The Biden administration continues promoting a nearly $2 trillion spending bill passed with zero Republican support despite criticism that the legislation played a big role in fueling inflation.
President Joe Biden spoke in Cleveland on Wednesday about how funds from the American Rescue Plan will shore up multiemployer pension plans. But the bill has become sharply divisive in economic circles, with some saying it contributed up to half of today’s 8.6% inflation.
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“The American Rescue Plan massively overstimulated the economy and caused inflation,” said Douglas Holtz-Eakin, president of the conservative think tank American Action Forum. “It was a major fiscal policy error. One of the worst in my lifetime.”
While it might be expected that conservatives would bash the bill — the Biden administration’s only bill passed on a partisan basis via reconciliation — criticisms have emerged from Democrats as well.
Larry Summers, who served in the Clinton and Obama administrations, blasted the bill as the “least responsible” economic policy he’d seen in 40 years due to its inflationary potential. Summers is now forecasting a recession.
Current Treasury Secretary Janet Yellen also reportedly urged the Biden White House to scale back the plan by one-third, again over inflation worries.
Congress had already passed multiple, bipartisan COVID-19-related stimulus bills, and GOPers united against passing more last March, after Biden took office and with vaccines going out by the millions. As to why Biden continues promoting the bill, Marc Goldwein of the Committee for a Responsible Budget points to its individual programs, which undoubtedly help some voters.
“If you think about it, the bill was problematic because of the totality of its macro effect. Putting all of this money into the economy at the same time caused excess inflation,” he said. “But each element looked at in isolation was helpful to the group that it supported.”
In this view, Biden’s Cleveland visit was a perfect encapsulation of the phenomenon.
“The multiple employer pension event from yesterday — I thought that bailout was horrible policy, but it’s great for the multiple employer pensioners,” Goldwein said.
Similarly, a family of five who received $7,000 in stimulus checks probably was happy about it. But they are now effectively paying it back via inflation. Goldwein said he thinks the American Rescue Plan could plausibly account for up to half of current inflation.
The president disagrees. Biden has said there is “zero evidence” the bill fueled inflation, even arguing that the notion is bizarre.
“You could argue whether it had a marginal, a minor impact on inflation,” he said last month. “I don’t think it did.”
The Biden administration continues talking about the bill frequently and even hosting events around it, indicating it remains proud of it.
Inflation is more likely due to lockdowns and lingering supply chain snags, along with high gas prices due to Russia’s invasion of Ukraine and corporate greed, according to the president.
Some economists tend to agree, especially with regard to supply chains.
“Shanghai is shut down, ports are clogged, and there’s still disruption in the labor force because people are not filling every job available, making it hard to keep up production,” said Gerald Friedman, a professor at the University of Massachusetts Amherst. “The Federal Reserve’s policy of slamming the brakes will eventually bring down inflation by reducing demand for things that are in short supply. But that will be at the expense of considerable suffering.”
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The Fed is now aggressively hiking interest rates in an effort to rein in inflation, but economists such as Friedman and the Center for American Progress’s David Madland warn the Fed could be moving too quickly, especially if inflation is caused mostly by supply chain shocks rather than big stimulus.
That’s misguided, according to Holtz-Eakin.
“The primary job of fighting inflation will fall to the Fed. It’s the best-positioned, has the best tools to do that, and has embarked on an aggressive path of financial tightening,” he said. “The Biden administration could help by cutting the pace at which they add costs and regulations. They could also cut some tariffs, which would be a tiny benefit but still worth doing. And Congress should concentrate on never putting the U.S. in this position again.”
