Will The New State Stimulus Checks Add To The Inflation? States Move In With Multiple Measures

Stimulus Check
Stimulus Check

The federal administration’s decision to stay away from any further stimulus checks has been tough on low and moderate-income families even as prices at the grocery store and the gas pump continue to rise. The stock market too has crashed along with the cryptocurrency market. The Federal Reserve tried to douse the flames by raising interest rates to the highest rate since 1994. They hope that it will cool down the economy and limit the demand for services and goods.

Businesses and the common people are getting increasingly worried that the US economy is on the verge of tipping into a recession. There are clear signs that Americans are cutting back on dining out, vacation plans, and even routine services like haircuts and manicures.

Memories of the 2008 recession are still fresh in the minds of many. But it is also true that all recessions are different and driven by different factors and movements in the economic situation.

The housing crash that spurred the Great Recession was very different from the COVID-19-induced recession. Even if the current situation leads to a recession in the coming years, economists hope it will not be as devastating and all-encompassing as the closest crisis we faced.

But, they warn, that it does indicate that there will not be a serious pain for people who lose their jobs and financial stability. And if the last few years are any indication, it is just that we do not know what lies ahead.

The talk of a light recession seems an oxymoron, but the hope is that if the economy does contract in the end, we would not see the level of suffering seen in 2008 or during the spring of 2020 during the height of the pandemic. Around 20 million jobs just disappeared from the labor market in a matter of weeks.

But then, any recession is painful, especially for the millions who live paycheck to paycheck. Even a slight spike in unemployment means that people will be without a job or will see their financial reserves disappearing in weeks.

Federal Reserve policymakers are not trying to jolt the economy into a recession in trying to rein in inflation. But the tools that they are being forced to employ, namely the high rates of interest, are the blunt end approach and cannot engineer what they term as a smooth landing, not by a long measure.

But despite fears, it appears very likely at this stage that any upcoming recession would be more limited in its negative impact. But then the past few years have been anything but normal.

The Stimulus Check Approach Was Good While It Lasted

The stimulus checks had definite economic benefits but also fuelled inflation. On the one hand, the pandemic stimulus undoubtedly helped citizens in some real tangible ways. The greatest benefit was that it prevented poverty among a large section of the population. It stopped people from ending up on the streets or defaulting on their payments and bills.

Around 1.7M were saved from certain poverty in 2020. The poverty rate dropped to 9.1% from a high of 11.8%. The 2021 poverty rate fell even further to 7.7%. It was clear to policymakers and economists that the stimulus checks were driving an intense decline in poverty.

One of the most important benefits of the stimulus checks was that they prevented a recession. It could have been the worst economic crisis in modern history and the stimulus checks helped the economy bounce back in record time.

But the stimulus payment stoked higher prices, especially the economic impact payment that came immediately after the second stimulus check of $600. Analysts believe that the stimulus check payments alone added around 3% to the inflation rate.

Increasing In Wages Not Keeping Up With Rising Prices

Americans are struggling financially despite earning more than last year. There has been a substantial increase in wages. A 5.6% jump would have been considered a healthy growth in normal times. But despite such a high year-over-year increase, the 8.5% inflation has outpaced the growth in wages. The adjusted inflation rate reveals that Americans have faced a negative growth rate of a 3% increase in wages.

Some economists had raised an alarm when the third stimulus check amount of $1,400 was declared. It was more of a political promise as the incoming president had made a promise of a $2,000 stimulus check. And the second and third payments added up to just that.

But it overheated the economy and the nation slid into an inflationary situation. This stimulus check led to people having idle money in their hands. It created a chief role in creating excessive demand for goods at the cost of services and in turn spurred inflation.

The boost in demand was very large in America and the stimulus checks were very much a part of it. But the line of thinking at the time was there was a greater risk of putting too little money into the economy than the danger of putting too little.

The Stimulus Check Got Stuck In Petty Political Bickering

The last stimulus check was backed by politics, not ground evidence or economic foresight. Though the CARES Act was passed near-unanimously on a bipartisan support base in March 2020, the transition to Democratic hands saw a different political game payout in Washington.

The second stimulus check was also proposed to be a $2,000 bonanza but was blocked by the republican Congressmen though it had Democratic support. In the Georgia run-off elections, the Democrats ended up promising a $2,000 stimulus check and there was no way the new president could back out of it.

Politically, it had to be $2,000 or nothing at all. Moreover, the Democrats oversaw the economic recovery of 2009 and Joe Biden was then the vice president. He did not want to repeat the mistakes of that period by pumping in too little. The reluctance to release more money slowed down the economic recovery after 2008, and it took years for it to normalize.

State Stimulus Checks Could Add To The Inflation

While around 14 states have revealed plans to go for stimulus checks for their residents, economists are worried that it could add to the inflation. But the amount being given out is too small, maintaining supporters of the move. With less than a third of the states moving ahead, the number could come down if the proposals get stuck in the state legislators. As of now only Maine and New Mexico have passed the bill and have begun sending out stimulus checks.

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