Who is to blame for the highest inflation in 40 years? New Hampshire’s U.S. representatives are offering a novel economic theory: It’s COVID’s fault.
“I’m gonna be the first to tell you that I’ve heard economists on all sides of this, but we know the core reason is the pandemic,” U.S. Rep. Annie Kuster of New Hampshire’s 2nd Congressional District told radio host Jack Heath on February 18.
Kuster suggested that a change in Centers for Disease Control guidance on masking in March would bring inflation down.
“The light at the end of the tunnel is in sight. I think March,” she said. “I’ve got my sights set on St. Patrick’s Day. Let’s burn the masks and move on. And I think that’s what’s gonna help bring down inflation.”
The pandemic caused inflation, she said, because “everybody was home, we weren’t using the services, and instead money was being spent on goods.”
U.S. Rep. Chris Pappas of New Hampshire’s 1st Congressional District made the same point about COVID on WMUR-TV last weekend.
“We’ve got to first and foremost understand that we’re seeing inflation and disruption in our economy because of COVID,” the Manchester Democrat said. “And the more we can return to normal and have available the tools we need to overcome COVID — that’s the vaccines and the tests — the better off we’re gonna be in terms of easing inflation over time.”
To sum up, Kuster and Pappas say that COVID caused inflation and rising prices will ease when the virus is under control.
And what about the trillions in federal spending since President Joe Biden and Democrats took control of Washington? According to Kuster and Pappas, federal spending has helped, not hurt, the fight against inflation.
For example, the $1.9 trillion American Rescue Plan passed last March helped people afford the higher prices caused by COVID.
“We have to look at how we can make things less expensive for families today,” Pappas said “And that’s why the American Rescue Plan was so important. It has brought down health care costs for tens of thousands of families in New Hampshire, put hard-earned money back in people’s pockets month after month.”
Kuster said the spending saved the economy.
“Look, we were trying to fend off a total economic collapse,” she said. “You’ve gotta take yourself back to … 2020 when, I think it was a miracle: the Paycheck Protection Program was keeping businesses open, and the American Rescue Plan. That’s why most Americans are feeling a strong economy.”
But the recession lasted only two months, ending in April 2020. Washington had already spent more than $3 trillion in COVID relief between the spring and fall of 2020. Congress passed the American Rescue Plan in March 2021, 11 months after the COVID-19 recession ended.
Economists attribute inflation not to COVID, but to the trillions of dollars in deficit-funded stimulus spending that followed, particularly the American Rescue Plan. They followed up with the $1.2 trillion bipartisan infrastructure bill, and the House passed the Build Back Better plan. According to the Committee for a Responsible Federal Budget (CRFB), its real cost over 10 years is around $5 trillion.
Both Kuster and Pappas voted for the spending package, which died in the U.S. Senate over concerns about inflation from Democratic Sen. Joe Manchin (W.V.)
All told, the Committee for a Responsible Federal Budget has tallied $5.78 trillion in COVID spending by Congress, with $5.17 trillion of that adding to the federal deficit. There was an additional $911 billion in administrative actions, with $156 billion of that in borrowed money.
To put that in perspective, the entire federal budget for the 2020 fiscal year was set at $4.79 trillion.
So, is inflation a symptom of COVID and supply chain problems, or federal monetary policy and government spending?
“After the economy recovered, they went into a full-employment economy, and they stimulated the heck out of it, and I think that’s why inflation is now up into the double digits,” said Kevin Hassett, who served as President Donald Trump’s Chairman of the Council of Economic Advisers. Hassett believes inflation will hit 10 percent before it begins to decline.
Desmond Lachlan, an economist at the American Enterprise Institute who formerly worked on economic policy at the International Monetary Fund, also blamed federal policy.
“My take is that the surge in inflation to its fastest rate in 40 years is the result of the very unfortunate combination of the largest peacetime budget stimulus on record, the easiest of Federal Reserve monetary policies, and supply-side problems caused by disruptions to the global supply chain,” he said. “This led to a situation where aggregate demand further outstripped aggregate supply, which in turn has led to price and wage pressures.”
He singled out the American Rescue Plan as particularly harmful.
“I find it very sad that the Biden administration still seems to be in denial about the role that its $1.9 trillion American Rescue Plan (ARP) played in causing today’s economic overheating. They would have done well to heed Larry Summers’s warning last March, who described the ARP as the most irresponsible of budget policies that he had seen in 40 years.”
Summers, who served as Treasury Secretary under President Barack Obama, blasted the $1.9 trillion stimulus legislation in March of last year as “the least responsible macroeconomic policy we’ve had in the last 40 years.” He predicted that it would prove inflationary if the Federal Reserve did not respond by raising interest rates. The Federal Reserve did not raise interest rates, and record inflation ensued.
In early February, Summers again attributed inflation to federal policies.
“I’m not sure that we would have the inflation if there had never been a pandemic and, even if there had been a pandemic, without the overwhelming stimulus that was applied well into recovery — during 2021,” he told The Harvard Gazette. “We had an economy where income was running short by $50 billion a month because of the pandemic, and we injected $150 billion to $200 billion a month into that economy. It’s perhaps not surprising that that’s led to an overflow of demand, which has generated inflation that on the CPI [Consumer Price Index] measure has risen to 7 percent.”
The Federal Reserve Bank of San Francisco has attributed inflationary effects to the $1.9 trillion stimulus.
Even Biden himself acknowledged the American Rescue Plan’s inflationary effects last November.
Writing in The Wall Street Journal last June, when inflation was already over 5 percent, economists John Greenwood and Steve Hanke predicted still higher inflation by the end of the year.
“…money supply (M2) should be growing at around 6 percent a year for the Fed to hit its inflation target of 2 percent. With M2 growing at nearly four times the ‘ideal’ rate since March 2020, inflation is baked into the cake, and it’s likely to persist. By the end of the year, the year-over-year inflation rate will be at least 6 percent and possibly as high as 9 percent.”
It hit 7 percent in December and 7.5 percent in January.
Given that Kuster and Pappas both advocated and voted for the trillions in Biden-backed spending, it’s understandable they would defend those votes as economically helpful.
But the general economic view is that pumping an overabundance of borrowed money into an economy in which demand was already high and supply was already constrained caused rapid inflation.
Unfortunately for Democrats seeking re-election, the inflation impact was predicted at the time. Congress did not have to continue pumping trillions of dollars of borrowed money into a hot economy a year after the recession had ended. It did so anyway.
And it appears those politicians have learned nothing. Even as inflation was soaring to a 40-year high, members of Congress like Kuster and Pappas continue to push for trillions more in borrowed spending.
During COVID, Americans were constantly told to “follow the science” and “listen to the experts.” It’s funny how those warnings never apply when the science is economics.