Inflation Hurt People, but How Poorly Would the Economy be Doing Now Without Government Spending that, Unfortunately, Contributed to Inflation
American Eclectic posts articles twice a month, on the 1st and 15th. This is the third year of publication; previously published articles can be found on my site.
December 15, 2024
The money supply is one of those issues that students are introduced to in an introductory Macroeconomics course in college. M2, the essential measure of money, fluctuated between a monthly change of 6.46 percent and 7.17 percent between January 2017 and December 2019, so Donald Trump’s first three years of his first presidential term. M2 measures the money you have in your pocket and quickly available bank accounts and money that is available but takes a bit more time to get your hands on, like savings accounts. Then, between January and December 2020, the last year of Trump’s first term, the monthly change was between 6.41 percent and 24.85 percent. Fluctuation is the wrong word to describe what happened in 2020 since the monthly increases continued to climb. Economists usually expect a lag of between six months and two years before signs that inflation is upon us due to the increasing money supply are felt by consumers. The essential point is that if Trump had won the 2020 election (he did not), the American economy would have felt the effects of inflation as 2021 unfolded. The growth rate in the money supply is an essential way to determine whether inflation is likely, and the monthly increases in 2020 gave a good indication of what could be expected regardless of who was sworn into office in January 2021. In fact, in March 2020, the inflation rate was 0.33 percent, and it began to climb. By December, Trump’s last month as President, inflation was 1.40 percent. Joe Biden’s first month as President, January 2021, saw inflation at 1.68 percent; by December, it was at 7.48 percent. Inflation eventually peaked at 9.06 percent in May 2022.
There is that magical line that is crossed where, suddenly, everyone feels the effects of inflation. Somewhere in 2021, as Biden’s first year in the White House rolled along, that line was crossed.
Added to the money supply was the impact of COVID-19, not just on the United States but globally. It should be no surprise that this pandemic would affect the global economy, including the United States. The first case of COVID-19 was in China in November 2019, and the first case in the United States was two months later, in January 2020. The World Health Organization first referred to this as a pandemic two months later, in March.
Associated with this pandemic, the term global supply chains began to enter widespread use. While studied by economists and others, it took the pandemic to make it a term that would be more commonly used. Supply chains are a normal part of a business where goods reach you through an infrastructure from production to delivery; all the word global does is to make that infrastructure something that involves many countries rather than a supply chain that exists simply within one country.
As the pandemic began to be felt worldwide, the impact could be felt as labor was adversely affected—labor shortages came with the pandemic. One study examined the effect on container ships. As this study stated:
Containerized seaborne trade accounts for 46 percent of all international trade. Large container ships operate on fixed itineraries, and even mild congestion can lead to substantial delays, costs, and trickle-down consequences. During the pandemic, wait times at some ports extended from only a few hours to two to three days.
Ports include both anchorages and berths. Vessels moor at berths to load and unload cargo; if a port is not congested, a vessel can moor directly at a berth upon arrival. When a port is congested, a vessel will moor first in an anchorage area; mooring patterns can be used to measure congestion. The researchers obtain data from January 2017 to September 2023 from the automatic identification system of the International Maritime Organization, which tracks all vessels larger than 300 gross tons at high frequency. They train a machine learning algorithm to identify areas with high densities of ships and then determine whether ships are at a berth or an anchorage. They define congestion as the fraction of ships that first moor at an anchorage when reaching port and compute the average congestion rate in each month, a ship-visit weighted average of congestion over the top 50 container ports worldwide.
They find that congestion was declining prior to the pandemic, and was around 25 percent from early 2019 to mid-2020. It rose to 37 percent in mid-2021 before declining again; it returned to normal levels in mid-2023.
The effect of problems at ports where container ships were backed up would contribute to inflation. Consumer demand for goods did not change, but the availability of goods did. A Bureau of Labor Statistics report echoed much the same sentiment and added additional factors that contributed to inflation:
As the labor market tightened during 2021 and 2022, core inflation rose as the ratio of job vacancies to unemployment increased. This ratio is used to measure wage pressures that then pass through to the prices for goods and services. As workers bargain for better pay, firms begin to increase prices. So, from this research, the authors find that three main components explain the rise in inflation since 2020: volatility of energy prices, backlogs of work orders for goods and service caused by supply chain issues due to COVID-19, and price changes in the auto-related industries.
Core inflation excludes the costs of food and energy.
The Biden administration did a terrible job explaining the situation to the American public. George Reedy was a special assistant to Lyndon Johnson when he was President (1963-1968). Reedy wrote an excellent book, The Twilight of the Presidency. The book's premise is that Johnson lived in a bubble, essentially insulated from the outside world, and, as a result, had no fundamental understanding of how to look at the world around him and, in the process, talk to the American public. I believe that Biden was living in this same bubble, and in his second term as President, I expect Donald Trump to live in the same bubble. Trump’s personality indicates that anyone wanting to give him news had better make sure it is the type of Christmas cheer news Trump wants to hear.
