Economic Stimulus: A Game-Changer for the Economy

The COVID-19 pandemic has taught us a valuable lesson: fiscal stimulus can have a significant impact on the economy, much more so than monetary stimulus. This year, we are seeing a substantial amount of fiscal stimulus, which could potentially boost economic growth.

Fiscal Stimulus in Germany

Germany is a prime example of a country that is experiencing a surge in fiscal stimulus. Economist Carsten Brzeski compares Germany’s stimulus to a ketchup bottle – nothing for a long time, and then a sudden splurge. This splurge is coming from infrastructure and defense spending. We may already be seeing the effects of this stimulus, with recent data showing solid new orders and production numbers.

Fiscal Stimulus in the US

In the United States, the government is providing support through last year’s tax bill. Many provisions, such as eliminating taxes on tips and overtime, are retroactive to early 2025. According to James K, this could mean that 2026 will be a record year for tax refunds. The chart below shows that these payments typically peak sharply at the end of February, with lower to middle-income households standing to benefit the most.

The "Tariff Rebate" Idea

Another potential source of fiscal stimulus in the US is President Trump’s "tariff rebate" idea. Although it has been quiet lately, the idea of direct cash payments could resurface, especially with the midterm elections approaching. However, there are many questions surrounding how it would be funded, particularly if emergency tariffs are struck down by the Supreme Court. Additionally, it is unclear whether Congress would agree to it.

The Potential Impact on the Economy

The question remains whether all this fiscal stimulus will finally help to soften the "K-shaped" divide and enable the bottom half of the population to spend more like the top half. With job insecurity high and interest rates still elevated, it is possible that much of the money will go towards debt repayment rather than spending, unlike the early COVID-19 stimulus checks. Furthermore, any boost could be diluted by the expiration of Affordable Care Act subsidies, which are driving health insurance costs sharply higher.

Conclusion

In conclusion, the current fiscal stimulus has the potential to be a game-changer for the economy. With countries like Germany and the US implementing various forms of stimulus, we may see a significant boost to economic growth. However, there are also potential challenges and uncertainties that could impact the effectiveness of the stimulus. As the situation continues to unfold, it will be important to monitor the effects of the fiscal stimulus and adjust policies accordingly to ensure that the benefits are felt by all segments of the population.