December's $600 stimulus boosted spending by 30% - and Biden's new plan calls for checks twice as large

• President-elect Joe Biden's $1.9 trillion stimulus package includes a $1,400 top-up for stimulus checks, bringing the total distributed amount from December to $2,000.
• These kinds of direct payments are intended to encourage consumers to spend, stimulating the economy.
• BofA Research found those who received $600 checks in the last stimulus spent 30% more than those who didn't, and as a result upgraded its forecast for GDP growth to 4% in the first quarter, from 1% previously.
• The stimulus is the first step in Biden's attempt to fix America's K-shaped recovery, in which the wealthy are doing fine and the rest are struggling.

President-elect Joe Biden introduced his plan for a $1.9 trillion stimulus package on Thursday. Called "The American Rescue Plan," the package would provide another infusion of federal aid to stimulate the economy as the pandemic continues to sweep the nation.

That includes a $1,400 top-up for stimulus checks, bringing the total distributed amount from December to $2,000. It's set to make a big difference in consumer spending.

The $900 billion stimulus which passed at the end of 2020, lambasted in some corners for not being hefty enough, has already helped stimulate the economy. Those who received $600 stimulus checks as part of December's package saw a 20% year-over-year increase in spending since January 1, according to a recent Bank of America Research report which cited proprietary bank data on consumer spending. They also spent 30% more on their cards compared to those who didn't receive a check.

Citing the increased spending, BofA forecast GDP growth of 4% (up from 1%) in the first three months of 2020, before slowing to 5% the following three months (down from a previous projection of 7%). The bank expects overall GDP growth of 5% in 2021, up from the prior 4.6% forecast. (BofA could further revise its forecast once the $1.9 trillion package passes.)

Now that Americans will have even more extra money in their pockets, it's likely that spending will continue to rise among those who receive stimulus checks, continuing to prop up the economy.

$1,400 checks are intended to help America's K-shaped recovery

BofA's economic growth forecast indicates that Biden's near $2 trillion package could be a promising tool as America's K-shaped recovery continues to intensify. Those at the top are seeing jobs recover and their wealth grow while the bottom of the K struggles to pay bills.

It's partly because the tools to used to save America's economy so far have mostly helped wealthy Americans. In March, Federal Reserve Chairman Jerome Powell implemented a policy known as quantitative easing, in which the central bank did the rough equivalent of "printing money" by adding credit to its bank accounts, buying its own debt and thus increasing the supply of money in the economy. He also kept interest rates low to encourage spending.

These two drivers helped stocks recover, incentivizing the wealthy to pump money into the stock market as they sought a sizeable return. Relatedly, America's household wealth hit a record high of $123.52 trillion in the third quarter.

But most Americans don't own stocks, and that's where stimulus is supposed to come in. After the $2.2 trillion stimulus package passed in March, US savings rates soared to an all-time high of 33% in April. When that package expired in July, Americans were left waiting out eight months of political gridlock before a second package was passed, with individuals falling into poverty and many small businesses closing their doors. Meanwhile, the Fed's quantitative easing continued uninterrupted, and the stock market finished the year on a record high.

Powell has repeatedly advocated for more stimulus spending, and Joe Biden's $1.9 trillion stimulus package looks like a clear response. If it passes, it may make Bank of America's 5% annual GDP growth forecast look tame.