When I first heard about this, I thought "oh man, how dumb! they're just going to make inflation worse!", and then I read more of the details.
By my understanding, the case for stimulus checks leading to inflation comes when the stimulus checks are paid for by printing more money (thus increasing the overall money supply).
This program is not that. This program is providing a tax refund from CA's tax surplus. No new money is being created. The only change is who gets to decide how the money is being spent? (e.g., the state? or the people?)
If CA could have seen the future, they could have achieved the same end by lowering taxes this last year for people in an equivalent amount. Would anyone seriously argue that lowering taxes is inflationary? How about the contrapositive? Would anyone seriously argue that we should fight inflation by _raising taxes_?
> By my understanding, the case for stimulus checks leading to inflation comes when the stimulus checks are paid for by printing more money (thus increasing the overall money supply).
Money supply isn't the only factor in the monetary side of inflation. The velocity of money[1] is also important. If you "printed" a load of new fiat currency but it all stayed in say for example savings accounts, then its pressure on inflation would be greatly diminished. The spending of that money is what bids up prices when more goods and services can't be produced fast enough.
The fear here is that the stimulus checks will increase the velocity of money. Tax dollars sitting in CA's coffers is effectively not part of the money supply. As soon as the check go out, it reenters the money supply and probably gets spent.
In fact, new money supply is a minority influence on inflation. The demand for USD as a result of economic activity is the primary factor for inflation (which also influence the velocity of money).
Of course, this is California ONLY - whereas the USD is a global reserve currency, so the impact on inflation will be minimal.
The bigger issue I see here is that there's a tax surplus, but the gov't isn't paying the money back to the people who paid taxes - it's just a flat refund.
This is effectively a forced wealth re-distribution, which I think raises ethical questions.
> In fact, new money supply is a minority influence on inflation
This obviously depends on how the money supply is created and deployed. If you take out loans to hand out stimulus check you get more inflation than you would from a similar dollar value of QE.
Yeah, sure but CA is an economy the size of France and represents a LOT of consumer purchasing power. Some cost like rent are also pretty local and represent a relatively fixed supply of goods. I wouldn't personally bank on global demand for dollars absorbing a bunch of new money supply sloshing around in markets local to CA.
> This is effectively a forced wealth re-distribution, which I think raises ethical questions.
Regressive tax structure (which happens when enough wealthy find ways to shelter their tax outlay) is already wealth redistribution but in the other way.
This is an attempt to spur the economy by giving money to those most likely to spend it.
Yes, that's why people are pointing out that this is inflationary. The economy is already running really hot. This is demand side stimulus when consumer demand is already very high relative to the availability of goods and services.
> Would anyone seriously argue that lowering taxes is inflationary?
Lowering taxes is inflationary. It's one of the reasons the financial markets have reacted so negatively to Britain's fiscal event.
> Would anyone seriously argue that we should fight inflation by _raising taxes_?
There's a difference between recognizing that raising taxes helps fight inflation, and wanting to use it for that. Raising taxes has other effects as well, that might (socially) outweigh the contribution in fighting inflation.
It's not. At least not per se. Lowering taxes for the wealthiest does not impact the basket of goods that generally composes the inflation index.
Markets reacted badly because the British debt and currency, despite covid and brexit, are still risk havens and worth holding for hedging one's positions. were.
The Kwarteng budget upended this picture, the long term solvency and ability to deal with the future of the UK government. Financiers readjusted their models and positions accordingly.
> Lowering taxes for the wealthiest does not impact the basket of goods that generally composes the inflation index.
That depends on what they do with it. For example, in my country rent and house prices are a part of the CPI, and if wealthy people decide to invest their tax cut gains in real estate, that will raise those prices.
Of course, you can debate how large the effect of lower taxes/stimulus checks is on the current inflation event. Personally I believe that the current situation is mostly caused by supply-side problems, and that demand-side measures will have only a limited effect.
>Would anyone seriously argue that we should fight inflation by _raising taxes_?
My understanding is all generally accepted economic theories argue that raising taxes will fight inflation. So: yes. Basically everyone who understands macroeconomics argues that raising taxes will lower inflation.
It's not hard to see why, either: Inflation measures the costs of goods and services, but not of taxes. If you increase taxes, there is less money to buy other goods and services, and the price of them will go down.
In practice the reason taxes are not used to combat inflation is purely a political one - it's much more difficult to convince voters to raise taxes to combat inflation even if they are the one's complaining about it.
