Center for Business and Economic Research - Ball State University


CBER Data Center
Projects and PublicationsEconomic IndicatorsWeekly CommentaryCommunity Asset InventoryManufacturing Scorecard

About

Commentaries are published weekly and distributed through the Indianapolis Business Journal and many other print and online publications. Disclaimer

RSS Feed

Disclaimer

The views expressed in these commentaries do not reflect those of Ball State University or the Center for Business and Economic Research.

Recent

Two Key Economic Lessons in One BillHoosiers face trade-offs and opportunity costs in the wake of SEA1.

Time to Fix Economic Development PolicyAllocating tax dollars to land development won’t cause economic growth.

The Unanticipated Effects of SB1Businesses, governments and households may all feel the effects.

The Stupidest of PoliciesThis whipsawing of tariff rates has unnerved financial markets, which on Wednesday, were toying with a liquidity crisis.

View archives

Top Tags

jobs and employment 261
economics 201
state and local government 188
education 186
economic development 171
indiana 171
budget and spending 145
taxes 144
law and public policy 142
workforce and human capital 139
Browse all tags
Reporter / Admin Login

June 19, 2022

Yes, State Stimulus Checks Boost Inflation

This current bout of inflation reminds us just what a bipartisan policy fiasco looks like. Before chronicling policy proposals that range from the goofy to counterproductive, it’s good to clearly define inflation and outline its causes.

Inflation is a decline in the value of our currency. That’s the disease, one symptom of which is higher prices. But, sometimes higher prices are caused by problems other than inflation. Wars almost always lead to higher prices for some commodities. Other shocks, like hurricanes or pandemics also cause higher prices for some items.

The decline in the value of currency isn’t an accident, it is a policy trade-off between higher prices and higher unemployment. The source of that trade-off is rarely a one-time event. Our current inflation has many sources. A quick inventory of recent inflation-inducing policies should be sobering.

A decade of low interest rates and easy monetary policy set the conditions for inflation. Mr. Trump’s Tax Cuts and Jobs Act substantially added to the deficit and set the stage for inflation. The bipartisan CARES Act passed in the first weeks of the pandemic and signed by Trump was the single largest stimulus bill ever passed. Mr. Biden’s American Recovery Plan of 2021 added yet more inflation risk.

Each of these bills were designed to aid economic growth or save us from a depression. The CARES Act and ARP doubtlessly boosted economic recovery that has been far, far stronger than any economic forecast predicted. It is worth noting that the average American family received far more stimulus money than the losses felt by inflation.

Inflation is not caused by greed; that’s just goofy nonsense. Inflation is always and everywhere a monetary phenomenon, in which the value of currency drops. Still, that does not mean other things, like persistent COVID lockdowns in China, don’t affect prices. As we are afflicted with inflation, there is also a war happening in a region that exports petroleum. The Biden administration has performed superbly in this conflict, so I am reluctant to blame them for high gas prices. I blame Mr. Putin.

Still, no one at the federal level in Congress, the Biden administration or the Federal Reserve is covering themself with glory over their response to inflation. The awful truth is that to get out of this inflationary period, we are going to face higher prices for many months. There is no easy nor quick way out of this. In a better country, we’d hear this message from honest, courageous leaders of both parties. We are not so gifted, as Indiana’s experience makes clear.

The Indiana Democrats were early in calling for a gas tax holiday over inflation and the war in Ukraine. This was unwise, and the GOP said so. Hoosiers are lightly taxed people; we are among the least taxed in the developed world. Our roads are an embarrassment, and the GOP undertook the tough job of raising taxes to fix them. We remain years away from that fix, and so a tax cut on gasoline is just an invitation for more potholes.

A more important point is that, during a period of inflation, tax cuts simply worsen the problem. Once again, inflation is caused by too much money supply. Adding more money to an economy during inflation can only worsen it. The inflationary effect of a reduced gas tax is modest, simply because it would be so small. It was always a gimmick and Hoosier taxpayers know better, or at least I thought they did.

