- Millions of Americans are receiving stimulus checks
worth up to $1,400 each.
You might be one of them.
It's all part of President Biden's $1.9 trillion
American Rescue Plan.
- The American Rescue Plan is already doing
what it was designed to do,
make a difference in people's everyday lives.
- But you might've also heard people say
that if all that money gets spent,
the economy will overheat, and we'll get inflation.
In this video, we'll answer the question
of whether stimulus checks will lead to inflation.
Short answer, it could but not necessarily.
And the reason is that the link
between stimulus checks and inflation is indirect.
There's a lot of other things going on at the same time.
(upbeat music)
First of all, not all of the checks are going to be spent.
Some people who didn't lose their jobs
and are doing pretty well
will save their money instead.
You know, put it in their 401k,
or they'll use the money to pay off their credit card bills
or other debts.
So if that money doesn't get spent
then it won't generate economic activity,
and it therefore will not cause any inflation.
However, some people will spend the checks,
perhaps on new furniture or a car or on a trip
or they could use it
to pay more for their rent or groceries.
And remember this isn't the only spending going on.
There's also billions of dollars being sent out
by the federal government
as additional unemployment insurance.
They're also sending out money
for state and local governments.
There's money being sent out to help small businesses
hold onto or hire workers.
Also, people have a lot of savings stored up
from last year's stimulus bills as well,
and they're just waiting for the virus to end
and for businesses to reopen so that they can go out
and spend that money.
And when that happens, businesses will need to go out
and hire back a lot of the workers
who got laid off last year.
So there'll be a lot of spending and hiring going on,
not just because of the stimulus checks,
but for other reasons too.
But will that be enough to overheat the economy?
Let's step back for a moment
and ask how overheating takes place,
Inflation happens when the demand for goods and services
runs ahead of the economy's capacity
to supply those goods and services
with its current labor force.
Think of the economy's capacity like a container,
and demand is like water going into that container.
If people go out and spend their stimulus checks,
that starts to fill up the container.
Businesses go out and hire workers
who go out and spend their paychecks.
And that also helps to fill the container,
but there's millions of workers out of a job,
thousands of businesses that are idle.
So we could have lots of spending and lots of hiring
without the economy running out of capacity
or the container filling up with water.
Not until the container overflows do you get inflation.
Now you may have noticed that the prices for some things
are already going up, for airline tickets and gasoline
and lumber.
That's not really inflation.
Inflation is when most prices are going up, not just a few.
And when they're going up year after year.
What you're seeing right now
are just one time only price increases in industries
that have specific bottlenecks.
So right now the stimulus checks
are probably not going to cause inflation.
Here's why.
Remember what I said about the economy
being like a container?
Well, the container is still a long way from being full.
There are more than 9 million fewer people with jobs now
than before the pandemic.
That's a lot of slack in the labor market,
and it's gonna take a lot of spending,
a lot of hiring over many, many months
before we start to run out of workers.
Economists don't really know
how much capacity the economy has.
It's like they don't know how big the container is.
We might run the water long enough to fill the container
and discover that the container has stretched
and gotten bigger.
In other words, we may think
we can only get the unemployment rate down to say 4%,
and then we'll run out of workers.
But maybe as unemployment goes down,
we'll find a lot more people
coming into the labor force to look for jobs.
One final point, inflation is partly psychological.
Businesses are more likely to raise prices and wages
if they think everyone else will do the same thing.
In other words, if they expect higher inflation,
they'll act in a way
that makes higher inflation more likely,
but inflation has been low for years.
In fact, it's too low.
The federal reserve targets 2%, which they think is ideal.
Inflation has been so low for so long
people will assume it will stay that way.
So I just explained why the stimulus checks
aren't likely to produce inflation soon,
but maybe in a few years we'll get inflation.
How would that happen?
Well, if we succeed in vaccinating most of the country,
the virus will go away, and most of the economy will reopen.
So people will start spending again big time.
And maybe those stimulus checks
won't be the last of the stimulus.
President Biden is talking
about a big infrastructure package.
- This not only creates jobs,
but it makes us a hell of a lot more competitive
around the world if we have the best infrastructure
in the world.
- So in a year or two, unemployment could fall close to 3%
for the first time in half a century.
That would look like a labor market
that has run out of slack,
like the container has started to overflow.
There's one important reason
why we haven't had high inflation in a long time.
The federal reserve didn't let it happen.
As soon as it thought the economy was overheating
because unemployment was low, it raised interest rates.
And often that put us into a recession,
but Jerome Powell, the Chairman of the Fed
says this time is different.
Because inflation has been below 2% for so long,
Powell wants inflation to actually go above 2% for awhile.
That's why he's keeping interest rates at zero,
and that's why he plans to keep them
close to zero until 2024 at least.
- We're not done, and I'd hate to see us
take our eye off the ball
before we actually finish the job.
- There's another thing that's different.
For a long time, all the politicians and the experts
said keeping inflation low should be the priority.
Not any longer.
Now Presidents, Congress, and the Fed
say low unemployment especially for disadvantaged groups
is more important.
So even if inflation starts to look like a problem,
maybe the fed will be reluctant to raise interest rates.
Also those stimulus checks, that's not really free money.
The government borrowed it.
And as a result, the national debt is sky high.
If the Fed raised interest rates to fight inflation,
paying the interest on that debt
quickly gets very expensive.
So if the Fed ever decides it needs to raise interest rates,
there'll be a lot of politicians hoping it doesn't,
and maybe pressuring it not to.
(upbeat music)