Stimulus Update: Stimulus Checks During the Great Recession Didn't Fuel Inflation. What Went Wrong This Time?

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  • The pandemic wasn't the first time the federal government issued stimulus checks.
  • Stimulus aid during the Great Recession didn't spur an inflation crisis, whereas pandemic-era stimulus policies clearly helped drive living costs up.

This isn't our first go-round with stimulus checks, but consumers are still feeling the impact of last year's policies.

When the COVID-19 pandemic hit U.S. soil in 2020, it spurred an economic crisis unlike any lawmakers had ever seen. Back in the spring of 2020, new weekly jobless claims started getting filed in the millions, and lawmakers had to intervene to prevent the economy from completely collapsing.

To that end, it issued three separate rounds of stimulus aid, starting with the CARES Act in early 2020 and ending with the American Rescue Plan roughly a year later. And it wasn't just stimulus checks that hit Americans' bank accounts during this time. Lawmakers also boosted unemployment benefits during the early stages of the pandemic and enhanced the Child Tax Credit by raising its value and making all of it refundable.

This massive amount of aid no doubt helped many individual Americans avoid a personal financial crisis in 2020 and 2021. The problem, though, is that these generous stimulus policies are said to have fueled a massive surge in inflation.

Since the latter part of 2021, consumers have been forced to spend more money on just about everything, from food to housing to apparel. That's forced a lot of people to raid their savings or load up on credit card debt to cover basic expenses.

But what's interesting is that the pandemic wasn't the first time stimulus aid was introduced. Lawmakers pumped stimulus funds into the economy back in 2008, when the Great Recession was taking hold. Yet those policies didn't lead to a notable uptick in inflation. So what gives?

Lawmakers may have gone overboard

Roughly one year after the American Rescue Plan was signed into law and a third round of stimulus checks was issued to the public, the Consumer Price Index (CPI), which measures changes in the cost of consumers goods, was up 8.5% on an annual basis. But in February of 2009, roughly a year after the Economic Stimulus Act of 2008 was signed into law, the CPI was only up 0.2% on an annual basis.

Back then, stimulus aid clearly didn't drive inflation to soar. So what went wrong in 2021?

The answer may boil down to the fact that lawmakers pumped too much aid into Americans' pockets. Let's remember that a lot of people who received stimulus checks in 2020 and 2021 weren't necessarily unemployed or impacted by the pandemic.

In fact, due to the nature of the pandemic, many reasonably well-off people received aid at a time when they were still gainfully employed and spending much less money than usual due to staying home. That gave consumers more flexibility to increase their spending during the latter part of 2021 and 2022. And it's that uptick in spending that's been a major driver of inflation.

Lawmakers are apt to be more cautious the next time around

The stimulus round that got approved in March of 2021 may not be the last time we see stimulus checks go out. But given the backlash due to inflation, it's likely that lawmakers will be more inclined to proceed with caution the next time they're moved to issue stimulus checks. That could mean giving out smaller payments, or limiting that aid to a narrower pool of recipients.

Meanwhile, as we gear up for the end of 2020, rampant inflation is still a problem. And so while it's certainly fair to say that pandemic-era stimulus policies were well-intentioned, it's also fair to say that they've caused a lot of lingering trouble that's hurting consumers in many ways.

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