The Democrats’ proposal was bad, but the Holcomb Administration’s tax rebate, which would return $1 billion to taxpayers, is worse. When combined with the tax rebates currently being mailed to taxpayers, it totals $1.5 billion. Here a little math helps.

The $1.5 billion rebate is roughly 8.3 percent of the state’s current budget. Inflation over the last year was 8.6 percent. This tax rebate is merely returning the inflated dollars back to taxpayers, it is not the result of strong growth. Indiana actually lost jobs last month. It is worth noting that the state is sending out equal payments to all taxpayers—this is a stimulus, not a refund. So, will this be inflationary?

Yes, of course it will be. Again, inflation is caused by too much money chasing too few goods. The question is how much inflation it will cause. Again, this involves mathematics, or really some statistical modeling, maybe an hour’s worth of work by a good economics undergraduate.

It’s easy to estimate how much the change in money supply affects inflation, and as a quick snapshot, that is as good as any approach to estimating inflation. Fortunately, the Federal Reserve publishes these data, and over the past 12 months, Indiana’s share of the national money supply rose by about $0.8 billion. Inflation has been at about 8.6 percent over the same 12-month period. So, a small change in money supply correlates with much more inflation.

Of course, at the state level, some of this money will be spent outside the state on vacations or on goods purchased elsewhere. Some of it will be saved, though the disbursement as a stimulus means this will be less that than in a normal tax refund. Still, the extra money injected back into the Indiana economy this summer will be close to twice the growth of money supply in the state over the last year. That alone should be a huge red flag to a budget team who takes economics seriously.

The statistical model suggests that the extra $1.5 billion will boost inflation for Hoosiers by more than 1.5 percent and lengthen our period of price increases by a year. To be conservative, I’d reduce that a bit to account for out of state spending, affecting consumer prices elsewhere. Still, at that level, it’s not clear consumers will be better off.

The proposed tax rebate equals about 0.4 percent of total personal income on Indiana. A 1.0 percent inflation increase on our personal consumption is over $2.5 billion. That would leave Hoosiers $1 billion in the hole. Even if my estimates are off by half, this is simply a costly gimmick with no real benefits. A very costly gimmick.

The last biennium budget planned for modest inflation in 2021 through 2023. By the end of next year, Hoosier schools will have fewer inflation-adjusted dollars per student than they had in 2010. The timing couldn’t possibly be worse for filling teaching jobs, so expect the return of the teacher shortage. This time it will be real. I’m sure state stimulus payments, gas tax holidays and tax rebates are politically popular. I’m equally sure they are poor public policy.

Link to this commentary: https://commentaries.cberdata.org/1164/yes-state-stimulus-checks-boost-inflation

Tags: bailout and debt, economics, federal government, federal reserve, finance, gov. holcomb administration, indiana, money supply, politics, prices and inflation, state and local government, the middle class


About the Author

Michael Hicks cberdirector@bsu.edu

Michael J. Hicks, PhD, is the director of the Center for Business and Economic Research and the George and Frances Ball distinguished professor of economics in the Miller College of Business at Ball State University. Note: The views expressed here are solely those of the author, and do not represent those of funders, associations, any entity of Ball State University, or its governing body.

© Center for Business and Economic Research, Ball State University

About Ball State CBER Data Center

Ball State CBER Data Center is one-stop shop for economic data including demographics, education, health, and social capital. Our easy-to-use, visual web tools offer data collection and analysis for grant writers, economic developers, policy makers, and the general public.

Ball State CBER Data Center (cberdata.org) is a product of the Center for Business and Economic Research at Ball State University. CBER's mission is to conduct relevant and timely public policy research on a wide range of economic issues affecting the state and nation. Learn more.

Terms of Service

Center for Business and Economic Research

Ball State University • Whitinger Business Building, room 149
2000 W. University Ave.
Muncie, IN 47306-0360
Phone:
765-285-5926
Email:
cber@bsu.edu
Website:
www.bsu.edu/cber
Facebook:
www.facebook.com/BallStateCBER
Twitter:
www.twitter.com/BallStateCBER
Close