Michael Faulkender on December 11, 2022
Last week, Treasury Secretary Janet Yellen blamed the American people for the 40-year high inflation we have been enduring.
Appearing on “The Late Show with Stephen Colbert,” she said that Americans “were in their homes for a year or more, they wanted to buy grills and office furniture, they were working from home, they suddenly started splurging on goods, buying technology.” According to her, this consumer “splurging” caused prices to rise so much.
That’s right. According to the Biden administration’s top economic official, the American people are at fault for inflation. Rather than take ownership of the failure caused by their misguided policies, now they are scapegoating hard-working Americans.
Let’s work through the facts and the data to see what they tell us about the root of this problem.
Stay-at-home orders for both workers and school children were issued in March 2020. Parents and kids alike created makeshift workspaces to telework and zoom into their classrooms. Like nearly every other industry, furniture sales fell considerably in the months of March, April, and May but ultimately recovered when the economy reopened.
For the year 2020, furniture and bedding sales were up just 0.6% compared to 2019. This is hardly the kind of boom that would cause 40-year inflation.
Indeed, it was not pandemic-induced purchases that caused the inflation. When demand significantly declined in the first two quarters of 2020, prices likewise declined. When the economy reopened and demand returned in the third quarter of 2020, prices rose at a temporarily elevated 4.7% rate on an annualized basis.
However, inflation returned to normal in the fourth quarter of 2020, with prices rising just 2.1% on an annualized basis. At the end of 2020, prices were just 1.3% higher than they were in December 2019. Nine months into the pandemic, when according to Secretary Yellen, Americans were splurging on grills, goods and technology, inflation was under control.
It was a year after the onset of the pandemic that inflation skyrocketed, starting its sharp upward trajectory in March 2021. From the time the economy reopened in June 2020 until February 2021, prices rose an average of 0.32% per month.
Prices rose at twice that pace in both March and April 2021, each seeing increases of 0.64%. In May, that number was 0.70%, and in June 2021 alone, it was 0.88%. Contrary to Secretary Yellen’s blame game, inflation did not start until a full year after pandemic-induced working and cooking from home set in.
What, then, explains the inflation? In March 2021, liberals in Congress passed, and President Joe Biden signed the so-called American Rescue Plan. This was an entirely debt-financed $1.9 trillion spending spree that sent excess stimulus into an economy that had already largely reopened.
By the end of the second quarter of 2021, the quarter when ARP funds were primarily distributed, aggregate balances of household checking and savings accounts hit $14.7 trillion, 34% higher than the $11 trillion in those accounts at the end of 2019.
With more money in the economy but not more production, excessive dollars were chasing the same quantity of goods and services. The inevitable result is inflation. This is why Clinton administration Treasury Secretary Larry Summers characterized the American Rescue Plan as “the least responsible macroeconomic policies we’ve had in the last 40 years.”
And who was one of the administration’s biggest cheerleaders for the American Rescue Plan? None other than Secretary Yellen herself.
Higher spending levels started in the spring of 2021. During 2019, spending at retail electronic and appliance stores averaged $7.5 billion. In June 2021, that number hit $8.5 billion. In 2019, spending at furniture stores averaged $10 billion per month. That fell to $9.4 billion in 2020 but hit $12 billion in March 2021 and has stayed near that level ever since.
Americans did indeed start buying more furniture and appliances, but it was a year after they started eating and working more at home. They did so because Secretary Yellen sent them the money to do that.
The 40-year high inflation the American people have endured is the direct result of the reckless spending policies that Secretary Yellen advocated for.
For her to instead blame the American people because they spent the money she demanded to be sent to them is, unfortunately, the standard deflection we have grown accustomed to from this administration.
Michael Faulkender is the Chief Economist at the America First Policy Institute and former Assistant Secretary for Economic Policy at the Department of the Treasury.
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