The Trump campaign keeps saying Joe Biden caused the inflation in 2020-23. I came across this paper by Ben Bernanke and Oliver Blanchard for the Brookings Institution. They argue the main bout of inflation wasnât primarily caused by the expansive fiscal policy of both Trump and then Biden, but rather covid price shocks beyond the control of the US government:
The shocks to prices came from several sources. First, like other forecasters (including participants in commodity futures markets), most economists did not anticipate either the magnitude or the duration of the rise in commodity prices that began in 2021. Beyond the more-familiar (but unexpectedly large and sustained) shocks to food and energy prices, the pandemic itself led to unusual distortions in key product markets, such as those for new and used vehicles. Strong aggregate demand and shifts in the composition of consumer spending (e.g., from services to durable goods) during the pandemic combined with constraints on supply in some sectors to create shortages and sectoral price increases not offset by decreases in other sectors. These sectoral mismatches between demand and supply proved more intractable and longer-lasting than many had expected. Together, these shocks to prices given wages would prove to be the critical triggers of the rise in inflation.
They model these effects and try to estimate which prices rises contributed how much to overall inflation. Hereâs the figure.
The figure shows a decomposition of the sources of inflation, 2020Q1 to 2023Q1, based on the solution of the full model and the implied impulse response functions. The continuous line shows actual inflation, and the total net heights of the bars are the modelâs forecast of inflation in each period, given initial conditions through 2019Q4 and excluding the effects of equation residuals. The grey portion of each bar shows the contribution of pre-2020 data (and also include the contributions of productivity shocks). Colored segments of each bar show the general equilibrium, fully dynamic contribution of each exogenous variable to inflation in that period, as implied by the estimated model.
Additionally, it might be worth adding that the slow reaction by the Federal Reserve is also none of the US governmentâs doing: Because the central bank is independent.
They do mention that some of Bidenâs and Trumpâs expansive relief packages might have fed into inflation, but they were not the âmain eventâ.
- Biden, December 2020: $900 billion for covid relief
- Biden, March 2021: $1.9 trillion American Rescue Plan
- Trump, March 2020: $2.2 trillion CARES Act
Overall, as a share of GDP, the headline costs of these three covid-era fiscal packages were about 4-1/2 times the size of the American Recovery and Reinvestment Act (ARRA), enacted in response to the 2008 financial crisis and the ensuing recession.