With President Joe Biden’s legislative agenda halted in Congress, the U.S. bailout plan – a $ 1.9 trillion stimulus bill passed by Democrats in March 2021 – could be his greatest achievement.
But has this contributed to the current inflationary mess in the country?
The Massive Expenses Act, which included $ 1,400 checks for each family member, generous extensions of unemployment insurance and child tax benefits, and hundreds of billions in state and local government assistance, was designed to help people in need and to stimulate economic demand, and became.
However, some economists say that all this comes at the cost of worsening inflation. New figures from the consumer price index, released on Wednesday, show prices have risen 8.3 percent from a year earlier. And “core inflation,” which excludes volatile energy and food prices, rose 0.6 percent in just one month.
Countries around the world are struggling with inflation due to pandemic disruptions, but Biden’s stimulus has made the problem of US inflation more serious, at least to some extent. “I think we can say with certainty that we would have less inflation and fewer problems to solve now if the US rescue plan was optimally sized,” said Wendy Edelberg, a senior economic research associate at Brookings Institution.
Inflation has brought with it two major problems. The first is now clear: because most Americans’ wages have not risen enough to cope, real (inflation-adjusted) wages are declining at the highest rate in four decades.
The second problem is, if inflation remains so stable, what could lead to its restraint. The Federal Reserve has begun raising interest rates in a bid to cool the economy. They try to do this carefully, striving for a “soft landing”. But if demand and investment eventually fall in response, the United States could face a painful recession.
What the future holds is unclear, but to understand how we got here is worth re-evaluating the past. The American rescue plan was drawn up with good intentions, but it created real problems.
The United States had significantly worse “core” inflation than comparable economies
It is important to understand the broader context. Inflation is happening around the world, caused by pandemic disruptions and exacerbated this year by Russia’s invasion of Ukraine and the blocking of Covid-19 in China. Even before the US bailout plan was adopted, “the seeds for a high-inflation environment have already been planted,” said Mark Goldwein of the Committee on the Responsible Federal Budget.
But in terms of the exact amount of inflation, the United States stands out. And he began to stand out shortly after President Biden took office.
From 2021 onwards, what is known as “core inflation” is significantly higher in the United States than in other rich countries. (Core inflation is a common indicator that excludes food and energy prices, which tend to be volatile, in order to try to get a better idea of overall price levels and inflation in an economy.)
A recent article published by the Federal Reserve Bank of San Francisco does just that. The authors – Òscar Jordà, Celeste Liu, Fernanda Nechio and Fabián Rivera-Reyes – compared core inflation in the US with the average of eight rich countries (UK, France, Germany, Canada, the Netherlands, Norway, Sweden and Finland). Before 2021, these and the United States had similar inflation rates. Then the United States exploded.
Federal Reserve Bank of San Francisco
The authors do not wonder why they think this, writing: “Estimates suggest that fiscal support measures designed to counter the severity of the economic impact of the pandemic may have contributed to this divergence by raising inflation by about 3 percentage points. by the end of 2021. “
That is: the United States has done much more incentives than these other countries and is now seeing much higher core inflation. And the most notable stimulus is Biden’s $ 1.9 trillion US bailout plan – because it was passed after more than $ 3 trillion had already been spent to boost Trump’s economy, much of it. this was approved only three months earlier.
“We put gasoline on the fire. This is essentially what ARP did. “It was almost written as if we hadn’t given a trillion-dollar incentive in December,” Goldwein said.
This discrepancy in core inflation between the United States and comparable countries continued in 2022, as Jason Ferman, a professor of economics at Harvard Kennedy School and former chairman of President Barack Obama’s Council of Economic Advisers, said on Twitter (although it’s also worth it. to note Europe has been affected by rising energy and food costs since the invasion of Ukraine).
Inflation in the United States remains * much * higher than inflation in the euro area. This is the 12-month change in the main HICP, a somewhat comparable measure for the two economies.
The United States is constantly with about 4 percentage points. higher than Europe. This is a HUGE difference. pic.twitter.com/pboWfRluRR
– Jason Furman (@jasonfurman) April 12, 2022
There are differing opinions among economists about how much higher inflation in the US in 2021 (an increase of 7 percentage points, including energy and food prices, and an increase of 5.5 percentage points, excluding them) can be due to the American rescue plan. Michael Strain of the right-leaning American Enterprise Institute estimated that the law added 3 percentage points. However, Dean Baker of the center-left Center for Economic and Political Studies set the figure at 1-2 percentage points.
Some economists with lower scores still say it is a mistake to place too much blame on the US bailout plan, which they say is only a small contribution to inflation. The White House shares this view. A senior White House official, speaking on condition of anonymity, said there were other potential explanations for the different levels of core inflation in the United States and Europe, and that the arguments blaming Biden’s incentives were simply correlated.
The United States also stands out from other countries in a more favorable way: it had a faster and stronger economic recovery in 2021. This really seems to be partly due to the cost of stimulating Biden.
However, international comparisons show that the United States would have gone back without the US rescue plan, albeit more slowly. “I think we would have a slower recovery, we would have more suffering along the way,” Furman said in an interview. “But almost everyone, including countries that have done essentially nothing, have recovered. And the side effects [in the US] they were quite problematic. “
And if temporary aid has worsened into a long-term inflation problem, that’s not great. Inflation-adjusted wages have seen their most dramatic annual decline in 40 years. The main fear is that inflation will become (or is already becoming) a self-fulfilling prophecy as consumers and producers begin to expect it and act accordingly. Then there may be a different kind of economic pain as the Fed tries to control inflation. “After all, if you have a situation where wages are out of step with prices and the risk of a recession is really quite high, that’s not a good situation,” Strain said.
Criticism of the American rescue plan
The case that the US rescue plan contributed to inflation consists of three parts: its size, its time and cost details.
First, the amount: $ 1.9 trillion. Many economic analysts at the time argued that this was too great. saying that their models show so many new costs (in addition to the trillions already spent) that are not needed to stimulate the economy and risk overheating it and causing inflation. “I was on the expansionist side of every fiscal debate in my life until last year,” Furman said. “But quantities do matter. It just can’t get any better. “
In early 2021, a group of 10 Republican senators offered an incentive of $ 618 billion as a counter-proposal to Biden. But Democrats, haunted by what they saw as political mistakes by the Obama administration, rejected it and decided it was better to do as much as possible than spend too little.
“I think the sweetest place could be an American rescue plan worth $ 300-500 billion,” Strain said. “This could have given us many of the benefits of ARP without causing such a rapid rise in prices. The ARP was so large that this kind of marginal dollar went to inflation, not to increase economic output.
The second was time: this money was spent mostly quickly (about half was spent last year), not distributed over a longer period of time. This sent a lot of money into the economy last year – which was the goal – except that supply could not cope and prices rose.
The third was composition: what the plan involved. Much of the ARP’s spending has done much to help people in need, reducing child poverty and child hunger. But other parts were not well targeted. $ 350 billion has been allocated to state and local governments on the outdated assumption that they will face budget crises, but by early 2021 it was clear that most states were not facing such crises. (A White House official said that while many states did not need the money, cities still needed it and that the money was being spent more slowly, so they probably haven’t contributed much to inflation yet.)
Checks were another problem. Due to a political promise made by Democrats for one against Trump and trying to win the runoff in the Georgia Senate, the checks cost about $ 400 billion, and some of them went to families whose finances are already in good shape. Giving money to people who don’t need it is not necessarily a bad thing in itself. But if the consequences are greater …
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