Government Handouts Do Not Reduce Inflation

By Philip Klein

Friday, March 25, 2022

 

In response to gas prices hovering around $6 in California, Governor Gavin Newsom has proposed providing residents debit cards of $400 per car. His idea is part of a long tradition of Democrats attempting to pitch government handouts as a solution to higher prices.

 

Newsom announced the policy in a video standing in a parking lot full of cars in his salesman suit, looking like he was publicizing great savings at the biggest sales event of the spring. “That direct relief will address the issue that we all are struggling to address, and that’s the issue of gas prices,” he declared.

 

Under the plan, every household would be able to claim the payout for up to two cars, meaning as much as $800. It is slated to cost $9 billion at a time when the state is running a surplus, having been helped last year by the injection of a windfall of money from the federal “Covid relief” bill that was pitched as emergency aid to desperately cash-strapped states.

 

In practice, the idea is ridiculous, as it won’t do anything to actually address higher gas prices, and it would likely trigger price hikes by flooding the system with more cash, increasing the ability of individuals to pay, and thus increasing demand relative to supply.

 

Although the White House, which considered a similar idea, according to Axios, ultimately thought better of it, President Biden has followed a similar tactic of trying to conflate subsidies to individuals with addressing the underlying problem of rising prices.

 

When all else failed, Biden and his allies began arguing that his Build Back Better plan — once valued at $3.5 trillion — was actually an inflation-fighting tool. Even though the absurd talking point had been repeatedly debunked, Biden revived the argument during his State of the Union address, in a desperate Hail Mary to get Senator Joe Manchin back to the negotiating table.

 

In the speech, he attempted to rebrand his agenda, even a scaled-down version of which would spend trillions of dollars at a time of historic debt levels, as his “plan to fight inflation.” The gist of the argument was that because it spends oodles of money subsidizing child care, education, and housing, that it is somehow fighting inflation.

 

But there is, once again, a huge distinction between reducing the cost of something and simply giving people money toward the purchase of something. Giving people more money to spend on child care (especially when coupled with more federal regulations) drives up the cost, which actually makes those who do not qualify for subsidies even worse off.

 

This is not a new trick for Democrats. It is something that we also saw, most prominently, during the Obamacare debate.

 

Back when the law was being debated in 2009–2010, it was clear that by requiring insurers to offer insurance to everybody, restricting the ability of carriers to charge more based on health status, and mandating that they cover a wide array of medical services deemed essential by the federal government, premiums would rise.

 

Nonetheless, the bill was named the Affordable Care Act, and Barack Obama and his allies spent much of the debate trying to obfuscate the issue of premiums. They accused opponents of misinformation and argued that because lower-income Americans would be receiving subsidies to purchase health insurance, premiums would actually go down.

 

Once Obamacare became law and was implemented, the reality set in. Premiums skyrocketed for exactly the same reasons that opponents said they would. And those who earned too much to qualify for subsidies were significantly worse off.

 

Eventually, when Biden came in, he addressed this issue by using the “Covid relief” package to temporarily make health-insurance subsidies more generous. He wanted to extend this policy as part of Build Back Better, and used this as another way to make his case that his plan would actually fight inflation.

 

The current inflation crisis has been fueled by a combination of runaway national debt, a lax monetary policy by the Federal Reserve, and a historically unique disruption to the normal functioning system of supply and demand that works to keep prices stable. Throwing more money at the problem is not actually going to solve the problem — it will only make it worse.