Saturday, September 30, 2023

Is Biden’s Stimulus Act Responsible For High Inflation?

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Ahead of the midterm elections, Republicans have blamed the Biden administration for the fastest inflation in four decades, arguing that the US $1.9 trillion bailout has been one of the main drivers.

Inflation rose in September 8.2 percent compared to a year ago and 0.4 percent from the previous month, according to a Consumer Price Index report published Thursday.

After Thursday’s release, Representative Jason Smith, the top Republican on the House Budget Committee, said, be aware of the US rescue plan as one of the reasons Americans “feel the sticker shock of rising prices every time they visit the grocery store or gas station.” Earlier this month, the Republican National Committee also tweeted“Every Democrat who voted for Biden’s ‘stimulus’ must answer to the polls for driving prices up and impoverishing American families.”

The US bailout plan, designed to boost the economy from the effects of the pandemic, was a massive spending package that was passed in March 2021. The legislation included checks for $1,400 for individuals, unemployment insurance and child support extensions, and hundreds of billions in support of state and local governments.

For months, economists have debated the impact of the US bailout plan on inflation. While many economists agree that the stimulus bill has exacerbated inflation by making people spend more money, they continue to disagree on its magnitude. The debate is partly about what else might be to blame in the United States and globally. Inflation started skyrocketing in early 2021 after the package was passed and has remained stubbornly high ever since. But even without the stimulus, inflation would have risen. The coronavirus has led to factory closures around the world, shipping backlogs and labor shortagesall of which have put pressure on supply chains and pushed up prices.

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

What do housing costs tell us about the impact of the stimulus on inflation?

Some economists say recent research and new data have confirmed their belief that the stimulus package has not fueled inflation significantly.

Higher housing costs have been a major driver of inflation – housing is the largest component of the consumer price index, making up about 30 percent of headline inflation as measured by the index. Dean Baker, a senior economist and co-founder of the liberal-oriented Center for Economic and Policy Research, argued that new housing inflation research has supported the idea that price increases were primarily driven by a massive shift to remote work and not the stimulus package. As people transitioned to remote work, house prices rose, and those prices in turn propelled overall inflation.

A analysis published by the Federal Reserve Bank of San Francisco on September 26, we examined the rapid rise in house prices and whether remote working, or other factors such as tax incentives, were driving the rise. The authors – Augustus Kmetz, John Mondragon and Johannes Wieland – wrote that as more people started working remotely, they sought extra space at home. This resulted in a peak in demand for housing and led to an increase in prices.

The researchers estimate that remote working caused home prices to rise about 15 percent from November 2019 to November 2021, accounting for more than 60 percent of the total home price increase.

“It means we can’t blame the stimulus. That clearly added to it,” Baker said. “But the main story there is this big move to work from home.”

Is the US an Outlier – or Part of a Global Trend?

Other economists are skeptical of the idea that a shift to remote work was driving inflation up because the stimulus package gave people more money to spend on housing.

“You can spend more on your house if you have more money, and they did, so I’m not buying that at all,” said Douglas Holtz-Eakin, the chairman of the conservative American Action Forum and former director of the Congressional Budget Office.

Holtz-Eakin said it was clear the package was driving inflation significantly and pointed to research by the Federal Reserve Bank of San Francisco, which analysis in March, it emerged that “tax relief measures designed to counteract the severity of the economic impact of the pandemic” could have contributed “to about 3 percentage points of the rise in US inflation through the end of 2021.”

The analysis — written by Òscar Jordà, Celeste Liu, Fernanda Nechio and Fabián Rivera-Reyes — found that the United States’ core inflation, excluding volatile food and energy prices, rose faster in 2021 compared to the average core inflation rate of other rich countries. Compared to the other countries – Canada, Denmark, Finland, France, Germany, the Netherlands, Norway, Sweden and the United Kingdom – the United States has given its economy more tax incentives.

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

But Josh Bivens, the research director at the left-wing Economic Policy Institute, said inflation has been ubiquitous “in every advanced economy” since the start of the pandemic and he didn’t believe the US bailout was making a significant contribution to inflation. A analysis published in August by Bivens, Asha Banerjee and Mariia Dzholos examined core inflation in the United States from December 2020 to May 2022 and compared it with core inflation in other Organization for Economic Co-operation and Development (OECD) countries. To calculate the acceleration in each country, the researchers took the difference between “post-pandemic” core inflation and “pre-pandemic” core inflation using data from 2018 and 2019.

The researchers found that the acceleration in core inflation in the United States was “on the higher side” but was “far from the top” and not that far above the average of all other OECD countries. All but one of the OECD countries saw an acceleration in core inflation, the researchers found. For example, Canada’s core inflation grew slightly more slowly than in the United States, but Portugal’s accelerated according to the analysis.

“The high inflation in the US has not been caused by any unique US policy – ​​not by the US bailout and other generous tax relief during the pandemic recession and recovery, nor by anything else that is US-focused,” the researchers wrote.

Bivens also pointed to the Federal Reserve Bank of San Francisco’s investigation into housing inflation, saying that price increases in the United States were primarily driven by pandemic events that would have occurred without the stimulus — such as supply chain disruptions and increased demand for housing. . And while he said he believed the US bailout had inflationary implications, the trade-off was necessary to avoid higher unemployment rates.

“We could have kept inflation in the US much lower if we had raised interest rates massively in early 2021 and not implemented the stimulus package,” Bivens said. “But there would be enormous costs involved. We would look at a very different labor market with much higher unemployment.”


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