Which economic stimulus works

Context: Poorly designed stimulus programmes are not just ineffective, but potentially dangerous and may lead to a potential liquidity trap. Fortunately, there are alternatives. 

Ineffectiveness of government stimulus programmes:

• Fire hose approach: devising stimulus measures is neither targeted nor precise without a massive injection of emergency liquidity.
• Fear of liquidity trap: with increase in the supply of money and only limited uses for it by households and businesses. 

• Low multiplier effect: Stimulus checks will sit idle in their bank accounts due to reduction in spending opportunities. (reserves held by US depository institutions doubled between Feb and April.)
• Increased precautionary savings: due to fear of future risks, restricts investment, spending and decreases consumption.

• High Social Cost: Stock market volatility fueled by financial speculation will discourage both consumption and the investment needed to drive the recovery.
• Temporary effectiveness: 

• According to the United Nations Department of Social and Economic Affairs (UN-DESA), theses stimulus measures may not boost consumption and investment.
• The money spent by the US ($3 million) in the form of various assistance has prolonged the lives of many enterprises by only a few months.

• Bad Policies: can contribute to inequality, sow instability, and undermine political support for the government.

Way forward: Careful designing of policies

• Reduce risks and increase incentives to spend:

• Arrow-Debreu Securities: payable at certain predetermined conditions.

• Government could bring out income-contingent loans which could be suspended if the risks due to the epidemic remain in the future.
• It could encourage the purchasing leading to increased consumption.

• Issue spending vouchers: to stimulate household consumption, as practiced in China which issues digital coupons to buy various goods and services.
• Provide assistance to firms: through the support of wage bills and other costs in proportion to their decreasing wages.