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COVID stimulus checks made inflation worse


Inflation has surged across much of the developed world over the past year as COVID-19 lockdowns eased and pent-up demand for goods and services collided with the ongoing snafus of the supply chain.

But inflation is higher in the United States than just about anywhere else right now. Why this? That’s because the U.S. government has been relatively more generous during the pandemic, borrowing and spending trillions of dollars not just to fund COVID-relief efforts, according to a new paper by four San Francisco Federal Reserve economists. 19, but also to line the pockets of Americans with direct payments that increased the money supply and overheated the economy.

“Inflation rates in the United States and other developed economies have closely tracked each other historically,” the economists write in analysis released this week. “However, since the first half of 2021, US inflation has increasingly outpaced inflation in other developed countries. Estimates suggest that fiscal support measures designed to counter the severity of the economic effect of the pandemic may have contributed to this discrepancy.

Inflation in the United States has reached an annualized rate of 7.9% in February (March data will be released by the Bureau of Labor Statistics next week), a 40-year high. Meanwhile, inflation in similar countries like France (3.6%), Germany (5.1%) and the UK (5.5%) is significantly lower, according to Data of the Organization for Economic Co-operation and Development (OECD), a consortium of 38 wealthy world governments. (Across the OECD, the average annual inflation rate is about the same as in the United States, but this is due to the influence of outliers like Argentina, where prices have increased by more than 52% in the last 12 months.)

February’s world price data is not just a snapshot, but indicates a worrying trend. The Pew Research Center noted in November last year that prices in the United States were rising faster than almost anywhere else. Between the third quarter of 2019 (the last full economic quarter before COVID-19 was first identified) and the third quarter of 2021, the inflation rate in the United States increased by 3.58 percentage points. percentage, a larger change than in all but two of the 46 countries. nations included in the study.

Governments around the world have of course spent heavily to fight the pandemic, but few have distributed money directly to citizens as the US government has. The four Federal Reserve researchers observe large increases in “inflation-adjusted personal disposable income” – simply put, excess cash spending – reported by US households over the past two years. “Throughout 2020 and 2021, US households experienced significantly higher increases in disposable income compared to their OECD peers,” they said. write.

About $817 billion in direct payments to U.S. households have been disbursed in three rounds during the pandemic, according to the COVID money tracker managed by the Committee for a Responsible Federal Budget, a nonprofit organization that advocates for deficit reduction. The first round of stimulus checks was worth $1,200 per person and was approved under the CARES (Coronavirus Aid, Relief, and Economic Security) Act in March 2020. Another round of checks for $600 was distributed to from December of the same year.

But the big blow came in early 2021, when the Biden administration imposed a series of $1,400 checks as part of the US stimulus package, passed by Congress in March 2021.

Although each round of direct checks had slightly different parameters for determining who would receive the payments, much of that $817 billion landed in the bank accounts of people who had never lost their jobs and were well above of the poverty line. Winning households up to $160,000 of joint income were eligible for the latest round of direct payments made in the first half of 2021 – and many progressives in Congress thought the threshold should have been even higher.

We are now reaping what Congress has sown. All that excess money is chasing the same number of goods. It’s a recipe for inflation straight out of any economics textbook. The four economists conclude that “US income transfers may have contributed to an increase in inflation of around 3 percentage points by the fourth quarter of 2021”.

It’s not a new idea, of course. Larry Summers, a top economic adviser to the Obama administration, warned of rising inflation more than a year ago. Passing another stimulus bill in the spring of 2021, Summers warned in a Washington Post editorial, “will trigger inflationary pressures of the kind we haven’t seen in a generation.” Other renowned economists, including a former president of the International Monetary Fund, offered similar warnings. The Biden Administration and Democrats in Congress did not listenAnd now here we are.

The value of this Federal Reserve analysis is that it does not look back in time and try to project what will happen, but looks at existing data to say what actually happened. Putting more money directly into Americans’ pockets and bank accounts has made inflation worse than it otherwise would have been.

In fairness, economists also point out that a less robust response to the pandemic may have caused a different kind of economic pain. “Without these spending measures,” they write, “the economy could have tipped into outright deflation and slower economic growth, the consequences of which would have been harder to manage.”

Any serious attempt to combat the current inflation crisis in the United States must be aware of this possible alternative reality – the grass is not necessarily greener on the other side.

But that doesn’t absolve the federal government – ​​from the White House to Congress to the Federal Reserve – of its role in making this mess worse. The whole world is suffering from a period of high inflation, but American policymakers have added an unusually high amount of fuel to the fire.

Eric Boehm is a journalist at Reason. This article first appeared on Reason.com.