Is the stimulus to blame for high inflation?

“The American Rescue Plan, intended to stimulate the economy from the effects of the pandemic, was a massive spending package that passed in March 2021. The legislation included $1,400 checks for individuals, expansions to unemployment insurance and child tax credit benefits, and hundreds of billions in aid to state and local governments.

For months, economists have debated the American Rescue Plan’s impact on inflation. While many economists agree that the stimulus law did worsen inflation by giving people more money to spend, they continue to disagree about the extent. The debate is, in part, about what else might be to blame in the United States and globally. Inflation started shooting up in early 2021 after the package passed and has remained stubbornly high since. But even without the stimulus, inflation would have increased. The coronavirus led to factory shutdowns around the world, shipping backlogs, and labor shortages, all of which have strained supply chains and pushed prices higher.

The disagreement essentially boils down to economists’ views on how pandemic-related factors independent of the stimulus, such as a shift to working from home, have contributed to inflation and how unique inflation has been in the United States compared to other countries.”

“Increased housing costs have been a big driver of inflation — shelter is the largest component of the Consumer Price Index and makes up about 30 percent of overall inflation as measured by the index. Dean Baker, a senior economist and co-founder of the liberal-leaning Center for Economic and Policy Research, argued that new research on housing inflation helped support the idea that price gains were mostly driven by a mass shift to remote work and not the stimulus package. As people shifted to remote work, housing prices went up, and those prices in turn pushed overall inflation higher.
An analysis published by the Federal Reserve Bank of San Francisco on September 26 examined the rapid rise in housing prices and whether remote work, or other factors like fiscal stimulus, led to the increase. The authors — Augustus Kmetz, John Mondragon, and Johannes Wieland — wrote that as more people started working remotely, they sought out additional space at home. That resulted in a spike in housing demand and helped lead to a surge in prices.

The researchers estimated that remote work resulted in house prices rising by about 15 percent from November 2019 to November 2021, which accounts for more than 60 percent of the overall increase in house prices.

“It means we can’t blame the stimulus. Clearly that added to it,” Baker said. “But the main story there is this big switch to working from home.””

“Holtz-Eakin said it was clear that the package significantly drove up inflation and pointed to research from the Federal Reserve Bank of San Francisco, which published an analysis in March that found that “fiscal support measures designed to counteract the severity of the pandemic’s economic effect” could have “contributed to about 3 percentage points of the rise in U.S. inflation through the end of 2021.”

The analysis — which was written by Òscar Jordà, Celeste Liu, Fernanda Nechio, and Fabián Rivera-Reyes — found that the United States’ “core” inflation, which strips out volatile food and energy prices, rose more quickly in 2021 compared to the average rate of core inflation of other wealthy countries. Compared to the other countries — Canada, Denmark, Finland, France, Germany, Netherlands, Norway, Sweden, and the United Kingdom — the United States injected more fiscal stimulus into its economy.

“The difference is really the stimulus in the US,” Holtz-Eakin said.

But Josh Bivens, the director of research at the left-leaning Economic Policy Institute, said that inflation has been ubiquitous “across every advanced economy” since the pandemic began and he didn’t believe the American Rescue Plan was a major contributor to inflation. An analysis published in August by Bivens, Asha Banerjee, and Mariia Dzholos examined the United States’ core inflation from December 2020 to May 2022 and compared it to core inflation in other Organization for Economic Cooperation and Development (OECD) countries. To calculate the rate of acceleration in each country, the researchers took the difference between the “post-pandemic” core inflation and the “pre-pandemic” core inflation using data from 2018 and 2019.

The researchers found that the acceleration in the United States’ core inflation was “on the higher side” but was “far from the top” and not that far above the average for all other OECD countries. All but one OECD country saw an acceleration in core inflation, the researchers found. For example, Canada’s core inflation grew at a slightly slower rate compared to the United States, but Portugal’s sped up faster, according to the analysis.”

“Bivens also pointed to the Federal Reserve Bank of San Francisco’s research on housing inflation and said that price gains in the United States were mostly driven by pandemic-related events that would have occurred without the stimulus — like supply chain disruptions and increased demand for housing. And although he said he believed the American Rescue Plan had inflationary impacts, the trade-off was necessary to stave off higher unemployment numbers.”