Take an extreme example - one could take a portion of their income convert it to bitcoin and then destroy the wallet's private key. If people did this en mass, it would be like burning money to reduce inflation. The only thing stopping people from doing this today is the social cooperation that it would take to accomplish it in spite of the game theoretic solution we find ourselves in today.
> My understanding is all generally accepted economic theories argue that raising taxes will fight inflation.
I couldn't find a single source backing that assertion. And it doesn't make logical sense either... Tax dollars are pretty much guaranteed to be spent so the idea that "there is less money to buy other goods and services" is wrong. At least, with untaxed dollars, there is a chance that those dollars will be saved.
It would depend on the kind of tax. VAT and sales tax will. most directly counter inflation, and income taxes will have a sort of second order effect on aggregate demand. Other taxes may be farther removed from consumption.
This analysis is fine. It indeed is not printing money (although we can and should question whether or not borrowing from the future is equivalent to money printing for states)
However, it's not equivalent to lowering taxes. This is wealth redistribution. The checks are not going out based on your total taxes. It's going out based on perceived needs.
As an example, Oregon also sent out checks this year. It's called the kicker. The state took in more than they could spend in 2021. This year, when I filed taxes, I took my total tax from last year. Then I went through a formula that allocated the portion of the excess to the total I contributed to the revenue of the state. I got that much back. Those who paid no tax or little tax because they have little income get less. Those who are wealthier and have higher incomes got back more. This is exactly equivalent to lowering taxes.
California's program is not. It's wealth redistribution. Which may or may not have an inflationary effect (richer people are more likely to save their refund, whereas poorer people are more likely to spend it, and spending does cause inflation).
> The state took in more than they could spend in 2021. This year, when I filed taxes
That's not quite accurate. They (government) can always find ways to spend the extra money. Oregon passed a ballot measure that constitutionally mandated them to send back any excess above what they budgeted. If they said they need $1.5 billion to run the state for the biennium (made up number) and they collect $2 billion, they have to return $500 million back, and in equal proportions to what the individuals (and corporations) paid. There was a long time where the gov't was overtaxing people (by keeping excess collected) and this was a fair remedy.
IIRC part of the issue is that California heavily taxes capital gains and in general has very progressive tax, so they can be wildly wrong about their forecast based on what is happening in the markets.
And the reason they do this is because of prop 13. In particular, California's per capita budget isn't any higher than other blue states.
I don't think its a good source of revenue for many reasons. But until it becomes politically tenable to remove prop 13, I'm not sure if there's a better solution.
The reason printing money causes inflation is because people spend the extra money. It increases demand for things, and suppliers raise prices in response to that.
Giving everyone money, regardless of whether it’s a tax refund or printed out of thin air, will have the same effect.
> This program is not that. This program is providing a tax refund from CA's tax surplus. No new money is being created. The only change is who gets to decide how the money is being spent? (e.g., the state? or the people?)
Did they raise taxes on some group to specifically to take the money out of the economy, to pay for this stimulus? If they didn't, I'm pretty sure this is inflationary.
IIRC, it doesn't matter so much for inflation if the money is "created" or not, it matters if it's circulating in the economy. If CA left its tax surplus sitting in a vault somewhere, that will help reduce inflation.
People seem to be missing the obvious here. What are people going out and buying with their stimulus checks? iPhones, TVs, used cars, etc. We need to be curbing demand significantly not stimulating it.
States only have a surplus from the all the free federal money they got from Covid. Either send it back, or use it for infrastructure. Maybe fire prevention and suppression?Maybe build some nuclear power plants again? Homeless programs and shelters? Anything but stimulating consumer demand.
If you look at the mean income across states [1] you'll find that there are states where it's higher than California. CA is above average but it's not the top.
The money people make in the tech industry isn't representative of what a typical person makes.
> What matters is the ability to service that debt, and the value of the debt compared GDP.
The value of the debt compared to GDP is really just part of being able to service the debt. Being able to service any debt is a good point and a complex factor when you take the long view. But, digging into that is more than hacker news comments.
> Put more simply, would you rather be someone earning $20k/yr with no debt, or someone earning $100k/yr with $20k of debt?.
This is one place people very much disagree. This gets into goals, values, etc. Do you want to make enough money to cover what you need or is your goal to just accumulate more money or stuff? People will look at this different and look at it differently for their government than for themselves.
Exploring the ideas we have on this and the reasons for those ideas is something I think is a good idea. It's a reflection on things we may not realize about ourselves.
Well, if I were the first person and my income stream disappeared, I'm now a hell of a lot better off than the person who has $20,000 in debt and also loses their income stream. Not to mention the costs of servicing that shitload of debt.
