In the next few weeks, Californians will begin receiving checks designed to help them cover the rising cost of living being driven by record-high inflation. The checks are part of a “middle class tax refund” program that delivers budget surpluses back to taxpayers, but are being sold as “inflation relief.” The program will deliver payments of up to $1,050 dollars to California taxpayers, with the lowest earners getting the full benefit and lesser payouts going to higher earners. Only the very highest earners, those households with annual earnings over $500,000, are excluded from receiving benefits.
At first glance, the logic seems sound. Life is more expensive right now thanks to irritatingly persistent inflation. So it might seem reasonable that governments, at any level, would hand out some extra cash to help Americans cover newly elevated expenses. The problem is that this logic would have us chasing our own tail. Handing out dollars in an inflationary environment will only make matters worse by driving prices up further.
Here’s how it works. When we put new dollars in the hands of consumers through programs like this one in California, they will likely go out and spend them. That’s sort of the point. But that additional spending—or increase in demand—will actually drive prices up further. This is especially true in the near term, when sellers have just a limited amount of goods or services they can provide and an increasingly eager client base with newfound dollars in their pocketbooks.
The lousy thing about inflation is that the only tools policy makers have to fight it are ones that inflict some amount of economic pain. The primary tool we’re using to fight the widespread and persistent inflation that has taken hold in our economy is monetary policy—in other words, the Federal Reserve raising interest rates. Fiscal policy, government spending, shouldn’t be the first line of defense against inflation. But every time lawmakers pump more cash into the economy they are making Federal Reserve Chairman Jerome Powell’s job a little bit harder.
And while it’s fine for California Governor Gavin Newsom to deliver checks to taxpayers as part of an existing surplus refund program, the magnitude of the spending and inflationary impact is small in the scheme of things, it’s a bit laughable to sell this as an inflation relief program.
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