In March 2020 as the pandemic started to really take hold of majority countries in the world, the unemployment rates began to skyrocket in every country including the superpower USA. To curb the effects of unemployment and to stop the economy from collapsing the federal government passed a stimulus bill worth 2.2 trillion dollars in the month of March. This included benefits for business loans, unemployment benefits and the most significant stimulus checks worth 1200 dollars each to millions of USA citizens. In December 2020 the Government gave away 900 billion dollars as a coronavirus response and relief act, and in March 2021 1.9 trillion dollars for American Rescue Plan.
All these new government policies made Larry Summers, former national economic council director for Barack Obama very concerned. He expressed his concerns by quoting, "We’re going to set ourselves up for inflation”. Inflation is the period of time where the price of the commodity keeps increasing whereas the worth of money keeps decreasing simultaneously. The USA has faced severe inflation in the 70s. So the question rises: can these stimulus checks really give rise to Inflation?
Before pondering on the question let's understand how inflation takes place. For survival of any economy it's necessary that the circulation of money keeps going on. When a person spends money in lets say a mall, employees at the mall get paid and they spend the money as per their requirement. It's a cycle, an individual spending money keeps other individuals employed and keeps an economy going. In an ideal economy the rate of unemployment is very low hence, the circulation of money is very high, so there's a comfortable amount of money in the economy. During a recession many people lose their jobs and other people scared of future unemployment start saving and spend less, and thus the flow of money in the economy drops.
In such situations, the government introduces more money into the economy in forms of stimulus checks, unemployment benefits etc. The USA government has been using the method of stimulus checks that helped maintain the economy during the recessions of 2001 and 2008. Studies found that these stimulus checks helped the economy a lot and that people were actually spending this money fast as it gave them access to direct cash.
This is where the problem rises, businesses all across the globe increase their prices a little bit each year as people make a little more than the previous year and this is what inflation is. But if suddenly people have way more money to spend, businesses can increase their prices a lot which means too much money in the economy which gives rise to bad inflation. Economists usually want a little inflation each year as it represents stability in the economy. For the past decade the targeted inflation of the USA has been 2%, and as pandemic struck USA failed to meet this mark and its economy started spiraling to a recession. So the American government used stimulus checks again to overcome recession and this induces the fear of several economists who believe it could lead to bad inflation.
Many economists studying the inflation graph of the USA pointed out that the USA faced a substantial dip in the economy and that these stimulus checks are just covering up the losses and not overflowing the economy with money. A little inflation is expected once the market is opened on a regular basis but an overflow is most likely to not happen. There is a lot of debate around the idea of stimulus checks however, many economists believe that these checks must be automated as soon as the government starts to observe signs of recession. So, as per present scenarios these stimulus checks are just keeping the economy going instead of giving rise to another problem.
This article has been written by Ritika Pandey for The Paradigm.
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