Ugly Politics Conjure Up Trade-Off Between Poverty Reduction and Inflation

Here’s a moral whiplash for you.

Tuesday of the past week began on a somber note. It was barely 8:30 a.m. when the Bureau of Labor Statistics told us that inflation was still on the rise: prices were 8.3% higher in August than a year earlier. The Biden administration once again looked like it had lost control of the script. stocks crammed. The Liberals ducked.

But then 10 o’clock rolled around. At that point, the Census Bureau told us that amid a public health emergency like no other — one that killed millions, disrupted global supply chains, and wreaked havoc on job markets around the world — the US managed to cut the supplementary poverty measure a calculation the poverty rate, taking into account the impact of government benefits, from 9.2% in 2020 to 7.8% last year.

The funny thing is that America’s bailout plan — that $2 trillion tax package that President Biden pushed through Congress to defy critics who argued it would build inflationary pressures — deserves a lot of the credit. The extended child tax credit alone under the plan has lifted more than 5 million people out of poverty. Tax incentive payments have lifted nearly 9 million people above the poverty line.

That’s not all. Extended unemployment insurance also helped. And the surge in demand from the rescue effort helped keep the finances of the most vulnerable afloat. According to Census data, after-tax household income increased slightly for Americans without a college education.

However, I understand: there is no inevitable trade-off between inflation and poverty reduction. You can reduce child poverty without driving inflation out of control. In fact, the price of expanding the child tax credit was only about $100 billion — hardly an inflation-busting number. Even if it were bigger, you could pay it with higher taxes and avoid pumping more money into the economy.

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But once you think for a minute about the policies shaping fiscal policy and redistribution in this country, the compromise the Biden administration faces comes into focus.

Think of poverty. According to the Supplemental Poverty Measure, the state-of-the-art measure of needs presented in 2009, the drop in poverty between 2019 and 2021 was greater than in the entire previous decade. This is despite the catastrophe that Covid-19 has brought upon us, which alone would have left millions more Americans in misery.

This has been possible because the political system has responded to the emergency with fiscal bailouts that appear un-American in scale and scope. Biden’s American Rescue Plan came on top of the Trump administration’s multi-trillion-dollar fiscal support packages, each of which had no precedent in American politics — at least since the Great Depression.

Remember how President Obama’s advisers alerted after the real estate crisis about 15 years ago? They argued that American policy would not support federal emergency spending in excess of $1 trillion, even if the emergency threatened the livelihoods of millions of Americans.

Covid has changed this policy. Perhaps the seemingly universal nature of the coronavirus threat has instilled a sense of “it’s all about the grace of God.” In any case, after multi-trillion-dollar stimulus in the final year of the Trump presidency, Biden’s advisers were hardly crazy to shun Obama-era advice and instead aim for the fences.

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Perhaps it wasn’t the ideal moment in the economic cycle to inject trillions of extra dollars into the economy. But opportunities must be seized when they present themselves. If you look at the history of American politics, the alternative seems to boil down to accepting tens of millions of Americans in poverty.

This isn’t the end of the story. Inflation has become the dominant economic issue in American political discourse ahead of the midterm election, undermining the Democrats’ claim to be responsible stewards of the economy.

Critics not only argue that Biden’s fiscal policy will not improve livelihoods in the long run as inflation eats up volatile gains. They also say poorly targeted spending — like universal scrutiny of Americans as to whether or not they needed the money — will complicate the economics and politics of other critical targets. For example, how could America’s bailout plan be viewed as a progressive success if it handed Congress over to a Republican party bent on obstructing any progressive political goal?

And yet the criticism fails to mention the importance of political possibilities. Critics of Biden’s actions must grapple with their own uncomfortable question: If not now, then when? “Politics are getting easier, believe me,” is hardly an appropriate response.

There is a better way to redistribute. Washington opted for austerity in the depths of the Great Recession after the housing meltdown, when interest rates were so low that virtually any government investment would have yielded a profit. Then it decided to issue hand over fist as inflation started to rise. Perhaps American policy could be more sensibly adjusted to the business cycle.

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Justin Wolfers of the University of Michigan argues that automatic stabilizers — support that turns on when the economy turns sour and turns off when it improves — could help better understand American redistribution. It would be a clear improvement over the current practice of forcing aid through reconciliation, because otherwise nothing could get through.

And yet automatic stabilizers require a kind of political consensus that we do not yet have. In his absence, the Biden administration should seize every opportunity that presents itself.

More from the Bloomberg Opinion:

• Nobody knows how long inflation will last: Niall Ferguson

• Inflation surprises are bad even when they are good: Jonathan Levin

• The Fed’s messaging needs an update: The editors

This column does not necessarily represent the opinion of the editors or of Bloomberg LP and its owners.

Eduardo Porter is a columnist for the Bloomberg Opinion, covering Latin America, US economic policy and immigration. He is the author of American Poison: How Racial Hostility Destroyed Our Promise and The Price of Everything: Finding Method in the Madness of What Things Cost.

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