Nearly four years ago, the Biden administration and Congressional Democrats made a $1.9 trillion bet in the form of the American Rescue Plan. They lost, as it contributed to a surge in inflation that fueled massive voter discontent and Donald Trump’s return to the White House.
Why it matters: In the next recession, politicians and policymakers may be more hesitant to unleash the type of programs that drove America’s rapid recovery from the pandemic-induced crisis.
Interesting, in my view the cause of inflation was companies seeing a way to increase prices while blaming a pandemic and laughing to the bank.
But sure, I guess blame the other thing…
At its core, that basically is what they’re saying. The argument points out that while the cost of goods went up because of supply chain issues, it wasn’t just that—prices also rose because consumers were in a better position to pay more. The Recovery Act and the student loan repayment pause boosted disposable income, making it easier for people to absorb these costs. As supply chains improved, prices have come down somewhat, but not entirely, partly because wages have gone up, increasing production costs. But there’s also truth to the idea that corporations took advantage of the pandemic to hike prices, blaming it all on COVID-related issues. This kind of “pandemic pricing” kept prices higher even when some original causes started to ease up. That being said, that isn’t the main factor at play—it was for FY21, to be sure, and it’s part of the broader problem, but it’s not the main driver like it was then.
To deny the Recovery Act’s role in shaping today’s economy misses the bigger picture. A-1.2 trillion-dollar injection obviously needs to be recognized for its effects in the economy. Even so, without that support, a lot of people would likely have struggled even more to cover basic costs. Ultimately, the choice was about providing a financial cushion when people needed it most, even if it meant dealing with some inflation down the road. Unfortunately, voters don’t envision the worse reality they would be in where they didn’t make it, they see the world where the costs of inflation has them barely make it. It would be difficult to argue that more people are worse off than they would be without the Recovery Act, but it’s hard to envision because the hypothetical worst-case scenario never seems as bad as the actual bad-case scenario. It’s what’s called the “preparedness paradox.” And you might be doing it right now. ☺️
I’m no economist but I don’t think inflation moves that quickly. The Act was signed in early March and by the end of April we hit inflation levels unseen since 2008. $1.9 trillion was not spent in a month and I’d be surprised if they spent even 25% in a month.
And a year earlier, also in March, Trump signed a $2.2 trillion stimulus bill ($1 trillion of which was basically a handout for businesses). But I’m sure his “brilliant business mind” knew exactly how to spend the money so as to not cause any inflation.
Prices go up faster than they go down. They rose fast as costs went up. They didn’t go down because profit margins were higher than what any of them lost from customers leaving. (Doubling the price of goods and halving the customers leaves companies ahead.) When other companies also kept prices high, suddenly all incentives went away.
Also, people have become entitled. Everyone. Just look at McDonald’s. They kept raising prices, way above competitors. They just kept raising prices until people stopped going there, but they never stopped. Even when they couldn’t afford it or they could go somewhere else.
People are feeling inflation and prices still aren’t coming down.
Honestly, I think government’s part in the higher prices are close to zero. People don’t want to give up their conveniences and capitalism just doesn’t work the way people think it does.
Let’s not forget other inflationary impactors. Russian energy coming off the broader market, Ukrainian food exports being offline for a year, a major shipping route through the Red Sea becoming more expensive to navigate, and even smaller things like a certain ship getting itself lodged sideways in a major global shipping artery for a little bit. Not even to speak of existing tariffs in the US that never came off.
Lots of individual factors stressing an already pandemic-stressed situation.
Yes, absolutely. I was largely restricting it to domestic factors and admittedly jamming a lot into the phrase “supply-chain issues.” ☺️
