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Saturday, August 6, 2022

Stimulus Checks Go Out As States Give Inflation Relief To Residents: Doubts Surface About The Inflation Reduction Act And Its Ability To Reduce Prices

With the federal administration caught in a bind as stimulus checks take the blame for inflation, it appears at this stage that any further direct relief measures are uncertain. But states, rich with a huge trade surplus and funds from the American Rescue Plan Act, are moving in with inflation relief checks to help out residents struggling with rising prices.

So it appears that we are talking about stimulus checks flowing in once again. Just when it appears that they were a thing of the past, they are back with a vengeance as it has become the sole weapon for states to battle inflation. Even Republican states such as Florida have been sending out stimulus checks despite being initially condemned by Governor Ron DeSantis for being responsible for the present mess.

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Unlike the federal stimulus checks which were, as the name suggests, issued to stimulate the economy, the inflation relief payments are for residents struggling to combat record inflation rates that have increased the prices of gasoline and other essential items including food.

Utility bills and home rent has risen sharply and the rise in wages has not been able to keep up with it. In effect, people are earning less than they did a year ago in real terms, despite a rise in wages.

But there is also the concern that further infusion of direct funds into the hands of citizens will only worsen the situation as the economy appears to be caught in a Catch-22 situation.

Inflation Stimulus Checks 

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The inflation relief stimulus checks are supposed to be a little different from the Federal stimulus checks both in terms of the purpose and their spread. These relief funds have been set aside to help people cope with the high cost of gasoline and other essential items that again has reached these levels due to inflation.

With the inflation rate at its highest since November 1981 and average prices of gasoline breaking records each day, it is unsurprising that states are stepping in to help out residents in their battle with the insane rise in prices.

The inflation relief checks are being finalized and sent by the state governments, mostly with funds from a huge surplus budget that most states enjoyed in 2021, thanks to a resurgent economy in the last two quarters of the year.

The purpose, thus, is not to stimulate the economy like with the federal stimulus checks, but instead to help people cover the high prices of essential goods and gas.

The Relief Checks Could Further Lead To rising In Inflation

While most of us are struggling to recover from the pandemic, we are being forced to cope with this outrageous rise in prices that has led to a decline in real wages despite an increase in money terms from a year back.

The logic behind the inflation relief stimulus checks appears unhinged as throwing more money at inflation is seldom the answer to arresting it. But the states have already moved in and are either sending out direct stimulus checks or giving a hefty rebate on taxes as a relief.

Much of today’s inflation has been driven by fuel prices and supply chain issues, the latter a throwback to the pandemic-induced disruption and the former caused by the war in Europe and the mindless sanction imposed consequently by the US and its NATO allies.

But the stimulus checks had their role. Too much money in the hands of people proved to be a double-edged weapon in hindsight. While it provided relief, the amount increased aggregate demand, with too much money in the hand of most people.

As a result, the aggregate demand shot up, but supply stagnated after the pandemic and struggled to keep up with demand. It further increased inflationary pressure on the economy. But it is not entirely true that the state stimulus checks will make inflation much worse than it already is.

Many economists instead believe that it will help ease the burden of this inflation, at least in the short term, on the poor and the middle-class families who have been most affected even as their budgets have gone for a spin by the hike in prices across the board.

The Introduction Of The Inflation Reduction Act Of 2022

Following a year of intense negotiations among their members, the ruling Senate Democrats have finally agreed to come to terms with a deal that will have a major effect on the energy bill and health care. It was more a struggle of wits between the whole ruling Senate and the President on one side and Virginia Senator Joe Manchin on the other.

The recalcitrant Manchin has time and again used his tipping power in a Senate split down the middle and used it to have his way. His business interests in coal and other fossil energy are spread beyond his state. And he has been a paid advocate of this lobby and has stymied attempts by President Biden to bring in green energy.

The Inflation Reduction Act will entail a large investment in making prescription drugs and the general health care sector more affordable. It will also help fight climate change and also tax wealthy corporations.

But what is of more immediate interest to voters is that it promises to immediately bring down inflation from its high perch of 9.1%, the figure for June 2022 for 12 months.

The Act is nothing more than a slimmer version of the ambitious Build Back Better bill which was blown away by Manchin because of its hefty bill. Some provisions in the present bill include the creation of a new 15% corporate minimum rate of tax. Corporates with a minimum of $1B in income will have a 15% tax rate. There will be no increase in household and individual taxes at present.

Reforms in prescription drugs are another significant provision of the bill. It will allow Medicare to negotiate the price of essential drugs, thus bringing down the price patients pay for their medicine. It will also force medicine companies to offer a rebate to customers on drugs that have increased at rates higher than the inflation rate.

Other provisions include added funding for the IRS to make them more efficient and streamlined, an extension of federal subsidies on medical insurance premiums through 2025, and numerous investments in the climate and energy security sectors.

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