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Newsom’s aid plan triggers inflation spiral

 

As inflation wreaks havoc on Californians’ personal budgets, Gov. Gavin Newsom is proposing an $18.1-billion “inflation relief” package that includes $400 gas-tax refunds, rental-assistance vouchers, increased pay for healthcare workers and subsidies for childcare, public transit, utilities and health insurance. Instead of relieving inflation, however, the program will only make it worse.

“We enacted the most comprehensive economic stimulus program in the nation last year, getting billions in immediate relief to millions of Californians,” the governor said. “This inflation relief package will help offset the higher costs that Californians are facing right now and provide support to those still recovering from the pandemic.”

Newsom needs new economic advisers — or a refresher class in economics. The inflation rate leveled off at 8.3% last month, but it remains at a level not seen since the Jimmy Carter era. Gas prices, for instance, are up 50% from last year. Those price hikes are rippling across the economy, as manufacturing and transportation costs rise.

While disruptions from the COVID-19 shutdowns are partly to blame, the main inflation drivers are the stimulus packages that the governor touts. The federal government went deeper into debt to provide relief funds. Disposable income increased significantly because of those stimulus checks, which drove up the demand for available products

The supply chain issues restricted supplies and compounded the problem. Simply put, more dollars were chasing fewer goods so prices rose. Let’s use an analogy. What if the government decided to subsidize the purchase of new automobiles and provided Americans with a $10,000 new-car voucher to help reduce the pain of rising transportation costs?

Car lots already are largely empty but, all of a sudden, the demand for new vehicles would soar. Dealers would respond by dramatically raising the prices of available cars. No one would really be better off. That’s essentially what happened economy wide.

“Stimulus bills approved by Congress beginning in 2020 unleashed the largest flood of federal money into the United States economy in recorded history,” the New York Times reported. Not surprisingly, the $5 trillion in spending has been followed by some of the most severe inflation in the nation’s history.

As the Wall Street Journal notes, the additional federal debt also incentivizes investors to sell bonds and buy other things — and triggers price hikes for other investments. Government spending also crowds out private investment, as governments grab a larger share of available dollars. That also increases prices.

Therefore, the Newsom package will only exacerbate the inflationary spiral, which is defined as “a situation in which prices increase, then people are paid more in their jobs, which then causes the price of goods and services to increase again, and so on.”

“It’s intended to help people with these rising prices but it’s putting more money into the economy that people will spend,” a Tax Foundation spokesman told the Sacramento Bee. “This rebate and all of the other policies states are pursuing to make one-time transfers are inflationary.” Exactly.

California has a mind-blowing $97.5-billion surplus, meaning that it’s collecting far more money than it needs. We support returning money to those who paid it, lowering tax rates and catching up on the infrastructure backlog. However, it’s economically illiterate to offer “inflation relief” with income transfers that will create more inflation.

 

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