Biden’s American Rescue Plan (ARP) increased government spending by $1.9 trillion. One conservative American Enterprise Institute economist estimated that this plan would increase inflation by 3 percent in 2021 (in other words, above what it would be without that $1.9 trillion). As noted above, by the end of 2021, inflation had reached slightly more than 7 percent. Even if we accept this 3 percent figure, Biden's spending alone did not cause inflation. An MIT study, however, was even more condemning of the American Rescue Plan and its impact on inflation. As one of the authors of this study stated, “Our research shows mathematically that the overwhelming driver of that burst of inflation in 2022 was federal spending, not the supply chain.” They attributed government spending to 42 percent of inflation by 2022. Notice that by itself, government spending was not the sole culprit that caused inflation.
The American Rescue Plan fits nicely into the expression, damn-if-you-do-damn-if-you-don’t.
The American Rescue Plan was signed into law in March 2011. The American Enterprise Institute economist referenced above saw this act significantly affecting inflation in 2021. It seems questionable, given how quickly this Plan affected inflation since it was passed in March when inflation was 2.6 percent and then jumped the next month to 4.2 percent. Through the rest of 2021, inflation continued to climb. However, consumer spending changed significantly as the country emerged from the pandemic, and during this period, the plan was passed and implemented. Between the spring of 2019 and the spring of 2020, consumer spending fell by 9.8 percent, but then it saw increases; the winter of 2020 to the winter of 2021 saw consumer spending increase by 2.8 percent, but the significant increase could be seen between the spring of 2020 and the spring 2021 when the increase was 15.7 percent. This was the period between the end of Trump’s first term and the beginning of the Biden presidency. An increase in consumer spending and demand for goods, but a continued labor shortage added to inflation. The American Rescue Plan and additional factors combined to play a role in driving inflation.
This money from the American Rescue Plan addressed the problems brought on by the pandemic. The National Bureau of Economic Research saw the United States in a recession beginning after February 2020. This recession ended 128 months of economic growth. Within two months of Biden becoming President, 500,000 Americans had died as a result of the pandemic.
During Trump's first term, the unemployment rate reached 7.9 percent in September 2020. It fell to 6.7 percent by the end of 2020. Biden inherited that unemployment and monthly unemployment rates in the 5-6 percent range existed between January and August 2021. The unemployment rate began to fall in September; through 2022 and 2023, it stayed below 4 percent. In the last year of the Biden Presidency, unemployment rose slightly above 4 percent, but unemployment would have remained 7 percent or higher without the American Rescue Plan. This plan, for example, impacted specific categories of unemployment. One report stated, “This recovery has seen a dramatic decline in women's unemployment to an average of 3.5% in 2023, the lowest annual average since 1953.” The pandemic increased Hispanic unemployment to 16.7 percent, which was understandable since many Hispanics work in industries that were hardest hit by the pandemic. The American Rescue Plan helped to cut Hispanic unemployment in half.
This plan addressed many issues to confront the economic and social problems caused by the pandemic, such as providing money for housing assistance, aid to help schools reopen safely, and grants to small businesses. The plan expanded COVID testing, helped to prevent evictions and foreclosures, extended unemployment benefits, and lowered health insurance premiums for some low-income families. It extended and added funds to programs that started in the Trump administration, such as the Paycheck Protection Program, which helped various businesses continue to pay their employees.
A Treasury Department press release a year after the American Rescue Plan was implemented noted that it contributed to accelerating economic growth that helped to add 4 million jobs to the economy and, as the press release stated, “that without it, the United States would have come close to a double-digit recession in spring 2021.” An economist echoed this sentiment: “Most economists of all institutions and of all stripes were expecting a very prolonged, and painful, and difficult recovery before that fiscal support was provided." A Brookings Institution report examined the impact of the American Rescue Plan after its first two years and noted that of the $1.9 trillion, $350 billion went to state and local governments and added, “these funds, [were] universally welcomed by local leaders.” Democrats on the House of Representatives Committee on the Budget released a report in July 2022, a little over a year after the American Rescue Plan began to be implemented, and as the report stated, “Even Stephen Moore, the Republican-selected witness at the hearing, admitted to Committee Members: ‘this is the best jobs market I've seen in my lifetime.’” A study by the Center for American Progress in assessing the impact of this plan stated:
The enactment of the ARP in March 2021 helped alleviate financial and health hardships for individuals and families across the country. The law led to higher real GDP and job growth, contributing to real financial stability for millions, especially as the nation still tackles the impacts of the ongoing pandemic. The economic stimulus package served as a historical benchmark demonstrating how public policy and federal investment can mitigate the effects of an enduring pandemic and economic recession while helping the most marginalized individuals and communities survive, recover, and rebuild. Without such legislation, the pandemic recovery, along with job and economic growth, would have stalled.
