California Gov. Gavin Newsom speaks during a news conference on October 1, 2021.
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California is planning to send residents $10 billion in relief checks to help cope with inflation.
This measure could help Californians, but “export inflation” to the rest of the US.
Several states have adopted inflation relief measures that could have a similar effect.
California Governor Gavin Newsome is taking matters into his own hands to help residents cope with inflation — potentially at the expense of the 49 other US states, says one Harvard economist.
Beginning October 7th, as many as 23 million Californians making less than $250,000 per year will receive a stimulus check ranging from $200 to $1,050, depending on one’s income and number of dependents. The program is expected to dole out nearly $10 billion to consumers.
In response, many have argued that the plan is counterproductive and will add spending power to the economy that will ultimately make inflation worse.
But while this inflation relief may boost some prices in California, the state’s residents could ultimately benefit from the extra dollars in their pockets, Harvard economics professor and advisor to former President Barack Obama Jason Furman wrote on Twitter Saturday. The rest of the country, however, might not be so lucky.
“These inflation relief payments will export inflation to the rest of the United States — with some showing up in California too,” Furman wrote. “Californians, on net will come out ahead.”
That’s because Californians’ stimulus spending won’t be confined to the state’s borders. The money will flow to the other 49 states — pushing up prices for Americans that don’t have government checks to help them keep up.
While California’s program is the most expansive, it’s one of at least 16 states that have taken measures to provide spenders some relief. If these payments can, as Furman argues, have a net positive impact on a state’s residents, perhaps it shouldn’t be surprising that so many states have adopted them. But if even more states join them — and more inflation is exported across the country — all Americans could suffer from higher prices. And the Federal Reserve will have all the more reason to raise interest rates and grind the economy to a halt — a development which could lead to substantial job losses.
Other states may “export inflation” right back to California
While California’s relief payments may have a net positive effect for its residents, it isn’t immune to the impacts of other states’ programs.
Florida for instance, has allocated $36 million for one-time payments of $450 per child, to be directed to nearly 60,000 households. Colorado is giving residents a $750 tax rebate next year. Other states have taken different approaches.
If some of this money pushes up prices in California, the state will have imported some inflation of its own. This could be good news for some businesses, but bad news for consumers on the whole.
“Californians are going to come out behind from any ‘inflation relief payments’ made by Florida and other states,” wrote Furman.
In effect, states acting in their own interest may make things worse for the economy at large.
“There is an unfortunate individual state rationality to all of this, and that adds up to collective irrationality,” Furman added.
To be sure, there is far from a consensus among economists about how stimulus payments impact inflation and the broader economy.
While the dollar amounts of states’ relief programs may seem large in scale, they’re far from the only factor keeping inflation stubbornly high. Americans are still spending down savings, pandemic-induced supply chain issues haven’t gone away, and the war in Ukraine carries on. Even without these programs, inflation would remain an issue for the US.
Additionally, while state relief payments may add some unnecessary fuel to the economy, in Florida for instance, these payments have been targeted towards families in need. Whether the targeted nature of the program offsets any inflationary pressures is for economists and policymakers to decide.
And when states like California export inflation with consumer spending, the US doesn’t bear the full impact. Some of this money goes abroad, boosting prices in Europe for instance, which is dealing with significant inflation problems of its own.
Given the strength of the US dollar, this overseas spending is looking increasingly attractive to many consumers. And for US businesses, cheaper imports can ultimately lead to more affordable goods for Americans.
In Europe, however, the strong dollar not only makes its products more affordable for US consumers, but its imports from the US more expensive. Both factors can make a challenging inflation problem even more so.