Were the stimulus checks a mistake?

It wasn’t so long ago that the US economy needed a prick in the arm. Millions of Americans have lost their job as the country shuts down to slow the spread of the deadly virus. At the time, politicians, lawyers, and economists agreed that Americans needed immediate help, and so they responded quickly.

Legislators adopted $2.2 trillion stimulus package in March 2020, followed by two more COVID-19 payments at the end of 2020, and then again in 2021. In total, this amounted to one of the most generous fiscal responses to the virus globally.

But it would be a trick. As US prices continue to rise at a rate not seen in decades, it is clear that the stimulus has come at a significant, unintended cost: inflation. It is not clear whether inflation reached its peakbut the situation is now economically and politically toxic, and many of the same politicians, advocates and economists are now wondering if the stimulus checks were a mistake.

The stimulus had large economic benefits, but it also fueled inflation.

On the one hand, the COVID-19 stimulus has undoubtedly helped Americans in very large and tangible ways. Namely, it reduced poverty — beyond just keeping people afloat in the early days of the pandemic.

According to Additional measure of poverty by the US Census Bureau, stimulus payments lifted 11.7 million people out of poverty in 2020, reducing the poverty rate from 11.8 percent to 9.1 percent. And the poverty rate in 2021 is estimated to fall even further to 7.7 percent, according to a July 2021 report from city ​​institute. We don’t know yet if this has come true, but Laura WheatonA senior fellow at the Urban Institute and one of the analysts behind the 2021 numbers told us that it was clear from their analysis that the stimulus checks led to a sharp decline in poverty.

More broadly, the stimulus checks also eased conditions for workers during one of the worst economic crises in modern history, likely helping the economy recover in record time. In April 2020, when Americans received the first round of checks—up to $1,200 under the CARES Act—the unemployment rate was at disastrous 14.7 percent. But two years later, it is almost back to pre-pandemic levels, with many job openings. “I hope we don’t forget how great it was that we supported people so well and that we recovered so quickly,” he said. Tara Sinclairprofessor of economics at George Washington University.

However, there is also evidence that the stimulus, especially the latest round, has likely contributed to higher and higher prices. for those same people It was designed to help. Although global supply chain issues (and most recently have you been in Ukraine) were significant contributors to inflation, the discrepancy between American and European inflation suggests that it is something more. Actually, recent analysis Researchers at the Federal Reserve Bank of San Francisco found that stimulus could boost U.S. inflation by about 3 percentage points by the end of 2021.

As a result, Americans are experiencing financial difficulties – especially low-income people which don’t have an airbag to absorb the higher prices. In addition, inflation is outpacing wage growth. Despite a 5.6% jump in wages year-over-year, inflation of 8.5% in March 2022 meant that Americans decreased by almost 3% wages adjusted for inflation.

This, too, was not a completely unforeseen problem. Back in early 2021, some economists raised the alarm about the size of the latest round of stimulus—the American Rescue Plan, headlined by $1,400 in direct payments to individual Americans—for its potential to overheat the economy and create an inflationary environment. According to Thomas Philippon, professor of finance at New York University’s Stern School of Business, stimulus checks played a major role in creating excess demand, which in turn fueled inflation. “The increase in demand in the US has been very significant, and checks have played a large part of that stimulus,” Philippon said. But at the same time, many politicians – including Jerome PowellThe chairman of the Federal Reserve, thought that the risk of putting too little money into the economy seemed greater than the risk of putting too much money into it.

The incentive became political

Part of the problem is that the latest stimulus rounds — checks that were held in December 2020 and March 2021 — may actually have been too big. But the decision to send an additional $2,000 to most Americans was not supported by evidence or economic calculations. It was shaped by politics.

While the CARES Act adopted almost unanimously on a bipartisan basis in March 2020, with former President Donald Trump in office, a very different story played out in the transition from his administration to current President Biden. By the end of 2020, Trump was pushing for an additional $2,000 payout, which was supported by House Democrats as well. later passedbut this effort was blocked by Republicans in the Senate, who were dismayed by the price tag. In the end, direct payments of just $600 were approved—despite comprehensive support for big checks voters of both parties.

