Inflation is a side effect of treating COVID’s economic chaos
Sometimes a medicine’s side effects make us forget the disease.
Americans have spent the last half of 2021 complaining about inflation, forgetting how we started the year wondering if the vaccines would work enough to get the economy back on track. Admittedly, no one wants to lose their hair to chemotherapy, but it’s better than having cancer.
The global economy relies on trading goods and services. When the pandemic ballooned in 2020, we needed to stay home to slow the spread of SARS-CoV-2 and save lives.
We hit the brakes so hard the economy slid sideways, and we were headed for a ravine.
More than 10 million Americans lost their jobs. We experienced the sharpest recession in modern history. Lines at food banks stretched for miles, and we all wondered how long the pandemic and our savings would last.
Government did what we expected them to do. They handed out trillions of dollars to millions of households over the next year. Leaders of both parties correctly decided to keep as many people in their homes and fed as possible until the economy was back on track.
Congress authorized $5.73 trillion in fiscal support, of which at least $4.9 trillion has been committed or disbursed, according to the right-leaning Center for a Responsible Federal Budget.
And that’s not all of it. “Presidents Trump and Biden have provided over $885 billion in (additional) support, nearly $745 billion of which has already been committed or disbursed,” the center’s latest tally said. “The Federal Reserve has undertaken around $3.91 trillion in emergency lending, asset purchases, and other liquidity actions, out of
around $7 trillion in allowed support.”
That’s an enormous amount of free money flowing to individuals and companies, not to mention cheap loans to homebuyers and corporations. For most Americans, money was not a problem during the pandemic. In fact, many had enough to pay off debts and renovate their homes.
Cash, though, does not kill coronaviruses. COVID-19 spread like wildfire in 2020 and in 2021, despite vaccines and treatments. Factories shut down, ships did not sail, miners did not extract energy, truckers did not truck. Supply chains broke down.
Companies that laid off workers in anticipation of a lengthy recession saw orders jump. Getting people back to work took time and was expensive. Getting raw materials and components also proved difficult, since many source countries had low vaccination rates and high absenteeism.
When demand grows and supply shrinks, prices rise.
The inflation rate, comparing post-vaccine 2021 with pre-vaccine 2020, has produced troubling numbers of 5 percent plus while we wait for supply to catch demand.
“Some of those price increases reflect a bounce back from the unusually low level of prices in the first part of the pandemic,” wrote Wendy Edelberg, a senior fellow in economic studies at Brookings, a center-left think tank. “While inflation has increased relative to recent years, inflation is significantly below the (double-digit) levels seen in the 1970s.”
Intellectually, we can understand why the inflation rate is high, but that does not make higher prices any less painful to our pocketbooks. Basic needs like food and energy are costing more than we budgeted, and no one likes to cut spending elsewhere to pay for basic needs.
What we will never know is what might have happened absent the government spending that put so much money into the economy all at once.
If we had not enhanced unemployment benefits and made cash payments to low- and middle-income Americans, they may not have paid their mortgages or car loans. Millions could have defaulted on those loans and credit cards.
When mortgage defaults reach a certain level, real estate values drop. When people do not repay loans, banks and bonds fail, which causes stock values to drop. A medical crisis would have become a financial one as well.
Did Congress, the presidents and the Federal Reserve inject too much cash into the market?
Quite possibly, but that’s only apparent in hindsight. No one has lived through something like this before.
We should keep in mind, though, that not all government spending causes inflation. Handing out cash for people to spend quickly on consumer goods increases demand and is a huge driver of inflation. We are seeing that today.
Long-term spending on roads, power plants and ports, though, is another matter. Using cash, labor and resources to build things that reduce costs and boost supply will suppress inflation.
Inflation will last longer than we wish, but considering the disease we dodged, it’s a side effect we’ll get over soon enough.