Sending money to kids didn't cause high inflation
Last year the new Child Tax Credit sent money to families monthly, supporting kids from the poor to the middle class. It expired at the end of the year, another victim of the frenzy over inflation.
The inflation fights have many flaws: Too often, they ignore Covid and the war in Ukraine. And even more often, they lump together every program in the Rescue Plan as if all that matters is the total dollars. Almost always, they forget that government support is a valuable lifeline and long-term investment in people.
That’s a flaw of macro, and it’s a big problem.
Ask the millions of children thrown back into poverty this year.
The new Child Tax Credit in the Rescue Plan was a long-overdue program to cut child poverty and provide extra support to children up through the middle class. Every month, starting in July 2021, families received $250 for each child over six and $300 for each child younger than six. No strings attached. See my earlier post:
It worked. The new Child Tax Credit led to a considerable reduction in child poverty. Researchers at Columbia University estimate that the monthly payments kept 3.7 million children out of poverty, cutting the child poverty rate by 30%. Then it ended. The child poverty rate jumped from 12% in December 2021 to 17% in January 2022. That’s an incredible amount of progress lost within weeks. The chances are nill it would be a part of any legislation this year.
So why did a successful, broadly popular program to invest in our future get canned? Inflation was one of the reasons that lawmakers like Senator Joe Manchin cited. So, anything that increases demand is bad when inflation is high.
Newsflash: Inflation is not the only urgent problem in this country. Children eating breakfast is a good thing, not a bad thing. Plus, little data suggests that money for kids significantly contributed to inflation.
Spreading out extra income spreads out extra demand
The Rescue Plan had several programs, each serving different goals and following different designs. Again, total dollars is a lousy way to center the inflation debate now.
The stimulus checks, enhanced unemployment insurance, and the Child Tax credit were the three critical programs for people in the Rescue Plan:
Unlike stimulus checks that came out in a burst, accounting for 16% of disposable personal income in March 2021, the new Child Tax Credit was monthly to families and was 0.5% of income from July through December. (Note, half of the credit was paid out monthly, shown above, and the rest was in tax refunds.)
If you want to blame something in the Rescue Plan for inflation, go at the stimulus checks, not the Child Tax Credit. Even if families spent the entire credit each month, its effect on our supply-demand imbalance would be small and stable.
Many uses of Child Tax Credit are not demand boosters
What did families do with the extra money? Exactly what we should have expected.
They spent it on their kids, keeping them fed and a roof over their heads. Good. Altogether, 54% of families said they used the largest portion of their credit on some spending. The rest said they saved it (36%) and paid down debt (10%).
Only about half of the Child Tax Credit went toward spending, so its potential contribution to high inflation is even smaller. Yes, the credit allowed families to spend more, and yes, technically, as more demand puts upward pressure on prices—however, the size matters. And by any reasonable assessment, the credit contribution is negligible.
Massive inequality swamps new child tax credit
The argument that the new Child Tax Credit created excess demand that led to high inflation falls apart when we look at the big picture. It’s a picture of massive inequality and one where pent-up demand due to Covid among the rich is a more likely source of the excess demand. No one talks about that. Why?
Still worried about inflation from the credit? The top has income and demand to spare and wouldn’t even notice. The low-income families who lost the money in January noticed.
One solution: raise taxes on the rich and fully fund the poor, working class, and middle-class kids. To cool aggregate demand, start with those who generate the most. It’s not that hard to grasp when we admit how outrageously unequal income is. On the margin, investing more in children and less in the wealthy—they benefit from government policies—pays off for the country.
More research undercuts the inflation narrative
Ioana Marinescu and I were on a panel recently talking about the effect of guaranteed income programs on inflation. Note that the new Child Tax Credit has no phase-in or work requirements, so it is close to Universal Basic Income (UBI) for kids.
Marinescu shares her research with Damon Jones on the Alaska Permanent Fund Dividend payments, similar to guaranteed income but at the state level. They find small feedback effects on macroeconomic outcomes like local employment from the extra income. It’s a well-designed study and complimented my remarks, which are the motivation for this post. Then we have Q&A. Recommended.
There’s more to policy than macroeconomics
Macroeconomic thinking can be powerful, and it can be overpowering.
The debates over social policies like the Child Tax Credit must center on people, not parameters in the model. There is a fierce debate over work disincentives, and it’s one that standard models are chomping at the bit to wade into. Whether the program is good or bad for total hours worked comes down to one arbitrary parameter.
Other effects of the program, like the reduction in child poverty; the increased time spent with children, not working a second job at Walmart; the reduction in food insecurity, is given no weight in these models. A work requirement would significantly reduce effects. Plus, evaluating a program for children as a workforce program for parents is absurd and damaging. But here we are.
I am also open to policies that would cut child poverty by 30% within months of its startup. If you don’t like this one, then suggest another. A bad habit of economists is telling us why every program won’t work without offering alternatives. No, letting the market work when the market has failed is not a solution. No child in the wealthiest country in the world should go to bed hungry.
We need to get beyond the economics too. Listen to this conversation with experts who work directly with low-income parents who received the money.
How often do you hear macroeconomic models' agency, stress, and joy? The new Child Tax Credit did far more than give families more money. That’s valuable too.
Using inflation as the lens for every policy decision comes at a steep cost.
High inflation will be “transitory,” either because the disruptions from Covid and the war in Ukraine work themselves out. Or because the Fed makes it so. We have a playbook for crushing inflation.
We also have a playbook for crushing poor children. For a brief moment last year, with the new Child Tax Credit in the Rescue Plan, it looked like we were writing a new one to help children and reduce poverty. But it didn’t last; short-term economic problems like inflation swept away the long-term benefits of investing in children.
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As always, inflation is blamed on the working class, on people who do not have capital.
In the UK, at the moment, there is a vilification of the workers who are apparently asking for more, while companies record all-time-highs profits, such as it is the case with oil and gas and companies.
I'm always dismayed by the callous cutting that happens to those least able to speak for themselves, or most in need of the support.