The messy true story of the last time we beat inflation

“The monetary tightening inaugurated by Volcker was one part of an entire deflationary policy repertoire that also included union-busting and the creation of a global supply chain to hold down the costs of labor, components, and commodities.”

“The Fed might be able to choke off credit to slow investment and job creation, but it can’t create the real-world political, legal, and logistical systems that in the past have kept prices down even amid economic growth.
To truly tame prices, we can’t just turn off the money hose. We have to plan for more concrete long-term solutions to a lack of labor, commodities, and goods.”

“Volcker’s shock and central bank independence happened at the same time as Ronald Reagan’s anti-union effort; the emergence of New Democrats like Jimmy Carter and Bill Clinton, who were less sympathetic to organized labor than their New Deal and Great Society forebears; and the collapse of union membership across almost every sector of the economy except government. Volcker and his central banker colleagues were keenly aware of the importance of union power to increasing wages: The minutes of Fed meetings show that these policymakers fixated on the ability of unions to set wages even after many academic economists had moved on from the subject.”

” Just as Volcker’s rate hikes coincided with a bipartisan anti-union push, so the rise of central banks paralleled the acceleration of globalization and the creation of a world-spanning super-efficient “just in time” supply chain. New logistics infrastructure, trade deals, and methods of inventory management allowed firms to get cheap commodities and components from the other side of the world astonishingly quickly. Globalization also reinforced the attack on unions, since it allowed businesses to move factories to countries with weaker labor laws, humbling labor leaders of industrialized economies. After the 1980s, and especially after the fall of the Soviet Union, markets began to integrate many formerly communist countries with large, well-educated — but poorly paid — workforces and ample natural resources. The creation of global supply chains depended in large part on a relatively calm geopolitical scene, with no serious confrontations between “great powers,” who generally seemed to be on the same page regarding globalization.”

“It’s this model of globalization that is currently breaking down, leading to volatile rising prices. As anyone who has ordered a piece of furniture in the last two years can tell you, “just in time” has become a thing of the past. Instead of speedy manufacturing getting imported from any nation on earth, now we import their supply chain bottlenecks, as, say, plumbing component manufacturers in China hamstrung by that country’s “zero-Covid” policy hold up house completions in the United States.

While supply chain bottlenecks were widely predicted to ease in 2022, geopolitics got in the way. The Russian invasion of Ukraine and subsequent economic retaliation rocked global energy supplies, a particularly troubling economic disruption since energy is a vital component of nearly every product, and further poisoned relations between wealthy Western countries and Russia’s key ally, China, where so much of the stuff Americans buy is made. Instead of getting more cheap electronics from China, the world’s second-largest economy, the US is sanctioning the chip industry there.

If the Federal Reserve is largely removed from the internal dynamics of the labor market, it has even less to do with foreign policy and geo-strategic maneuvering.”

“We don’t want policymakers to make the mistake of fighting the last war. If we leave inflation up to the central bankers rather than continuing the push for coordinated investments in cost-saving renewable energy and dense housing, or policies that reverse the shrinkage of the labor supply since the pandemic, we won’t so much beat inflation as resign ourselves to a poorer, less-resilient future.”

What the 1970s Can Teach Us About Today’s Inflationary Politics

“Critics, including some economists associated with the Democratic Party, warned that Biden’s determination to go big could set off an inflationary spiral. Among the most prominent of those critics was Harvard economist Lawrence Summers, a former adviser to President Barack Obama, who in February 2021 wrote in The Washington Post that “while there are enormous uncertainties, there is a chance that macroeconomic stimulus on a scale closer to World War II levels than normal recession levels will set off inflationary pressures of a kind we have not seen in a generation, with consequences for the value of the dollar and financial stability.”
Biden ignored Summers’ call for a substantially smaller bill. The president flatly rejected a Republican counteroffer that would have cut the bill’s cost to about $600 billion in more narrowly targeted pandemic relief. He offered no substantial criticism of the idea; he simply objected that it was too small.

There was no risk in overreach. The only danger was in doing too little.”

” Is America of 2022 simply repeating the mistakes of the 1960s and 1970s? It isn’t a note-for-note remake, but it does feel rather like a remix, a collage of historically familiar elements rearranged and repackaged in an updated aesthetic. If there is a lesson to be learned from the inflationary drama of the recent past, it is that inflation is to some degree a policy choice, made for political reasons. And thus, as with Reagan in the 1980s, it has both policy and political consequences.”

