Did The 3 Stimulus Checks Result In Higher Inflation Rates?

Stimulus check
Stimulus Check

It was not long ago that the American economy required a boost. As the country shut down to stem the spread of a deadly epidemic, millions of Americans lost their employment. Policymakers, campaigners, and economists all agreed at the time that Americans needed rapid help.

In March 2020, lawmakers authorized a $2.2-trillion stimulus check package, which was followed by two further COVID-19 relief stimulus checks later that year and again in 2021. Overall, it amounted to one of the most generous financial reactions to the epidemic anywhere on the planet.

However, there would be a catch. As prices in the United States continue to increase at rates not seen in decades, it is evident that the stimulus has an unforeseen consequence: inflation.

Although it is uncertain if inflation has peaked, the situation has become economically and politically poisonous, prompting many of the same politicians, campaigners, and economists to question whether the stimulus checks were a mistake. On the one hand, the COVID-19 stimulus unquestionably helped Americans in several significant and practical ways. It did this by reducing poverty, rather than just keeping people alive during the early days of the pandemic.

Did The Stimulus Checks Do More Harm Than Good?

According to the supplementary poverty measure used by the US Census Bureau, the stimulus checks lifted 11.7 million individuals out of poverty in 2020, lowering the poverty rate from 11.8 percent to 9.1 percent. According to a July 2021 forecast from the Urban Institute, the poverty rate in 2021 will drop even more to 7.7%.

We do not know if this came to pass, but Laura Wheaton, a senior scholar at the Urban Institute and one of the researchers behind the 2021 statistics, told us that the stimulus checks were causing a huge drop in poverty.

In a broader sense, the stimulus checks protected employees amid one of the worst economic downturns in recent history, allowing the economy to recover in record time. The unemployment rate was at a catastrophic 14.7 percent in April 2020, when Americans were getting the first wave of payments — up to $1,200 under the CARES Act — However, two years later, it is nearly back to pre-pandemic levels, with plenty of employment vacancies.

“I hope we do not forget how amazing it was that we were able to help people so effectively and recover so rapidly,” said Tara Sinclair, an economics professor at George Washington University.

However, there is evidence that the stimulus, particularly the most recent round, fueled rising costs for the same individuals it was supposed to benefit. Though global supply chain concerns (and, more lately, the crisis in Ukraine) have been major drivers of inflation, the disparity between the US and European inflation implies there is more to it. According to a recent study by analysts at the Federal Reserve Bank of San Francisco, the stimulus may have risen US inflation by nearly 3% by the end of 2021.

We do not know if this came to pass, but Laura Wheaton, a senior scholar at the Urban Institute and one of the researchers behind the 2021 figures, told us that their study showed that the stimulus checks were causing a huge drop in poverty.

More generally, the stimulus checks provided relief to employees amid one of the worst economic downturns in modern history, allowing the economy to recover at record speed. The rate of unemployment was at a catastrophic 14.7 percent in April 2020, when Americans started getting the first wave of stimulus checks – up to $1,200 under the CARES Act. However, two years later, it is virtually back to pre-pandemic levels, with plenty of employment vacancies.

The stimulus checks, according to Thomas Philippon, a finance professor at New York University’s Stern School of Business, were a major factor in producing excessive demand, which fueled inflation. “The stimulus checks were a big element of the demand surge in the United States,” Philippon added. However, many officials, including Federal Reserve Chair Jerome Powell, believed that the danger of injecting too little capital into the economy was higher than the risk of injecting too much. Part of the issue is that the most recent waves of stimulus, which included checks issued in December 2020 and March 2021, may have been too large.

However, there was no data or economic considerations to support the decision to distribute an extra $2,000 to most Americans. Politics had a hand in shaping it. We are still discovering what the lessons are in many respects since the pandemic is not done. And, of course, it is difficult to say what could have occurred if the government had not reacted so forcefully. However, one obvious takeaway from the COVID-19 epidemic is that America’s social safety net was unable to deal with a catastrophe of this size, which explains why the reaction had to be so huge.

According to Sinclair, because our social safety net was not equipped to capture everyone who needed help, it was impossible to determine who required help and when the faucet should be turned off. Because shaky state unemployment insurance systems were unable to restore people’s earnings, many people were paid significantly more after losing their jobs. Because it was difficult to target stimulus checks to persons in certain income levels, some families who did not need them received them.

Thus according to Darrick Hamilton, an economics and urban policy professor at the New School, we would not have been as susceptible to inflation if we had a better social welfare system. A massive, blanket reaction would not have been necessary if we had been able to identify and contact the people who were most in need.

Economists may conclude that the COVID-19 stimulus check compromises were worthwhile depending on inflation, but that will not necessarily be the political conclusion. All of this emphasizes the basic contradiction that any solution to an economic crisis will face: it will be constructed by politicians, whose objectives will be molded by the political winds. And, regardless of whether economists agree, it is quite probable that the political agony caused by rising prices will determine how we recall the present reaction. 

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