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Wednesday, September 28, 2022

Stimulus Check Opponents Say State Stimulus Checks Will Worsen Inflation

It is normal for economies to experience a period of high inflation after a severe economic disruption or a recession. And the US and every other world economy have been reeling to control the high record inflation rate over the past 8-9 months. But while inflation has been the bane of most other leading economies including the European Union, the stimulus check is taking the brunt of the blame in the US.

The nation is divided on the extent to which the successive stimulus checks have influenced the high inflation. And it would be too simplistic to pin the blame on inflation as various factors have been at play for the past year and a half that have affected world economies.

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The factors behind the US inflation are varied, but the source is the COVID-19 pandemic, and no one can dispute that it hit hard and long. People suddenly lost every source of income and thousands of businesses shut down immediately. The ones that survived had to let go of employees or cut back on the working hours.

The series of stimulus checks saved people from starving and helped them pay their bills and prevented many from going homeless.

The Inflation Was Caused By Multiple Factors And The Stimulus Checks Played Their Part

While the stimulus checks and other relief measures initiated during the pandemic kept many households afloat, they also played a part during the pandemic. But the federal government and the opposition are starkly split about the extent to which it influenced the record inflation rate.

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From the start, the US Congress approved around $6T to prop up the economy and help families get through the economic downturn caused by the pandemic. Around $900B of that amount went directly to American individuals and families as three stimulus checks, two in 2020 and the third in 2021.

Stimulus Check
Stimulus Check

These three stimulus checks have taken part of the blame for the spike in inflation. But the federal government and the opposition Republicans have been sharply divided to the extent to which it played a role in the high prices of essential items including food and gasoline.

President Biden changed tack after the third stimulus check, the Economic Impact Payment which was part of the American Rescue Plan Act he signed in March 2021 immediately after coming to power.

He concentrated on rebuilding the derelict infrastructure of America, including its roads, airports, and telecommunication network. His move away from the direct stimulus checks was pounced on by critics as a tacit acknowledgment that the $1,400 payments approved in the ARPA were majorly to blame for the inflationary spike.

The President has also talked about the supply chain issues that America has been experiencing partly because of this rundown infrastructure that Biden inherited from Trump, whose reign was generally marked by a total breakdown in governance.

Other factors that had a major role in inflation were the disruption in the production and supply system and the war in Europe. It was this ripple effect that affected all economies around the world, and the US was the worst of it.

People had more money now than ever before, but the American industry could not keep up with production to satiate the high demand for goods. There was a marked shift away from services to goods as people had money to spare even as the economy experienced a brief boom in the last two quarters of 2021.

The Extent To Which The Stimulus Checks Affected Inflation

It has not been possible to individually parse out the extent to which the stimulus checks caused the spike in inflation that led it to touch record levels, something not seen since 1981. The money came in through multiple other avenues other than the three stimulus check payments.

People also benefitted from the enhanced unemployment benefits, the expanded Child Tax Credit stimulus check, which was paid out well in advance, and the Paycheck Protection Programs.

They pumped trillions of dollars into the economy, with the ARPA alone pushing in %1.9T in stimulus and other COVID-19 relief.

Analysts concluded that the American Rescue Plan Act had the most effect on the pandemic for multiple reasons. It came immediately after America received the second stimulus check worth $600.

The amount was large, and the economy too was opening up at that stage as workers returned to their jobs. The sudden spike in the money that people had in their hands immediately ratcheted up inflation, but it did not lead to overheating as some have suggested.

Stimulus check
stimulus check

It was estimated that the Rescue Plan Act caused an increase in inflation by around 0.3% points last year and by 0.2% this year. There is expected to be a negligible impact on the Rescue Plan the following year.

The controversy surrounding the stimulus check and the effect it had on the US economy forced the administration from shying away from any more stimulus checks. The strong opposition to any further stimulus check by the Republican opposition has made it easier for Biden to show that his hands are tied at this stage when it comes to stimulus checks.

The ruling Democrats are more focussed on the Build Back Better Act and getting it through the Senate. But the gridlock in the Senate led to logjams that led to the original plan being pared down severely.

The original plan was to spend around $4T, which included the American Families Plan. This transformative effort was expected to overhaul the American economy and create millions of jobs.

The bipartisan infrastructure bill of $1T was signed by the President in November 2021 and will put %550B in new funds into broadband, utilities, and transportation among other sectors.

The state stimulus checks are expected to be too small and limited in scope to cause a further spike in the inflation rate. Only around a dozen states could finally end up legislating on this issue and as of now only Maine and New Mexico have begun sending stimulus checks to their residents.

California too could soon legislate on the matter to send up to $1,050 in stimulus checks to residents who qualify for the payment. Other states are yet to legislate on the matter but are mostly sitting on billions of dollars in surplus thanks to a booming economy in 2021.

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