Democrats’ $1.9 trillion bet that blew up
Nearly four years ago, the Biden administration and Congressional Democrats made a $1.9 trillion bet in the form of the American Rescue Plan. They lost, as it contributed to a surge in inflation that fueled massive voter discontent and Donald Trump’s return to the White House.
Why it matters: In the next recession, politicians and policymakers may be more hesitant to unleash the type of programs that drove America’s rapid recovery from the pandemic-induced crisis.
Catch up fast: With the ARP, Democrats wagered that the risk of under-stimulating the economy was greater than the risk of over-stimulating. They were determined not to repeat the mistakes of the 2010s, when unemployment remained elevated long after the Global Financial Crisis was long over.
- The ARP included $1,300 payments to American families that were already sitting on hefty pandemic savings, generous unemployment benefits at a time businesses were ramping up hiring, and extra cash for state governments that were in fine financial shape.
- Democrats shrugged off the concerns of centrist and conservative economists who warned that the cumulative stimulus — the $1.9 trillion ARP came on the heels of $2.7 trillion in pandemic relief enacted under former President Trump — was a recipe for inflation.
What they were saying: “In general, increases in inflation disproportionately hurt the poor and are associated with reductions in trust in government,” Larry Summers, the most prominent of those critics, wrote in May 2021.
- “Progressives might consider the role that inflation played in electing Richard M. Nixon in 1968 and Ronald Reagan in 1980.”