As President Biden advocated for a stimulus check program in early 2021, he acknowledged that “The price tag will be high,” but it is necessary “to keep the economy from collapsing this year.”  However, even though the checks have gone out there is no guarantee they will have the desired effect on the economy.  With the stimulus just released, it is important to recognize that the effect it has on the economy depends entirely on how people actually use the money. 

When the first round of stimulus checks was released in the spring of 2020, many recipients did not spend their checks.  In fact, according to a June 2020 census study, the only demographic that acted as one would expect were those with an income less than $25,000 per year, of whom 87 percent spent the stimulus on much needed essentials and rent (this same phenomenon of the lower income classes behaving closest to economic models’ predictions is widely documented).  However, according to the National Bureau of Economic Research, over a third of recipients saved the entirety of the money and half of all recipients used it to pay off debt.  Seeing as banks have been lending out significantly less money as of late, much of this money is thus removed from the economy.  Only 15 percent of recipients used the entirety of the check.  As a result, the stimulus did not achieve its full potential.  According to MarketWatch, only about 15 percent of Americans making above $75,000 a year engaged in “relief spending,” a fancy name for “bought an Xbox or new TV set,” as coined by Walmart CEO Doug McMillon, with their stimulus checks.  In other words, excluding those who needed the money urgently, many Americans simply stashed the cash.

A likely reason for this is the uncertainty that accompanied a global pandemic.  Fear of the future overrode self-indulgent tendencies, and many who were not in dire straits chose to save for a rainy day.  As the next round of stimulus checks has just gone out, this issue needs to be addressed, as the pandemic is still ongoing; to ignore it is to essentially waste a large part of $600 billion as much of the stimulus goes unused.  It seems the Biden Administration subscribes to economist John Maynard Keynes’s theory that the propensity to consume unexpected additional income varies across economic classes, and that this is simply how life goes.  The administration seems to be satisfied with the effects of the stimulus, but the negligence to consider options to increase the spending of stimulus money leaves behind much of the package’s potential.  To achieve the true potential of the billions of dollars dished out, the Biden Administration needs to employ some behavioral theories: the concepts of obedience of authority, social proof persuasion, and the house money effect. 

The obedience of authority has often been the focus of social psychologists and more recently, economists.  Countless studies, such as the Milgram Experiment in the 1960s, have demonstrated that humans have an innate desire to obey authority.  Furthermore, they are willing to do so at the expense of their morality, independence, or even financial interest.  In 2006, a study was published in Experimental Economics which details how people even forgo financial gain to obey a perceived authority.  The researchers suggested that participants pay a voluntary tax – and they did.  In other words, human desire to obey authority exceeds financial interest. 

Similarly, when people are uncertain, they are easily influenced by social proof.  For instance, if someone is searching for a new book to read, they often check the “new and notables” section, relying on the bookstore staff to choose a book for them.  Social proof also takes the form of peer influence.  If a product is highly reviewed on Amazon, people are more willing to buy it.  When people are uncertain, they often look towards an authority for subtle guidance. 

            People are especially open to such influences when they receive any sort of money other than their usual salary.  According to the National Endowment for Financial Education, about 70 percent of people who win the lottery go broke within a few years.  This tendency is present whenever people “win” money, whether it be in a casino or from inheritance.  As they win money, their risk tolerance changes.  In casinos, people have a much higher risk tolerance for their profits than the money they walked in with.  Richard Thaler, winner of the 2017 Nobel Prize in Economics, and economist Eric Johnson coined this the “house money effect” in 1990 (because people see their wins as the house’s money).  This is largely because many people engage in two-pocket accounting, grouping money differently based on its source.  In other words, directly working for money leads to people valuing it far more.  Though stimulus checks are not exactly blackjack profits, the house money effect is still present.  As people receive stimulus, they likely regard it as more expendable than their standard income source, because they see it as a separate type of money.  This has significant influence on how they spend it.

By examining the behavioral side of spending, the Biden Administration can drastically increase the benefits from the stimulus package on the economy.  The President is an authority figure with a massive audience.  President Biden could hold a press conference and play into his persona by suggesting that people treat themselves in this trying time and thus encourage domestic spending.  Ads could be run praising people who support small businesses, utilizing social proof persuasion.  A strong sense of patriotic duty could be invoked, and check spending spun as the American people playing their part in building up the economy.  There are many paths that the administration can take.  Coupled with the house money effect, this would likely influence many people to put some of their stimulus into the economy.  These efforts are needed urgently now that the checks are in the hands of recipients.  Once people lump the money in with their savings, the house money effect no longer applies, and people will be less willing to spend the checks.

Disappointingly, the administration has taken no steps to address this.  The window of opportunity is closing, and the American economy is going to miss out.