Marco Rubio Wants To Make Your Groceries More Expensive

“Sen. Marco Rubio (R–Fla.) led a bipartisan group of lawmakers—all of them from Florida—in submitting a petition to U.S. Trade Representative Katherine Tai seeking “an investigation” into what the lawmakers call “the flood of imported seasonal and perishable agricultural products from Mexico.” They ask Tai to invoke Section 301 of the Trade Act of 1974 to impose “trade remedies” that will protect American growers from the scourge of…low-priced produce.

While they don’t come out and say it directly, it’s obvious from the letter that Rubio and his colleagues are seeking tariffs on Mexican produce. Section 301 is the same mechanism the Trump administration used to impose wide-ranging tariffs on goods imported from China. It’s a law that grants the executive branch broad, unilateral power over trade.

Rubio and the other lawmakers say the Mexican government is subsidizing its domestic agricultural infrastructure as part of a scheme to undercut the prices charged by U.S. growers. “Mexico poses a direct threat to Florida’s seasonal and perishable agricultural industry,” they conclude.”

“Anyone who has taken a basic economics class should be able to explain what’s happening there. A high level of supply tends to push prices downward. Whether grown in Mexico or Florida, it makes sense that cucumber prices would be at their lowest when there are a lot of cucumbers in the market.
But that’s not how Rubio and his colleagues see it. Instead, the petition describes this minor pricing difference as “a clear attempt to displace Florida cucumbers from the U.S. market.”

Take a moment to enjoy the fact that some of the most powerful men and women in the U.S. government are freaking out over the idea that American consumers might get to save a few cents on their next cucumber purchase. Then amuse yourself with the optics of American agricultural special interests—which are, of course, pulling Rubio’s strings here—complaining about subsidies, as if “direct government aid” doesn’t account for nearly 40 percent of American farmers’ annual income.

“These Florida politicians are following a time-honored tradition of trying to help their local constituents at the expense of Americans in other states, who benefit from low-priced fruits and vegetables regardless of where they are grown,” says Bryan Riley, director of the free trade initiative at the National Taxpayers Union Foundation. “

Child poverty in the US was stagnant — and then something changed

“Most surprising is that declines in poverty, rather than stalling with the decline of the Covid-19 pandemic, accelerated. While economic conditions could have led to one of the largest increases in poverty on record, the federal government stepped in to support families as the economy ground to a halt. While the pandemic brought a new set of hardships, these federal relief efforts prompted child poverty to fall sharply: In 2020, according to the supplemental poverty measure, child poverty fell from 12.5 percent to 9.7 percent — by far the largest single-year drop over the previous half-century.

These declines continued in 2021. In figures released Tuesday, we learned that in 2021 child poverty fell even further, to just 5.2 percent, by far the lowest rate ever recorded. This means that, between 2020 and 2021, an additional 3.4 million children were pulled out of poverty, and over the past two years almost 5.5 million children were, as the child poverty rate fell by nearly 60 percent in just two years.”

“it’s no great mystery how it happened. To stave off a recession and prevent a spike in material hardship amid widespread joblessness and economic uncertainty, the federal government temporarily reinvented the traditional US safety net, pushing cash into US households. There were three rounds of economic impact payments (stimulus checks), expanded unemployment assistance, and, in 2021, an expanded child tax credit, which sent modest monthly cash payments to most American households with children from July through December 2021.

While the traditional safety net targets poor families and relies heavily on in-kind benefits rather than money, the pandemic safety net was largely cash-based, unrestricted, and nearly universal.”

“it worked.

Over the past two years, tens of millions of people lost work and had their lives disrupted by Covid-19. Yet amid this economic disruption, child poverty plummeted.”

“An analysis from the Center on Budget and Policy Priorities found that, absent government intervention, poverty in 2020 would have experienced its second-largest increase on record, but as a result of the pandemic safety net, poverty in the US experienced the largest single-year decline in more than 50 years.”

“these programs were long gone before inflation became more entrenched. Inflation began in the goods-producing sector, as supply chain problems and rising shipping costs, combined with increased demand for goods, led prices to soar. Inflation was further spurred by Russia’s invasion of Ukraine and its impact on global energy and food prices. More notably, as relief programs ended, growth in demand did not appreciably slow. A quick look across the globe reveals that inflation has hit most countries in the wake of the pandemic regardless of the share of children who go to bed hungry.

