Biden's $1.9T stimulus caused inflation, critics say. But others argue it saved the economy.

Is President Joe Biden to blame for the nation’s skyrocketing inflation?

With midterm races in full swing, Republican candidates are pointing a finger at the $1.9 trillion American Rescue Plan, which Biden spearheaded and Congress passed in March 2021 with no Republican votes. It was billed as the final steroid shot needed to propel the economy out of its COVID-19-induced doldrums.

Economists, meanwhile, are debating how much of the price surge can be traced to the law – and whether its benefits outweigh the costs – as the Federal Reserve gears up for a flurry of interest rate hikes to fight inflation. Next week, the Fed is expected to raise its key rate by half a percentage point, the most in two decades, sparking fears of a downturn.

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Too much stimulus for a hot economy?

In a TV ad this month, Jane Timkin, a Republican U.S. Senate candidate in Ohio, said: “Joe Biden’s wasteful spending has sent prices skyrocketing. Now everything from groceries to gas and meals with our families cost more.”

Republicans and Democrats agree that the American Rescue Plan – along with supply chain bottlenecks and employee pay increases – contributed to inflation that reached a 40-year high of 8.6% in March. But they differ starkly over how much and whether it was worth the run-up in prices.

First as a candidate and then as president-elect, Biden also pushed for COVID-19-related stimulus measures totaling $4 trillion that Congress passed in 2020 and included checks of $1,200 and $600 to most households, among other provisions. But those bills were approved with bipartisan votes, and many GOP officials say they were needed to pull the nation from a deep hole.

The rescue plan, conservative and some progressive economists argue, added too much kindling to an economy that was already recovering. It pushed total COVID-19 relief to about a quarter of the nation’s gross domestic product, far more than the 10% or less of GDP enacted by other countries.

Besides sending most households a third check for $1,400, the law extended enhanced unemployment benefits of $300 a week until September 2021, expanded the child tax credit, provided more aid to small businesses, added funding for state and local governments and money for COVID-19 vaccinations and treatments, among other provisions.

Once-in-a-generation inflation

Before it was passed, former Treasury Secretary Larry Summers, a Democrat, said in a Washington Post opinion piece that the package would “set off inflationary pressures of a kind we have not seen in a generation.”

He cited Congressional Budget Office figures showing the gap between the economy’s actual and potential output was about $50 billion a month, but the legislation would generate about $150 billion a month, causing the economy to overheat.

Mark Zandi, chief economist of Moody’s Analytics, disagrees. He says the output gap was larger than the CBO estimated, and the stimulus plan closed it but didn’t push activity beyond that threshold.

Douglas Holtz-Eakin, president of the American Action Forum, a conservative think tank, says he can tell how much the law fueled inflation by looking overseas. Annual inflation in the U.S. and Europe was running below 2% in early 2021. Starting in March, inflation began to pick up much more sharply in the U.S.

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By September, price growth was at 3.4% in Europe and 5.4% in the U.S. By the end of the year, it was 5% in Europe and 7.1% in the U.S. Both the U.S. and Europe contended with COVID-19-related supply chain snarls that led to product shortages and sharply rising prices, says Holtz-Eakin, who was chief economic policy adviser to Sen. John McCain's 2008 presidential campaign.

Thus, he says, the 2 percentage difference between European and U.S. inflation can be pinned on the stimulus plan.

Some say supply chain was main cause

Moody’s economist Bernard Yaros has a different view. Instead of looking at annual inflation, which shows a steady rise through 2021, he cites the month-to-month change in prices at an annualized rate. That’s more telling, he says, because it eliminates distortions caused by low numbers the previous year.

By that measure, he says, inflation was already rising before the measure was passed, kicked into a higher gear after the bill became law, then fell sharply until the delta coronavirus variant upended improving supply chains.

As a result of delta, many factories in Asia shut down and U.S. truckers, as well as port and warehouse workers, stayed out of work, which slowed deliveries. Yaros estimates the supply troubles added 3.3 percentage points to inflation.

Increasing vaccinations through last summer that coaxed more Americans to travel, shop and dine out also juiced prices, he says.

The stimulus bill, Yaros says, was a factor but “didn’t add meaningfully to inflation.” Moody’s computer model estimates it tacked on two-tenths of a percentage point to price increases last year and three-tenths in 2022.

A bigger factor was the shift of consumer purchases from services to goods as people hunkered down at home during the health crisis, says Josh Bivens, research director at the left-leaning Economic Policy Institute.

Was it worth it?

Did the stimulus bolster the economy enough to warrant the boost to inflation?

Not according to Holtz-Eakin and other conservative economists. The economy already was reopening, vaccinations were rising and employers were hiring briskly, he notes.

Before the bill was passed, the U.S. added a booming 520,000 jobs in January and 710,000 in February, Holtz-Eakin says. Average job growth slowed to a monthly average of 471,000 in the three months during and after the bill was passed.

The economy, meanwhile, grew a vibrant 6.3% annualized in the first quarter, chiefly before the bill was enacted. Growth increased to 6.7% in the second quarter – not enough to justify the jolt to inflation, Holtz-Eakin says.

“You’re adding $2 trillion to a rapidly growing economy,” he says.

Yaros, however, describes a more dour economic backdrop in early 2021. The pandemic had flared that winter, the economy lost 115,000 jobs in December, and previous stimulus measures were running dry.

“We were still coming out of a massive shock to the economy," he says.

Without the bill, U.S., employers would have created about 2.7 million jobs last year instead of the record 6.7 million, Yaros says. Economic growth would have been 3%, not the 5.7% that marked a 37-year high. And unemployment would have averaged 7% last year instead of 5.4%.

Food insecurity and child poverty dropped

The $1,400 stimulus checks and child tax credit payments cut food insecurity in half, and the child poverty rate fell by 7.7 percentage points last year, David Kemper, an EPI policy coordinator, wrote in a blog.

“Given how weak the economy still was at the beginning of 2021, the best-case scenario (without the stimulus) was a weak recovery like the one after" the Great Recession of 2007-09, he wrote.

Biden’s determination to avoid such a tepid rebound solidified his decision to push through a larger package.

Ultimately, if inflation eases this year, supply chain problems unwind and the nation avoids recession, the stimulus will have improved the lives of millions of Americans at minimal cost, Yaros says.

Holtz-Eakin disagrees, saying inflation is squeezing a large population of low- and middle-income Americans whose wage increases aren’t keeping up.

This article originally appeared on USA TODAY: Is Biden's $1.9T American Rescue Plan to blame for inflation?