But Democrats, whose control of the Senate hangs in the balance, have decided to campaign for bigger stimulus checks. on the eve of the second round of elections in Georgia. It is impossible to know if the support was giving checks now – Sep. Raphael Warnock and John Ossoff have their advantages, but the Democrats ultimately won both seats and passed the American Bailout Plan two months later, which included $1,400 checks to reach the desired $2,000 goal.

Claudia Sam, director of macroeconomic research at the Jain Family Institute, said the March 2021 check should ideally have been smaller. But due to the political nature of the issue, it was not possible to insist on a smaller number. “People were promised $2,000 checks,” she said. Politically, this meant either a $2,000 payout or nothing at all.

Moreover, many of the economic responses to COVID-19 leaned to the leftwhich might help explain why so many politicians underestimated the threat inflation. Instead, they were more worried that the Americans would not be given enough money, a lesson from a bygone era. Democrats in power during the Great Recession, including Biden, who helped watch the 2009 recovery as VP – approached COVID-19 recovery decided not to repeat the mistakes spend too little money. It wasn’t clear at the time, but many economists now believe that Congress’s reluctance to pump money into the economy after the 2008 crash led to a long and painful recovery.

That’s why the Democrats wanted to inject money into the economy this time around. It seemed to be a clear political winner as support for another round of stimulus payments was extremely high: polls from end of 2020 as well as early 2021 it is consistently found that the vast majority of Americans, including many Republicans, supported the proposed stimulus checks. But while the Democrats gained control of the Senate and adopted a hugely popular incentive – albeit on party line vote – this popularist spirit has not seemed to bear fruit since then. In particular, voters do not appear to be rewarding Democrats and Biden for the extra money provided by the stimulus. Majority of voters blame Biden for inflation – including a significant portion of Democrats – and more broadly disapprove of his attitude towards the economy.

So instead of helping Biden and his party, the stimulus could hurt them in the 2022 midterms.

We are likely to learn the wrong lessons from the stimulus

The lessons we learn from the response to the COVID-19 recession are important because they will almost certainly determine how we respond to the next economic downturn. After the Great Recession, politicians shot too low. Now they seem to have shot too high. If this were a Goldilocks story, we’d be willing to do it right next time, but politics is no fairy tale, and it’s entirely possible that we’ll reevaluate whenever another recession strikes.

In many ways, we are still trying to learn lessons as the pandemic is not over yet. And, of course, it is difficult to understand what could have happened if the government’s response had not been so aggressive. However, one clear lesson from the COVID-19 pandemic is that America’s social safety net was not prepared to deal with a crisis of this magnitude, which is the main reason why the response had to be so massive.

Our social safety net wasn’t ready to catch everyone who needed it, so it was very difficult to know who really needed help and when to turn off the tap, Sinclair said. Unreliable public unemployment insurance systems failed to recalibrate replace people’s incomes, so many people ended up being paid a lot more after they lost their jobs. It was not easy to target direct payments to people with a certain income, so payments came some families that didn’t need them.

But with a better welfare infrastructure, we might not be as vulnerable to inflation. Darrick Hamilton, professor of economics and urban politics at the New School. If we could identify and reach the people who needed support the most, there would be no need for a massive response.

“[T]The automatic stabilizer of that makes us less vulnerable to economic shocks like a pandemic recession,” Hamilton said. “We would already have such a political infrastructure.”

The problem is that politicians’ motives run the other way: there is no political benefit in preparing for a nebulous future crisis, so they often don’t. And as worries about inflation rise, few are willing to pump more money into the country’s social safety net. “That would be a radical change and look like a huge expense,” Sinclair said. And it’s hard to tell people, “Look, if we do this, it’s going to look like a lot of money right now, but next time there’s a crisis, we won’t just spend a trillion or two, willy-nilly.” willy-nilly.”

Depending on what happens to inflation, economists may eventually conclude that the trade-offs with COVID-19 stimulus were worth it, but that won’t necessarily be a political conclusion. All this underscores the fundamental tension of any response to an economic crisis—it will be designed by politicians whose goals are shaped by the prevailing political winds. And at this point, it seems very likely that the political pain caused by rising prices will shape how we remember the current reaction, whether or not economists agree.