Was there an alternative to a program that helped to alleviate the economy at a time when government action was needed? It is no doubt true that inflation was made worse by this government program. It is incorrect to say inflation would not be part of a second Trump term if he had won the 2020 election. Would Trump have stood by and done nothing as the economy and people's lives were affected by the pandemic? Watching television news, one sees a world of living inside different bubbles. Fox News, News Max, and a whole assortment of talk radio shows, all make-believe conservative but basically Republican radio shows, avoided addressing conundrums that confront us daily. Simple ways of looking at the world and what needs to be done are comforting and usually off the mark. Still, they are the prime way of looking at the world around us if you receive your news from too much talk radio (the us versus them format is the meat and potatoes of talk radio). We are about to re-enter the new, or maybe not new, version of the Trump Presidency. I wonder how the American public will look at Trump’s actions and how they will evaluate those actions and policies. Trump will be on his game, assigning all blame to others, and, unfortunately, too many will easily believe what he says. Inflation hurt many, and they reacted by how they voted: They blamed the Biden administration. Suppose Biden had not introduced the American Rescue Plan. In that case, I wonder how many of those same voters would have voted the way they did, not because of the hurt caused by inflation, but because of the hurt caused to them by a President who stood by and did nothing to help them as they struggled because no government action was undertaken to help alleviate suffering.
The late former President Ronald Reagan had a frequently used quote: “The government is not the solution to our problems; the government is the problem.” It is a cute quote, but saying it does not make it accurate. There are times when the government is the solution, and we want Presidents to act as though they care about all Americans because of the economic hardships we are experiencing.
NOTES
Lavea Brachman and Glencora Haskins, “The American Rescue Plan, two years later: Analyzing local governments’ efforts at equitable, transformative change,” Brookings, Commentary (March 9, 2023): https://www.brookings.edu/articles/the-american-rescue-plan-two-years-later-analyzing-local-governments-efforts-at-equitable-transformative-change/
Morgan Chalfant, “How much does Biden’s $1.9T bull have to do with inflation?” The Hill (June 18, 2022): https://thehill.com/homenews/administration/3528230-how-much-does-bidens-1-9t-bill-have-to-do-with-inflation/
“Changes to consumer expenditures during the COVID-19 pandemic,” TED: The Economics Daily, Bureau of Labor Statistics (May 3, 2022): https://www.bls.gov/opub/ted/2022/changes-to-consumer-expenditures-during-the-covid-19-pandemic.htm
Changing the Course of Recovery: How the American Rescue Plan Saved America, House Committee on the Budget (July 5, 2022): https://democrats-budget.house.gov/resources/reports/changing-course-recovery-how-american-rescue-plan-saved-america
M2 Money Supply Growth vs. Inflation, Longtermtrends: https://www.longtermtrends.net/m2-money-supply-vs-inflation/
Xiwen Bi, Jesus Fernandez-Villaverde, Yiland Li, Francesco Zanette, “Supply Chain Disruptions and Pandemic-Era Inflation,” National Bureau of Economic Research (NBER), Working Paper 32098 (April 1, 2024): https://www.nber.org/digest/202404/supply-chain-disruptions-and-pandemic-era-inflation
FACT SHEET: The Impact of the American Rescue Plan after One Year, Press Release, U.S. Department of the Treasury (March 9, 2022): https://home.treasury.gov/news/press-releases/jy0645
FACT SHEET: The American Rescue Plan (ARP): Top Highlights from 3 Years of Recovery, The American Presidency Project (March 11, 2024): https://www.presidency.ucsb.edu/documents/fact-sheet-the-american-rescue-plan-arp-top-highlights-from-3-years-recovery
Fast Facts About The Economic Status Of Hispanic Americans, Joint Economic Committee Democrats (September 15, 2022): https://www.jec.senate.gov/public/index.cfm/democrats/2022/9/fast-facts-about-the-economic-status-of-hispanic-americans
Richard Hernandez, “What caused inflation to spike after 2020?” Monthly Labor Review, Bureau of Labor Statistics (January 2023): https://www.bls.gov/opub/mlr/2023/beyond-bls/what-caused-inflation-to-spike-after-2020.htm
George Reedy, The Twilight of the Presidency From Johnson to Reagan (New York, Dutton, 1987)
Kyle Ross, Arohi Pathak, Seth Hanlon, “The ARP Grew the Economy, Reduced Poverty, and Eased Financial Hardships for Millions,” Center for American Progress (March 14, 2022): https://www.americanprogress.org/article/the-arp-grew-the-economy-reduced-poverty-and-eased-financial-hardship-for-millions/
Dominic Rushe, “US has officially entered first recession since 2009,” The Guardian (June 8, 2020): https://www.theguardian.com/business/2020/jun/08/us-has-officially-entered-first-recession-since-2009
Betsy Vereckey, “Federal spending was responsible for the 2022 spike in inflation, research shows,” MIT Management Sloan School (December 4, 2022): https://mitsloan.mit.edu/ideas-made-to-matter/federal-spending-was-responsible-2022-spike-inflation-research-shows
