Did President Joe Biden cause inflation? The answer is that he caused only 2% of the 8% rise in U.S. inflation and by doing so kept the economy from falling back into recession in 2021.
At the beginning of 2021 there was only 1% inflation in the U.S. Since then, consumer price inflation has risen in the U.S. and is currently 9%. What caused this 8% rise in inflation? Many have contended that the main cause was the fiscal stimulus generated by the American Rescue Plan proposed by Biden and enacted by the Democrats in Congress in March 2021.
But the most crucial fact about the rise in inflation since COVID-19 is that, like COVID-19, the rise occurred in most countries, not just the United States. Any analysis of the rise in inflation in the U.S. must explain why an equal rise in inflation occurred in Europe. Since spring 2021 consumer price inflation in Europe has risen from 1% to 9% currently, a rise of 8%, just as in the U.S. But as documented by Moody’s Analytics, fiscal stimulus was much smaller in Europe than in the U.S., and the European unemployment rate is still above 6%, so European fiscal stimulus did not cause any rise in European inflation.
Three factors caused the 8% rise in European inflation:
1. The worldwide severe supply chain disruptions from COVID-19 that raised producer costs and therefore prices;
2. The large rise in the world price of oil and gasoline, and especially the huge rise in the price of European natural gas after Russia’s invasion of Ukraine in February 2022 which alone added 2% to Europe’s inflation rate; and
3. The sharp rise in world food prices due to droughts, extreme heat, and fuel cost increases.
The U.S. faced the same three factors except the huge rise in the price of natural gas. Thus, excluding natural gas, the U.S. and Europe were both hit with a 6% rise in inflation from the same factors listed above. This 6% rise was not caused by Biden.
What about the other 2% of the 8% rise in U.S. inflation? In March and April 2020 Congress, with bipartisan support, enacted the CARES act and several other acts that injected a huge stimulus, roughly $2 trillion, into the economy in 2020 but little stimulus after 2020. In December 2020, Congress, with bipartisan support, enacted fiscal stimulus for 2021 that was only about a third of the expiring CARES stimulus, $0.7 trillion — plus $0.2 trillion for 2022. When Biden took office in January 2021 fiscal stimulus in 2021 was therefore about to plunge by two-thirds — a plunge of $1.3 trillion — that would have thrown the economy back into recession in 2021.
Biden and the Democratic majority in Congress correctly sought to prevent this $1.3 trillion plunge in stimulus by proposing and passing the $1.9 trillion American Rescue Act in March 2021 which injected $1.3 trillion of fiscal stimulus for 2021, thereby keeping fiscal stimulus roughly the same in 2021, $2 trillion, as it was in 2020 — and injected the remaining $0.6 trillion in 2022.
Moody’s Analytics Macroeconomic Model developed by Mark Zandi and colleagues simulated what would have happened when the huge 2020 fiscal stimulus — CARES and other acts — ended in early 2021 if the American Rescue Plan hadn’t replaced it. According to Moody’s Feb. 24 analytics report "Global Fiscal Policy in the Pandemic": “Without ARP, the U.S. economy would have come close to suffering a recession in spring 2021. Based on a simulation of our macro model assuming no ARP, real GDP declines in the second quarter of 2021 and ekes out only a small gain in the third. Because of the weakened economy, unemployment rises back over 7% and remains materially higher after that.”
When the $1.9 trillion American Rescue Plan proposal was debated in Congress in February 2021, opponents claimed that if ARP were enacted it would boost demand so much that actual output in 2021 would be much greater than potential output, thereby causing a sharp rise in inflation. ARP was enacted in March 2021 and implemented, but actual output in 2021 did not exceed potential output in 2021 or 2022. Why were these opponents wrong? Because they overlooked the crucial fact that the huge 2020 CARES act was expiring so fiscal stimulus was about to plunge $1.3 trillion in 2021 without the American Rescue Plan. Inflation rose sharply in 2021, but not because actual output exceeded potential output. It rose in the U.S., Europe, and around the world due to the three factors listed in the paragraph above that begins with “Three factors …”
With ARP in 2021 replacing CARES, a recession was avoided in 2021 and the unemployment rate gradually declined from 6.7% in December 2020 to 3.9% in December 2021. A portion of ARP’s stimulus continued in 2022 and the unemployment continued its gradual decline to 3.5% in July 2022. Before covid in 2019 the unemployment rate also gradually declined and reached 3.5% in September 2019 but there was no inflation, so it might seem that Biden’s ARP would generate no inflation. But the job vacancy rate has been higher since ARP, and this higher vacancy rate may have caused a 2% rise in wage increases, cost increases, and price increases. If ARP caused the higher vacancy rate, then ARP may have caused a 2% rise in inflation.
Biden’s American Rescue Plan kept fiscal stimulus the same when it would otherwise would have plunged $1.3 trillion in 2021. It kept the economy from falling back into recession in 2021. It did not overheat the economy: actual output did not exceed potential output in 2021. It caused only 2% out of the 8% rise in inflation. The phrase “Biden’s inflation” is false.
Laurence Seidman is Chaplin Tyler professor of economics at the University of Delaware.
This article originally appeared on Delaware News Journal: Did President Joe Biden really cause inflation? He did not