While government pandemic spending has certainly played some role in pushing prices upward, it is important to recognize the uncertainty around the economic recovery. These same policies were responsible for the economy’s rapid recovery and swift employment growth. Following the Great Recession, unemployment remained elevated for years, to devastating effect.”

“in the last two years, labor force participation rates have steadily recovered as the economy adjusted to living with the pandemic and showed no sign of accelerating as income supports expired.”

“One pandemic-era policy is permanent: a change to the way food assistance benefit levels are calculated. This will reduce hardship and poverty going forward and should be celebrated. But most of the new Covid-era safety net has already expired, and we should expect child poverty to rise in tandem in 2022.

The clearest avenue for action, to relieve the current rise in hardship and ensure the lessons of the pandemic safety net are not lost to history, is to revive the expanded child tax credit. Most wealthy Western nations use a universal child allowance or child benefit — money sent to families with children across the income spectrum — to help defray the big costs that come with raising children and better ensure the healthy development of that nation’s children.

For the final six months of 2021, the US finally joined this group, and the results, as we now know, were staggering. Child poverty, child food insecurity, and other measures of material hardship all fell sharply. Critics feared the payments would provide a disincentive to work, but the policy had no discernible impact on the labor force participation of recipients. The benefits of the policy were extraordinary, and the downsides were negligible. We can, and should, bring it back.”

“But what about inflation? Can we really send more cash to households while the Fed is trying to rein in spending? Data shows that low- and middle-income families receiving child tax credit payments in 2021 largely spent the funds on necessities, like food and utilities — the same necessities that Americans are now paying higher prices for — so the payments would go a long way toward relieving rising material hardship.
At the same time, a number of economists have noted that the expanded child tax credit is “too small to meaningfully increase inflation across the whole economy.” Perhaps most importantly, the government can help the most vulnerable in our society, even if it means asking others to chip in more to offset those costs. The Inflation Reduction Act begins that process by ensuring that the IRS can collect the tax revenue that high-income Americans actually owe.”

Biden’s Student Debt Relief Plan Will Worsen Inflation

“even though student debt relief might not look like spending the way we traditionally think of it—the government isn’t cutting checks or awarding grants here, the way it did in the American Rescue Plan, for instance—economically, it will function the same way.
Because money is fungible, student loan borrowers will effectively now have extra discretionary income equal to whatever they would have had to pay towards that $10,000 in loans. That might sound great, but remember that the standard definition for inflation is what happens when a larger supply of money is chasing the same amount of goods and services. Money that would have been spent paying back loans will, upon the conclusion of the repayment moratorium, remain circulating in the regular economy. Ending the repayment moratorium without passing forgiveness would’ve been deflationary by returning U.S. dollars to Treasury.”

Inflation Hits 8.2 Percent After Another Month of Sharply Rising Prices

“Inflation continued burning a hole in Americans’ wallets last month.
Prices rose by an average of 0.4 percent overall, driven primarily by rising costs for housing, food, and medical care. According to the newly released data from the Bureau of Labor Statistics, prices rose by 8.2 percent overall during the last 12 months ending in September. Food prices have climbed by 11.2 percent in the past year, while energy prices are up by a whopping 19.7 percent despite falling by about 2 percent in September.”

“Particularly worrying is that so-called core CPI, which filters out more volatile categories like food and energy prices, rose by 0.6 percent last month. In other words, inflation is widespread throughout the economy and no longer contained to the categories that were driving the phenomenon a year ago. Far from being transitory, inflation now seems to be a deeply rooted problem.”

“rising interest rates needed to combat inflation will rebound onto the federal balance sheet by making the federal debt more expensive. Even when interest rates were at or near historical lows, interest payments on the national debt were on course to become one of the largest segments of the federal budget within the coming decade. Higher interest rates mean the government will have to spend a significantly larger amount of revenue on simply managing the existing debt—a nasty feedback loop that makes the government’s already untenable fiscal situation considerably worse.”

Would the Inflation Reduction Act actually reduce inflation?

“I think it’s likely to have a modest downward effect on inflation, so directionally, I think it is likely to push downward on prices. But that’s unlikely to be the primary effect of the legislation, given how many specific policies there are.
Most of the impact on inflation and the broader economy from this legislation is likely to be medium-term, not felt in the immediate next few months, which is how households are thinking about inflation.”