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

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

    Here’s some moral whiplash for you.

    Tuesday last week started on a grim note. It was barely 8:30 in the morning when the Bureau of Labor Statistics told us that inflation is still on the rampage: Prices in August were 8.3% higher than a year before. The Biden administration looked, again, like it had lost control of the script. Stocks tanked. Liberals took cover.

    But then 10 a.m. rolled around. That’s when the Census Bureau told us that, in the throes of a health emergency like no other — one that killed millions, snarled global supply chains and wrought havoc with labor markets around the world — the US managed to cut the Supplemental Poverty Measure, a calculation of the poverty rate that takes into account the impact of government benefits, to 7.8% last year from 9.2% in 2020.

    Funny thing is that the American Rescue Plan — that $2 trillion fiscal package that President Biden pushed through Congress defying critics who argued it would build inflationary pressure — deserves much of the credit. Just the child tax credit, expanded under the plan, moved more than 5 million people out of poverty. Fiscal stimulus payments lifted nearly 9 million people above the poverty threshold.

    That’s not all. Expanded unemployment insurance also helped. And the rescue effort’s boost to demand helped to keep the finances of the most vulnerable above water. After-tax household income for Americans without any college education increased slightly, according to the census data.

    I get it, though: There is no inevitable tradeoff between inflation and poverty reduction. One can reduce child poverty without sending inflation off the rails. Indeed, the price tag for the expansion of the Child Tax Credit came in at around only $100 billion — hardly an inflation-busting number. Even if it were bigger, you could use higher taxes to pay for it and avoid pumping more money into the economy. 

    But once you think for a minute on the politics that shape fiscal policy and redistribution in this country, the trade-off faced by the Biden administration comes into focus.

    Consider poverty. According to the Supplemental Poverty Measure, the state-of-the-art metric of want unveiled in 2009, the decline in poverty between 2019 and 2021 was greater than during the entire preceding decade. And that’s despite the cataclysm that Covid-19 brought upon us, which on its own would have driven millions more Americans into destitution.

    That was possible because the political system responded to the emergency with fiscal rescue packages that seem un-American in their scale and scope. Biden’s American Rescue Plan came on top of multi-trillion dollar packages of fiscal support from the Trump administration, each of which had no precedent in American policymaking — at least since the Great Depression.

    Remember the alarm of advisors to President Obama in the aftermath of the housing crisis some 15 years ago? American politics, they argued, would not support emergency government spending above $1 trillion, not even if the emergency threatened the livelihood of millions of Americans.

    Covid changed these politics. Perhaps the seeming universal nature of the threat from the coronavirus sparked a sense of “there but for the grace of God go I.” In any event, following multi-trillion-dollar stimuli in the last year of the Trump presidency, Biden’s advisors were hardly nuts to eschew the Obama-era advice and aim for the fences instead.

    Maybe it was not the ideal moment in the economic cycle to throw trillions of additional dollars into the economy. But opportunities must be seized as they come. To go by the history of American policymaking, the alternative seems to amount to accepting several more million Americans in poverty.

    This is not the end of the story. Inflation has become the dominant economic theme in the American political conversation in the runup to the midterm elections, undermining Democrats’ claim to be responsible stewards of the economy.

    Critics argue not only that Biden’s fiscal policy will fail to improve livelihoods over the long term, as inflation eats into any fleeting gains. They also say that poorly targeted spending — like universal checks to Americans whether they needed the money or not — will complicate the economics and politics of other critical objectives. How, for instance, could the American Rescue Plan be deemed a progressive success if it delivers Congress to a Republican Party hell-bent on obstructing every progressive policy goal?

    And yet, the critique elides the importance of political opportunity. Critics of Biden’s approach must deal with their own uncomfortable question: If not now, when? “The politics will get easier, trust me,” is hardly an adequate response.

    There is a better way to do redistribution. Washington chose austerity in the depths of the great recession following the housing collapse, when interest rates were so low that virtually any government investment would have turned a profit. Then it chose to spend hand over fist just as inflation started perking up. Maybe American policy could be made to fit more sensibly around the economic cycle.

    Justin Wolfers at the University of Michigan argues that automatic stabilizers — assistance that turns on when the economy goes sour and turns off as it improves — could help make better sense of American redistribution. It would be a clear improvement over the current practice of pushing help through reconciliation because nothing could get through otherwise.

    And yet automatic stabilizers require some sort of political consensus that we, as of yet, do not have. In its absence, the Biden administration should capitalize on every opportunity it gets.

    More From Bloomberg Opinion:

    • Nobody Knows How Long Inflation Will Last: Niall Ferguson

    • Inflation Surprises Are Bad Even When They’re Good: Jonathan Levin

    • The Fed’s Messaging Needs an Upgrade: The Editors

    This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

    Eduardo Porter is a Bloomberg Opinion columnist 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.”

    More stories like this are available on bloomberg.com/opinion

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