Inflation is a side effect of dealing with the economic chaos of COVID-19


Sometimes the side effects of a drug make us forget about the disease.

Americans have spent the last half of 2021 complaining about inflation, forgetting how we started the year wondering if vaccines would work enough to get the economy back on track. Sure, no one wants to lose their hair because of chemotherapy, but it’s better than having cancer.

The global economy is based on trade in goods and services. When the pandemic exploded in 2020, we had to stay at home to slow the spread of SARS-CoV-2 and save lives.

We braked so hard the economy slipped to the side and we headed for a ravine.

More than 10 million Americans have lost their jobs. We have experienced the deepest recession in modern history. The queues at food banks stretched for miles and we all wondered how long the pandemic and our savings would last.

The government did what we expected of them. They distributed billions of dollars to millions of households over the next year. The leaders of both parties have rightly decided to keep as many people in their homes and feed them as possible until the economy gets back on track.

Congress has authorized $ 5.73 trillion in tax assistance, of which at least $ 4.9 trillion has been committed or disbursed, according to the Right Center for a Responsible Federal Budget.

And that’s not all.

“Presidents Trump and Biden have provided more than $ 885 billion in (additional) support, of which nearly $ 745 billion has already been committed or disbursed,” the center’s latest tally says. “The Federal Reserve has undertaken approximately $ 3.91 trillion in emergency loans, asset purchases and other liquidity actions, out of approximately $ 7 trillion in authorized support.”

That’s a huge amount of free money pouring in to individuals and businesses, not to mention cheap loans to homebuyers and businesses. For most Americans, money was not an issue during the pandemic. In fact, many had enough to pay off debts and renovate their homes.

Cash, however, does not kill coronaviruses. COVID-19 has spread like wildfire in 2020 and 2021, despite vaccines and treatments. The factories have closed, the ships have not sailed, the miners have not extracted energy, the truckers have not trucking. Supply chains have collapsed.

Companies that laid off workers in anticipation of a long recession saw their orders jump. Getting people back to work was time consuming and expensive. Obtaining raw materials and components also proved difficult, as many countries of origin had low vaccination rates and high absenteeism.

When demand increases and supply decreases, prices rise.

The rate of inflation, comparing the 2021 post-vaccine to the 2020 pre-vaccine, has produced troubling numbers of over 5% as we wait for supply to meet demand.

“Some of these price increases reflect a rebound from the unusually low level of prices in the early part of the pandemic,” wrote Wendy Edelberg, senior economic studies researcher at Brookings, a center-left think tank. “Although inflation has increased from recent years, inflation is significantly lower than the (double-digit) levels seen in the 1970s.”

Intellectually, we can understand why the inflation rate is high, but that doesn’t make the higher prices any less painful on our wallets. Basic needs like food and energy cost more than expected, and no one likes to cut spending elsewhere to pay for basic needs.

What we will never know is what could have happened without the government spending that pumped so much money into the economy all at once.

If we had not improved unemployment benefits and provided cash payments to low- and middle-income Americans, they might not have paid off their mortgages or car loans. Millions of people could have defaulted on these loans and credit cards.

When mortgage defaults reach a certain level, real estate values ​​fall. When people fail to repay their loans, banks and bonds go bankrupt, causing stocks to plummet. A medical crisis would also have turned into a financial crisis.

Have Congress, Presidents and the Federal Reserve injected too much liquidity into the market? Most likely, but this is only apparent in hindsight. No one has experienced anything like this before.

We must keep in mind, however, that not all government spending causes inflation. Distributing money so that people spend quickly on consumer goods increases demand and is a huge driver of inflation. We see it today.

Long-term spending on roads, power plants and ports, however, is another matter. Using money, manpower, and resources to build things that lower costs and boost supply will suppress inflation.

Inflation will last longer than we want it to be, but given the disease we’ve been avoiding, it’s a side effect we’ll get over soon enough.

Tomlinson writes commentaries on business, economics and politics.

twitter.com/cltomlinson

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