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Coronavirus Spending Is To Blame For High U.S. Inflation

coronavirus spending us inflation
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EDITOR'S NOTE: We may be skeptical when it comes to trusting politicians, but owing to the Fed’s dismal performance, especially over the last few years, we trust the central bank even less. Yet, there is one assessment that they might have gotten right, and we appreciate their honesty in coming forth with their findings: massive government spending during the pandemic is to blame for our current inflationary woes. That’s coming straight out of the San Francisco Fed’s report and not some “cabal” of GOP lawmakers. "Fiscal support measures designed to counteract the severity of the pandemic’s economic effect may have contributed to this divergence by raising inflation about 3 percentage points by the end of 2021," it says in the San Francisco Fed’s weekly Economic Letter. We saw $4.1 trillion in spending from President Trump and $2 trillion from President Biden over the last two years, and now CPI inflation has spiked to just under 8%. Yet the San Francisco Fed cautions readers’ reactions to its findings, saying that without these measures, we would have found ourselves in a years-long recession. Furthermore, it says, most Americans would be out of a job. Do you buy it? Check out the Fox Business piece below and decide for yourself.

COVID-19 spending cause US inflation to rise by 3%, researchers say.

Ask Democrats and Republicans what is to blame for high U.S. inflation, and they would point their fingers at extremely different culprits.

While the White House has identified supply-chain bottlenecks and other pandemic-induced disruptions in the economy for the recent price spike, GOP lawmakers have pinned it on the president's massive spending agenda.

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But now researchers at the Federal Reserve Bank of San Francisco are weighing in on the topic – and they say that massive government spending during the coronavirus pandemic has caused U.S. inflation to surge more than in other developed economies. 

"Fiscal support measures designed to counteract the severity of the pandemic’s economic effect may have contributed to this divergence by raising inflation about 3 percentage points by the end of 2021," wrote Òscar Jordà, Celeste Liu, Fernanda Nechio and Fabián Rivera-Reyes in the San Francisco Fed's weekly Economic Letter.

 

In the span of just two years, Congress unleashed a torrent of federal money to shield the economy from the coronavirus pandemic, approving roughly $6 trillion in relief measures. Lawmakers approved about $2 trillion under Biden and $4.1 trillion under former President Trump, according to a COVID money tracker published by the Committee for a Responsible Federal Budget, a nonpartisan organization based in Washington. 

The majority of the money allocated for emergency spending — close to $4 trillion — stemmed from two pieces of legislation: the CARES Act, passed in March 2020, and the American Rescue Plan, passed in March 2021. The remaining money came from the Response and Relief Act (December 2020), Families First Coronavirus Response Act (March 2020) and the Paycheck Protection Program and Health Care Enhancement Act (April 2020).

The sheer size of pandemic-related spending in the U.S. is entirely without precedent: During the 2008 financial crisis, for instance, the Obama administration approved a relief package roughly half the size of the American Rescue Plan, and a fraction of overall relief efforts this year and last. 

Still, the San Francisco Fed economists cautioned that without such astronomical levels of federal spending, the U.S. risked sliding into a years-long recession with stubbornly high unemployment. 

"Without these spending measures, the economy might have tipped into outright deflation and slower economic growth, the consequences of which would have been harder to manage," they wrote.

President Joe Biden signs the American Rescue Plan, a coronavirus relief package, in the Oval Office of the White House, March 11, 2021, in Washington. (AP Newsroom)

Core inflation, which strips out the more volatile measurements of food and energy, started 2021 below 2% on an annual basis and ended the year above 5%, the highest rate in decades. By comparison, inflation among countries in the Organization for Economic Cooperation and Development countries rose at a more gradual pace.

To compare fiscal stimulus in the U.S. with OECD nations, the researchers used an index of real disposable income to determine how much support was received by American households. They identified two distinct spikes in the U.S. that correlated with the American Rescue Plan, passed under Biden in 2021, and the CARES Act, passed under Trump in 2020. 

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"Both Acts resulted in an unprecedented injection of direct assistance with a relatively short duration. In contrast, real disposable personal income for our OECD sample increased only moderately during the pandemic," they wrote. 

The sample of OECD nations included Canada, Denmark, Finland, France, Germany, Netherlands, Norway, Sweden and the U.K.

Originally published on Fox Business.

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