My City July 2022

MYECON

In ation was Avoidable BY DR. CHRISTOPHER DOUGLAS

As of this article’s writing, in ation is 8.2%, imposing an unavoidable tax on all Americans. A tragedy of this is that thi in ation could have easily been avoided. Recent research from the San Francisco Federal Reserve District Bank found that the March 2021 American Rescue Plan (ARP), which sent most Americans $1,400 and state and local governments $250 billion amongst other beneŽts, increased in a tion by three percentage points. In other words, had the ARP not been signed into law, in ation would be 5.2% rather than 8.2%. ere was little justiŽcation for the ARP. e unemploy ment rate had already fallen to 6%, more than 300,000 jobs were being created per month (except for December 2020) and the total production of goods and services in the economy was only 1% below where it was pre-pandemic. As economists have known since at least Milton Friedman, dumping newly-printed money into a largely recovered economy results in in ation. People try to spend this new money, this spending outpaces the production of goods and services, and prices surge. e ARP was the largest stimulus package in U.S. history, costing over $2 trillion. It should not have surprised anyone that the ARP would be in ationary, though apparently it surprised both the Federal Reserve and the Secretary of the Treasury. Friedman’s knowledge had apparently been lost on them (and others) in what economist Tyler Cowen calls “ e Great Forgetting.” e Russian-Ukrainian war caused the price of crude oil to increase by over $50/barrel and the price of gasoline to increase by over $1/gallon; this has probably added another percentage point to in ation. Had the U.S. pursued a diplomatic solution

Dr. Christopher Douglas came to the University of Michigan-Flint in 2006. He earned a B.S. in Electrical En gineering and a B.S. in Economics from Michigan Tech nological University in 2001, and his Ph.D. in Economics from Michigan State University in 2007. As Associate Professor and Chair of the Department of Economics, he teaches Principles of Microeconomics, Principles of Macroeconomics, International Economics, Public Finance, and Sports Economics. I am convinced that previous generations will look back at policies enacted over the last two years as some of the most severe policy blunders of modern American history. anks to these blunders, the Federal Reserve will have to do something it has never done before, namely engineer a soft landing that brings down the rate of in ation without inducing a major recession. e signiŽcant energy price spike the economy is currently facing makes that prospect even more daunting. ® and prevented this war, rather than ooding the region with weapons, in ation would have been one percentage point low er, and thousands of lives saved. e December 2020 stimulus was modest by COVID standards, but still large in absolute dollars, costing over $900 billion and sending most Americans a $600 check. It is hard to justify this package as well, since GDP and job growth were both strong at the time. is package probably added another percentage point or so to the rate of in ation. us, with more responsible domestic and foreign policies, the United States could be emerging from the COVID-19 pandemic with a rate of in ation on the order of 3% to 4%, rather than over 8%. Reducing in ation from the former back down to 2% is astronomically easier than from the latter.

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