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Sunday, December 4, 2022

Stimulus Check Payments Continue To Be A Dividing And Deeply Political Issue

The record inflation rate continues to hurt residents even as the federal administration has washed its hands off any more direct stimulus checks or payments to citizens. It has stayed above the 8.5% mark for this whole quarter, the highest since November 1981. But the federal administration contends that it will only make inflation worse if it injects any more money into an already heated economy. And that would be a disaster in an election year.

That is what has assailed the Biden administration for a year. It made every effort from day one to muster support to every section of Americans through multiple support measures, including the third stimulus check. But it faces the blame for having caused inflation that threatens to undo all the good it has done.

The Stimulus Check And The Inflation Blame Game In An Election Year

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With midterm elections in November, no party wants to further rile its voter base and would prefer to play it safe, especially as the Republican opposition has turned it into their main election plank and is going hammer and tongs at the ruling Democrats for their allegation of having messed up the economy.

Stimulus Check
Stimulus Check

In the middle of diminishing real wages, the looming chances of recession, and rising household debts, the inflation issue is now entrenched firmly in the dome of partisan politics in the US, especially as it is an election year. The Democrats appear set to lose control of both the houses and inflation and rising prices have taken precedence over every other issue, especially for the Republicans.

Further, like all other partisan issues and conflicts, this issue is driven by clear partisan politics. And a politically biased understanding and interpretation of inflation threaten the federal administration’s ability to respond cohesively to contain the rising prices.

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The Fed came down heavily on inflation after over a year of waiting for the markets to cool down. They have initially gone for a hike of 0.75 percent, which is the highest in close to 3 decades. The Fed has also hinted that rates could further increase to above 3 percentage points by end-2022 if matters do not improve.

But on the day of the hike, there was a 0.3% drop in May retail sales and a slide of 14.4% in the housing sector. This is a foreshadowing of the recession that is inevitable if the Fed continues to hike the rate. And with the great stakes in the inflation issue, the partisan mudslinging is not a surprise. This inevitable method to rein in the runaway rising prices undermines the ability of the administration to look beyond hiking rates to cultivate a coherent response to inflation.

Federal Administration Questions Republican Attempts To Link Inflation To Stimulus Check

The federal administration sought to link the high prices to the war in Europe. The events thousands of miles away have certainly shaken supply chains across the globe and have severely affected the price of oil across the world. Russia is the third-largest supplier of oil and gas in the world and blocking it was bound to have its consequences, though NATO members in Europe continue to draw oil from the former communist nation.

The administration is correct as rising costs of energy make up about a 70% inflationary spike in the first quarter of 2022. But even discounting the energy cost component, inflation over the past year stands at 7%, close to 4 times the normal for the US.

The war has merely compounded the problem and has come at the worst possible time. Even though it is difficult to say exactly what the inflation rate would have been without the war, it is evident that there was a rapid price increase even before the first signs of war between Russia and Ukraine.

Another Republican line of attack is the direct cash transfer and its effect on the economy. They argue that cash transfers both to businesses and individuals increased the purchasing power of domestic consumers artificially and boosted inflation. But the stimulus packages began with a Republican President, with the Trump administration pumping in $4 trillion and the Biden administration chipping in with the American Rescue Plan Act, with $1.9 trillion.

The measures were definitely not perfect but were the only solution at that instant. The American economy had gone into a free fall immediately after the shutdown was declared across America. It was a total economic blackout that was to last for months. Millions lost their jobs. The poverty levels and homelessness were set to double as people struggled to put food on the table, clear their utility bills, or pay their home rent.

Economists Concede That Stimulus Checks Were Partially Responsible For Inflationary Pressure

Economists and policymakers concede that the stimulus checks were partially responsible for the inflationary burden. But the extent has been massively exaggerated by the Republicans, especially as the midterms are on this year in November. European nations, even without any stimulus check payout, have also seen a 7% rise in inflation.

stimulus check
stimulus check

The most compelling argument is that lockdowns were responsible for inflation, something that is not part of the narrative in the vitiated atmosphere of partisan politics. Simultaneously shutting down much of the US economy and disrupting the global supply chain is bound to have its consequences.

What the ARPA and the third stimulus check did was delay the process. Pending up consumer demands from consumers, flush with funds during lockdown led to an inevitable spurt in demand for goods at the cost of services even as the economy limped back to normal.

This even as the supply chains, severely compromised during the prolonged shutdown, struggled to gear back up to cater to the explosion in demand post the lockdown.

It is these mechanisms that give the most compelling explanation for the reason inflation continues to persist. A recession was inevitable due to the unprecedented shutdown of the economy, something that has never happened even during the Great Depression.

The opposition has singularly emphasized the role of the stimulus check in spurring inflationary pressure. The federal administration, on the other hand, has tended to focus on the war in Europe and corporate greed, while minimizing the role that internal forces have played in creating this mess. In a period when consumers continue to expect a modicum of relief, both parties must arrive at a midpoint and understand that understanding the causes is vital in winning the fight to tame it.

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