How much does Biden’s $1.9T bill have to do with inflation?
President Biden’s American Rescue Plan is perhaps his most significant legislative accomplishment in his first year and a half in office.
But the sweeping $1.9 trillion COVID-19 relief bill is also at the center of a debate over raging inflation, with Republicans pointing the finger at Biden and his policies.
The White House maintains that the bill was essential to ushering in the economic recovery, physically reopening schools and distributing vaccines during a deeply uncertain pandemic.
Biden as recently as Thursday dismissed the notion that his relief plan fueled increases in prices.
In fact, economists concede that the $1.9 trillion bill did contribute to inflation, though there’s some debate about how much.
The pandemic-related supply chain woes and, more recently, Russia’s war in Ukraine are also major factors driving up costs. Former President Trump also signed two pandemic relief bills totaling nearly $3 trillion in his final year in office.
Many Americans are still wading through their excess savings from COVID-19 pandemic lockdowns that saw people stay home and spend less. Jason Furman, who served as the chairman of the Council of Economic Advisers under former President Obama, said that Americans spent some $800 billion less than normal during the pandemic.
“That is also a reservoir they can tap into to spend extra or cover gas prices without cutting their spending on other things,” Furman said in an interview. “People are running through their cushion, but they still have a bit of a cushion because the cushion was so large.”
Economists’ estimates of how much the COVID-19 relief package contributed to inflation vary. Michael Strain, director of economic policy studies at the right-leaning American Enterprise Institute, wrote in February that the rescue package added 3 percentage points to inflation in 2021, when it hit a near 40-year high of 7 percent.
Furman said the rescue plan caused between 1 and 4 percentage points of inflation last year.
“If you look at the inflation over the last four or five months, there’s no doubt that the price increases caused by [Russian] President [Vladimir] Putin are playing a much bigger role at this stage and the rescue plan is playing a fading role,” he said.
Mark Zandi, chief economist at Moody’s Analytics, estimated this past week that the rescue package added 0.1 percentage points to year-over-year inflation, well behind shocks caused by the war in Ukraine, the pandemic and the affordable housing crisis.
The partisan blame game over inflation has intensified as costs and particularly gas prices have continued to rise, despite the Federal Reserve and top White House officials insisting early last year that inflation would be “transitory.”
Recently, Treasury Secretary Janet Yellen acknowledged in an interview with CNN that she misjudged the path that inflation would take, citing unforeseen shocks to the economy.
But Yellen has also defended the rescue package — which passed in March 2021 with no Republican votes — noting as have other administration officials that inflation is a global problem.
“We’re seeing high inflation in almost all developed countries around the world, and they have very different fiscal policies, so it can’t be the case that the bulk of the inflation that we are experiencing reflects the impact of the ARP [American Rescue Plan],” Yellen told the Senate Finance Committee earlier this month in response to questioning from Sen. Steve Daines (R-Mont.).
Republicans, however, have accused Biden’s policies of driving inflation and seized on earlier warnings from Larry Summers, who served as Treasury secretary under former President Clinton, about the size of the rescue package.
Ellen Hughes-Cromwick, a former chief economist at the Commerce Department under Obama, said she finds arguments that fiscal policy was a main driver of inflation “suspect.” She noted the complex supply chain issues caused by pandemic shutdowns beginning March 2020 that to this day are causing disruptions, pointing to the semiconductor shortage for automobiles.
“We are still living with these very significant challenges,” said Hughes-Cromwick, who is now a fellow at the centrist Democratic think tank Third Way’s energy program.
Furman said that the Biden administration’s pandemic response was too large, though he noted that inflation would be a topic of conversation today regardless of the rescue package.
“People say it’s better to err on the side of too much. Well, that means you can make an error,” he said. “The lesson of 2009 was you can do too little, and the lesson this time was you can do too much.”
In an interview with The Associated Press on Thursday, Biden insisted there was “zero evidence” for Republicans’ claim that his pandemic stimulus bill caused inflation.
“You could argue whether it had on the margin a minor impact on inflation,” Biden told the publication. “I don’t think it did. And most economists do not. But the idea that it caused inflation is bizarre.”
The administration has also guided states and localities to spend rescue plan dollars to support law enforcement in its fight against violent crime and used funding from the law to extend postpartum coverage through Medicaid and the Children’s Health Insurance Program.
The rescue package has been a major component of the president’s self-touted legislative successes as he tries to hit a positive note on the economy. He often mentions, for instance, aspects of the bill that provided relief for renters and funded the rapid distribution of COVID-19 vaccines.
“It gave them what my dad used to call a little bit of breathing room,” Biden said at an AFL-CIO convention earlier this month.
For the time being, the White House’s stated top priority is lessening inflation. Administration officials have recently been exploring more ways to lower gas prices and Biden is also considering lifting some Trump-era China tariffs as a way to ease costs, an idea that Furman endorsed.
Biden has also been deliberate in emphasizing the independence of the Fed, which this week increased interest rates 0.75 percent — the biggest such hike since 1994.
“The main thing that they are doing — and are doing right — is appointing good people to the Fed and respecting the independence of the Fed and making clear the Fed is the primary agency to deal with this,” Furman said.
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