How Pandemic Relief Efforts Caused High Inflation

EDITOR'S NOTE: Under President Biden, the US government spent a larger share of its funds relative to GDP than Canada and the EU. Around $1.9 Trillion, a sum equivalent to 25% of America’s  GDP, was spent on pandemic relief. And now, the US CPI inflation rate has skyrocketed from under 2% to 8.5% and rising. The White House’s early messaging efforts tried to pin the blame on supply chain disruptions. When Russia invaded Ukraine, the White House tried to spin a ‘Putin price hike” narrative—a move that may be just as devious, though not as clever, as Putin’s own propaganda efforts. But the San Francisco Fed’s report detailing how fiscal stimulus was a major contributor to our current inflationary woes was something of a checkmate for the Biden administration’s spin efforts. As a result, the White House Council of Economic Advisers’ report doesn’t dispute the role that Biden’s $1.9 trillion played in the current “pandemic inflation.” Not surprisingly, however, the progressive end of the Democratic party still defends the outcome, pointing to the “historic growth and low unemployment,” we’re seeing, but not to the soaring inflation that virtually renders all of these benefits pointless. Another spin, or just a testament to the Dems’ cluelessness of all things economic?

Source: Data: White House Council of Economic Advisers via national statistics agencies; Chart: Axios Visuals

The U.S. spent more on its pandemic relief efforts than other nations. The results have been higher inflation — but also a much more rapid recovery, Axios’ Neil Irwin writes.

• That narrative is a key takeaway from the "Economic Report of the President," published this morning, that gives the administration's official analysis of economic conditions.

Why it matters: The Biden team isn't disputing that the president's signature pandemic aid, the $1.9 trillion American Rescue Plan, contributed to inflation. Rather, they argue that it has created benefits that put the U.S. economy in a position to be more resilient to the shocks of 2022 — like the Ukraine war and rising interest rates.

• The White House Council of Economic Advisers produces the annual economic report, a tome-length document.

State of play: In a chapter focused on international comparisons, the White House economists note that the American fiscal response to the pandemic amounted to more than 25% of GDP, well above the 16% in Canada and 11.5% of the eurozone.

• The U.S. has also ended up leading those nations in inflation rates, with consumer prices rising 8.5% from December 2019 to December 2021 in the U.S. versus 5.5% in Canada and 4.7% in the eurozone.

What they’re saying: The American Rescue Plan was a kind of insurance policy," CEA chair Cecilia Rouse said in an interview with Axios. "Go back a year ago, it was not at all a given that we would be here today with historic growth and low unemployment."

• U.S. GDP was 3% above its pre-pandemic level in the fourth quarter, by the CEA's calculations, but had shown no gain in Canada, the Eurozone, or Britain.

Consider the auto industry, which played a major role in elevated inflation in 2021. The report notes that American auto production was stronger, relative to pre-pandemic trend, than in other countries.

• "The fact that the rise in car prices has been larger here than abroad stems partly from the particularly resilient demand created by the U.S. recovery passing through to the auto sector," the report says.
• While noting that high vehicle prices "do pose challenges" for households and businesses, the report adds that the strength of the recovery "highlights the important benefits of the U.S. demand-driven recovery for workers and businesses."

The bottom line: The economists who have the president's ear see robust economic activity as the most important legacy of the pandemic aid spending, and inflation as a secondary effect.

Originally published on Axios.