How Biden's economists view the inflation-stimulus connection
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.
That narrative is a key takeaway from the "Economic Report of the President," published Thursday 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 (ARP), contributed to inflation. Rather, they argue that it has created benefits that put the U.S. economy in 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.
- In an interview with Axios, CEA Chair Cecilia Rouse noted that private economists have a wide range of estimates of how much of a role the ARP played. (A San Francisco Fed study put the contribution at around 0.3% of 2021 inflation, while other economists' estimates are higher, in the 2 to 3 percentage point range).
Yes, but: The White House economists also argue that the Biden administration's fiscal actions helped fuel a more robust recovery in growth and jobs, making the American economy better able to weather the challenges ahead.
- The American Rescue Plan was a kind of insurance policy," Rouse said. "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.