A survey by the U.S. Census Bureau adds to the argument that direct payments to households are the most efficient way to help families in need.
The policy is providing an increase in spending among those with the highest marginal propensity to consume.
The recent innovation in the child tax credit—taking half of it and turning it into six lump-sum payments over the course of a year—has yielded some interesting and economically relevant information.
The data shows that the policy is providing an increase in spending among those with the highest marginal propensity to consume—the very people who are intended to benefit from the child tax credit. And that spending has a multiplier effect, leading to a boost in overall economic activity.
In the weeks after receiving the first midyear payment of the tax credit, 68% of households reported spending it on food, 37% on purchased clothing, and 22% on school books and supplies, according to the Census Bureau’s Household Pulse Survey released last month. The survey was initiated last year as a way of measuring the impact of the pandemic.
This is aligned with the 1% increase in income and 0.3% advance in consumer spending in July, which is when the lump sum payments started arriving in consumer bank accounts.
To put this in a greater context, personal income excluding government transfers increased at a more subdued 0.2% in July.
The policy, which started around July 15, should bolster income and spending in households just as young children are returning to school.
Enabling children to return to school will allow more women age 25-54—those in their prime working years who have borne the brunt of the pandemic in the workforce—to get back to their jobs.
In contrast, only 7% of the respondents in the survey reported spending on recreation, sporting goods and games, about the same as the percentage who used the money to pay down credit cards.
The takeaway
The government’s broad income assistance programs during the pandemic have succeeded in lifting families out of poverty and reducing food insecurity.
The child tax credit is a continuation of those programs and its success bolsters the case for its permanent extension.
For more information on how the coronavirus pandemic is affecting midsize businesses, please visit the RSM Coronavirus Resource Center.
