfers were widely used by governments to stimulate their macroeconomies during the Global Financial Crisis and again during COVID. Most policymakers and economists believe that temporary cash transfers are effective macro stimulus tools. . . .

My coauthors and I argue that researchers and policymakers should subject the evidence and models to what we call historical plausibility analysis. It creates a rigorous basis for choosing between models and estimates so that one is not tempted to choose the estimate and/or model that is the most convenient for the present purpose.

Ramey examines four major episodes: the 2001 and 2008 U.S. tax rebates, a 2011 Singapore cash transfer program, and Australia’s 2008–09 stimulus payments.

Across all four cases she studied, the pattern is clear: Cash transfers raised household income, but they did not meaningfully raise consumption or GDP. This finding contradicts claims that such transfers are an effective countercyclical tool.

The 2001 U.S. tax rebates, for example, saw the government issue one-time payments of $300–$600 per household. While some studies suggested that recipients spent most of the money in the first few months, the consumption aggregate data tell a different story. Disposable income rose sharply, but consumption barely moved. Households saved most of the money or paid down debt, negating the intended stimulus effect.

The same pattern appeared with the 2008 U.S. tax rebates, when the government distributed $100 billion in stimulus checks, amounting to 11 percent of monthly personal income. Again, income spiked while consumption hardly budged. Even studies claiming high marginal propensities to consume (MPC) — some suggesting households spent nearly all of the transfer — failed to explain why aggregate spending remained flat.

A similar dynamic unfolded in Singapore in 2011 when the government issued citizens a one-time S$600–S$800 cash payout. While micro-level estimates suggested that 80 percent of the money was spent, macro data showed no discernible impact on GDP. A comparable pattern was found in Australia, where aggregate data confirm that Australians saved nearly all of the transfer money, causing no meaningful boost to economic activity.

One of the fundamental assumptions behind stimulus checks is that households will spend them, raising aggregate demand. However, Ramey’s research shows that this assumption is incorrect. In every case she looked at, household saving rates surged when transfers were issued. (Incidentally, the same thing was true of transfer to the states during the Great Depression.) Consumers do not treat one-time checks as permanent income, so they store the money rather than spend it. This aligns with Milton Friedman’s Permanent Income Hypothesis, which predicts that temporary income shocks have minimal effects on consumption.

Even when consumers do spend, other factors can dilute the stimulus effect. Ramey documents that in 2008, U.S. car prices spiked by 1 percent in response to the tax rebates, as supply constraints prevented production from adjusting immediately. Instead of increasing output, the stimulus money simply raised prices, diminishing real economic gains. Additionally, if monetary policy is tightened to counteract fiscal expansion, or if consumers anticipate higher future taxes, the impact of stimulus checks is further diluted.

If one-time transfers fail to meaningfully increase GDP, are they worth the massive fiscal costs they impose? The answer appears to be no. Stimulus transfers are deficit-financed, adding to public debt without any long-term growth benefits. This is particularly problematic if countries implementing the policies fail to implement austerity measures to reduce the debt after an emergency, as the Biden administration did after Covid.

Ramey highlights how the U.S. federal debt skyrocketed following the federal government’s repeated use of stimulus payments. Unfortunately, we don’t even have the comfort of getting some significant macroeconomic payoff.

Ramey’s research provides a clear and cautionary lesson: Temporary cash transfers are a poor stimulus tool. They inflate government debt while failing to generate meaningful increases in economic activity. As economic challenges persist, it’s time to stop treating temporary transfers as a silver bullet.