Biden stimulus spending worsened inflation, Federal Reserve Bank economists say

Biden stimulus spending worsened inflation, Federal Reserve Bank economists say

Government stimulus spending was already enormous by the time Joe Biden took office. Biden ignored economists’ warnings that continuing this spending would cause inflation, and ramped up the spending further to unprecedented levels. That caused major inflation in the U.S. Meanwhile, other countries began scaling back their stimulus spending, resulting in less inflation overseas than in the United States.

Reason magazine reports:

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

But inflation is running higher in the United States than just about anywhere else right now. Why’s that? According to a new paper from four economists at the Federal Reserve of San Francisco, it’s because the American government was relatively more generous during the pandemic, borrowing and spending trillions of dollars to not only fund COVID-19 relief efforts but to line the pockets of Americans with direct payments that enlarged 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 an analysis published this week. “However, since the first half of 2021, U.S. inflation has increasingly outpaced inflation in other developed countries. Estimates suggest that fiscal support measures designed to counteract the severity of the pandemic’s economic effect may have contributed to this divergence.”

Inflation in the U.S. hit an annualized rate of 7.9 percent in February (data for March will be released by the Bureau for Labor Statistics next week), a 40-year high. Meanwhile, inflation in similar countries like France (3.6 percent), Germany (5.1 percent), and the United Kingdom (5.5 percent) is significantly lower, according to data from the Organization for Economic Cooperation and Development (OECD), a consortium of 38 rich-world governments. (Across the OECD as a whole, the average annual inflation rate is about the same as the U.S., but that’s due to the influence of outliers like Argentina—where prices are up over 52 percent in the past 12 months.)…Governments all over the world spent heavily to combat the pandemic, of course, but few handed out cash directly to citizens as the American government did…But the big blow came in early 2021, when the Biden administration pushed through a round of $1,400 checks as part of the American Recovery Plan, passed by Congress in March 2021…. All that excess cash is chasing the same number of goods. That’s a recipe for inflation straight out of any economics textbook. The four economists conclude that “U.S. income transfers may have contributed to an increase in inflation of about 3 percentage points by the fourth quarter of 2021.”

This isn’t a novel idea, of course. Larry Summers, one of the Obama administration’s top economic advisers, was warning about rising inflation more than a year ago. Passing another stimulus bill in the spring of 2021, Summers warned in a Washington Post op-ed, “will set off inflationary pressures of a kind we have not seen in a generation.” Other top economists, including a former chairman of the International Monetary Fund, offered similar warnings. The Biden administration and Democrats in Congress did not listen, and now here we are.

LU Staff

LU Staff

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