As the US economy gradually recovers from the coronavirus pandemic, prices are rising across the board with inflation exceeding the Federal Reserve’s 2% target and reaching a 13-year high in June. Republicans have turned that jump in inflation into a political talking point, trying to place the blame on President Joe Biden and Democrats, andat times misrepresenting the current economic landscape in the process.
In mid-July, Minority Leader Rep. Kevin McCarthy tweeted, “Inflation is running rampant due in part to out-of-control spending from President Biden and Speaker Pelosi.”
About two weeks later, the chair of the House Republican Conference, Rep. Elise Stefanik, went a step further in blaming Democrats, saying in a press conference that “inflation is skyrocketing because of Democrats reckless and wasteful spending” and “this rampant inflation is a result of Democrats reckless tax and spend policies.”
Later that day, in an interview with Newsmax, Republican Sen. Ted Cruz suggested Republicans should not support Democrat-led initiatives that call for more spending and cited Biden’s several trillion dollar proposed budget, claiming “when it comes to spending, spending trillions is what is driving inflation.”
On Monday, Rep. Jim Jordan tweeted that Democrats “spend trillions of dollars. Then ignore inflation.”
Facts First: While some economists say the stimulus packages passed in response to the Covid-19 pandemic are having an impact on inflation, it’s misleading to suggest that’s the only explanation for the recent rise in inflation. Blaming it exclusively on Democratic spending proposals misrepresents what’s actually been passed, and ignores the trillions of dollars in spending passed last year supported by Republicans and signed by then-President Donald Trump which economists say have also contributed to inflation.
Last year, Congress passed two bills totaling around $3 trillion in Covid relief spending – the $2 trillion Coronavirus Aid, Relief and Economic Security Act passed in March 2020, and the $900 billion pandemic relief bill passed in December 2020. Both were signed by Trump and supported by Republicans. The economic stimulus packages, including the $1.9 trillion American Rescue Plan signed by Biden in March 2021, which contained at least one tax credit program which is already in effect, have contributed to inflationary pressures but are not the only reason behind the spike, experts say.
“Inflationary pressures are arising from a variety of factors: supply chain issues, the reopening of the economy, over $2 trillion of excess household savings, accommodative monetary policy, President Trump’s $900 billion December stimulus, and the President’s $1.9 trillion stimulus,” said Michael Strain, Director of Economic Policy Studies for conservative think tank, the American Enterprise Institute.
Jason Furman, the Aetna Professor of the Practice of Economic Policy at Harvard Kennedy School, noted that the stimulus checks included in all three Covid relief packages, not the tax credits in the American Rescue Plan, were likely responsible for any impact on inflation those policies had.
“The tax credit’s relatively small compared to the economy as a whole,” Furman said. “If you want to call the checks a tax policy, yes I think that did contribute to inflation.”
Furman, a Democrat who previously worked for the Obama administration, acknowledged that the American Rescue Plan has contributed somewhat to inflation, but said, “I think the biggest thing that’s contributed to inflation is just restarting an economy,” something other countries recovering from the pandemic have also experienced.
Mark Zandi, chief economist of Moody’s Analytics, told CNN that “The jump in inflation has nothing to do with tax and spending policies.”
According to Zandi, inflation is being temporarily driven by “a one-time adjustment in prices” following a decrease last spring when the pandemic erupted, supply chain constraints which have limited production and an increase in demand as the economy reopens.
“Businesses that slashed prices during the height of the pandemic, such as hotels, airlines, rental car companies, etc. are simply raising prices back to where they were pre-pandemic,” Zandi said, adding that, “the supply-side of the economy has lagged demand as the pandemic continues to struggle with scrambled global supply chains.”
According to Zandi, “All of this will be sorted out in coming months, supply will catch up with demand, and inflation will moderate.”
Federal Reserve Chair Jerome Powell, who was nominated by Trump, also expressed confidence that the rise in inflation is temporary.
In testimony to the House Financial Services committee on July 14, Powell said he expects these “rapid” price hikes to “partially reverse” as bottlenecks ease in certain sectors . And in a press conference on July 28, he said, “We think that inflation should move down over time,” but that “it’s hard to say when that will be.”
According to a report from the Commerce Department released Friday, one key inflation indicator rose in June slightly less than anticipated, though it still represented the biggest gain in 30 years.
Future Inflation
The tax aspect of Republican criticism of Democratic “tax and spend policies” likely refers more to proposed policies which have yet to be passed or enacted. A few Republicans, including Jordan and Sen. Rob Portman, are claiming that those future policies, such as the initial infrastructure bill Democrats proposed which Biden says would be paid for largely through taxes, would further increase inflation.
However, economic experts suggest the impact would likely be minimal.
“I think to a first approximation the forward looking proposals would have very little impact on inflation because they’re spread out over time and give the Fed a lot of time to react and are mostly paid for,” Furman said.
Compared to the American Rescue Plan which Garrett Watson, senior policy analyst for the Tax Foundation, said was mostly funded through deficit spending, Biden’s proposed infrastructure plan “would be partially offset by tax increases, which would mitigate the inflationary impact,” Watson told CNN.
“How much this spending would increase inflation depends on two uncertainties: (1) how close the economy is to full capacity over the next few years without the additional spending, and (2) how much additional supply the spending itself generates,” Watson said, adding that the latter is a point White House advisors make to explain why they are not as worried about the plan’s inflationary impact.
Though it’s possible some of Biden’s proposed taxes increases for the wealthy and corporations make it into the reconciliation bill, it’s worth noting that no tax increases are included in the bipartisan infrastructure bill that the Senate is currently considering.
According to Furman, the Republican argument that Democrat-supported tax policies will contribute to inflation makes little sense.
“It’s bizarre. The tax changes the Democrats are proposing are tax increases so if anything, you’d think that would reduce inflation,” Furman said. “In general you think tax cuts are inflationary and tax increases are you know deflationary, so I think it’s sort of strange because I think Republicans aren’t trying to accuse Democrats of being big tax cutters but if you think taxes are causing inflation it’s like you’re accusing the Democrats of cutting taxes by too much.”