The White House’s continued efforts to deflect blame for historic levels of inflation after pumping money into an overheated economy are becoming harder to swallow. So it’s no surprise Jeff Bezos became the latest public figure to let loose in a series of tweets castigating the White House for continuing to push massive spending packages amid rising inflation. Yet, this high-profile clash online is not all flash: new research backs up the fact that the American Rescue Plan Act (ARPA) bears a great deal of responsibility for Americans’ inflation woes.
In early 2021, all the economic doom-and-gloom of the pandemic was starting to turn around. The underlying cause of the recession — depressed demand due to lockdowns and fear of the pandemic — was dissipating with the increased availability of vaccines. The economic strategy during the pandemic had been to help people and businesses “hibernate” during lockdowns and, in so doing, preserve the economy’s ability to spring back to where it had been. And it was working.
That was good news for most people, but not for members of Congress who had gotten a taste of spending without having to even pretend to care about the national debt. Unwilling to hand back the emergency credit card, they pushed forward with a $1.9 trillion stimulus bill, the American Rescue Plan Act (ARPA).
But while extraordinary spending packages had been justified in the midst of a unique economic crisis, they became harmful when the return to normalcy began. Unfortunately, President Biden and congressional leaders were determined to keep spending, no matter the cost.
Take the provision in ARPA for a massive bailout for state budgets (on top of previous bailouts). ARPA’s state aid provision had been crafted to respond to an anticipated 8 percent drop in year-over-year revenues in FY 2020, but by the time it was passed, it was clear state revenues only dropped an average of 0.4 percent. By the last quarter of the fiscal year, incoming state revenues were largely back to normal.
That was hardly the only wasteful and excessive part of ARPA. After all, in response to Congressional Budget Office estimates of a $380 billion output gap, Congress passed a bill that spent five times as much — rejecting in the process a more moderate bipartisan proposal to spend $618 billion as insufficient.
But in the end, excessive stimulus hurt American families. Research from the Federal Reserve Bank of San Francisco shows that efforts to pass fiscal stimulus contributed three percentage points to inflation by the end of 2021. In other words, the 7 percent inflation that Americans faced by the end of 2021 could have instead been a more manageable 4 percent had Congress not gone off the rails. Instead, wage growth below the rate of inflation meant that Americans saw a 2.4 percent decrease in their real income during 2021.
And as Bezos points out, things would have been even worse if the White House had gotten its way. The proposed $3.5 trillion Build Back Better Act failed in Congress despite President Biden’s support, but had it passed, it would have driven inflation even higher. Supporters claim the legislation was “paid for,” reducing its inflationary impact, but those claims ignored the gimmicky nature of the supposed pay-fors. Even as it was, Congress still passed a large infrastructure package towards the end of 2021.
The White House’s refusal to own up to the mistake of overspending should worry taxpayers, because it suggests he has not learned his lesson. As efforts continue to revive Build Back Better, taxpayers deserve to hear that the President takes inflation seriously and will not continue to pump money into the economy. In the meantime, taxpayers are left with tweet storms reflecting a better grasp of what will help average Americans than official statements from the President of the United States.