So idk if that's going to be your best choice of analogy here.
Instead of a person, then, call it ten people at different companies, so that all ten won't lose their jobs at once barring an event so catastrophic money will be meaningless.
The point is, absolute numbers aren't nearly as relevant as per GDP numbers.
This is the third stimulus check that California has sent out, after "Golden State Stimulus 1" and "Golden State Stimulus 2". This new one (9.5 billion) is actually less than the previous one (12 bil).
Some form of tax rebate is required by law when the state surplus exceeds a certain amount:
> I'm skeptical of elected officials sending money to constituents right before elections.
There seems to have been a lot of very suspiciously-timed policy announcements like that recently. Of the top of my head: the student loan forgiveness plan, the Federal marijuana possession pardons, and now this.
“A democracy cannot exist as a permanent form of government. It can only exist until the voters discover that they can vote themselves largesse from the public treasury. From that moment on, the majority always votes for the candidates promising the most benefits from the public treasury with the result that a democracy always collapses over loose fiscal policy, always followed by a dictatorship. The average age of the world's greatest civilizations has been 200 years. These nations have progressed through this sequence: From bondage to spiritual faith; From spiritual faith to great courage; From courage to liberty; From liberty to abundance; From abundance to selfishness; From selfishness to apathy; From apathy to dependence; From dependence back into bondage.”
Very wise. No matter who it is, everything in politics is about image and voter influence. Im grateful for the help when it is offered to me, but I don't ignore the real purpose behind it all either.
I also find it ethically questionable to not return a tax surplus to the people who paid the most in taxes.
This is effectively a forced wealth re-distribution.
The gov't should spend our tax money on the common good. Not just to literally tax money from my family and turn around and hand it directly to our neighbors.
I'm glad I moved out of California. They don't even hide forced wealth redistributions anymore.
Idiotic. Currently elected politicians are literally doing the opposite of the FED and making inflation worse all in the name of trying to stay elected. Burn the economy, peoples savings, and retirements at all costs to stay in office.
I hope people enjoy their stimulus checks while their pensions, savings, retirements and jobs go up in smoke.
How is a (effectively) tax rebate going to cause inflation? Nothing was created out of thin air, they took in more money than they needed in taxes and so they are returning that to the population.
In effect it increases the amount of money circulating in the economy, particularly in the parts of the economy where inflation is high e.g. groceries, rents, etc. Basically CA is taking money (via taxes) that would likely sit in some form of savings or equities and transferring it to people who will spend it.
As a value neutral take, it simply moves cash into the economy and increases the velocity of money. If the production of goods and services can't keep up, there will be more inflation.
Tax rebates cause inflation because they result in more money available to chase an unchanged quantity of goods and services, which causes prices to rise.
Similarly, tax increases reduce inflation because after paying taxes, people have less money to buy things that are not taxes.
Critically: inflation measures the cost of goods and services, and taxes are not a good or service.
Because they're taking income from the rich and giving it to the poor. Poor people are more likely to spend. If instead they took the money and gave it to rich tax payers (which I imagine would be deeply unpopular), then this would likely reduce inflation as rich people typically would save it, and thus remove it from the consumer spending category.
But! It is definitely better than all the states that used their Covid windfalls for permanent tax cuts. If we end up with a bad recession, one-time checks are going to hurt an awful lot less than lower recurring tax revenue.
Tax cuts are better than giving hand outs to people that go out and buy worthless goods and services. At least tax cuts gives money back to people who are actually productive and pay into the system.
How incredibly out of touch one must be to think that the people getting these checks won’t use from for food, fuel, and rent. The lower classes live in a constant recession, and will put these funds to better use than the marginal dollars of someone very well off: survival.
> How incredibly out of touch one must be to think that the people getting these checks won’t use from for food, fuel, and rent.
Hold on hold on. The discussion was whether these checks will cause inflation. If your answer is that, by being sent to the poor, they will be used for food, fuel and rent... then that is going to cause inflation. If you do something that makes people more able to spend more money on limited goods (all goods are at this level), then you will cause those prices to increase.
With all due respect, reread the comment I replied to. It is not an argument about inflationary pressures. It is a value judgment of the economically disadvantaged.
The job of the politician isn't to make things better, it's to get re-elected. In this respect their actions are quite shrewd. Making things worse may help them!
You’d think this will help. But all it’ll do is cause more inflation. This money comes directly to the people. Meaning their creditors don’t get paid. And we all know what happens when people come into money. It’s gets squandered, causes a shortage and causes more inflation.
Rents are sky high because the government decided to directly pay people instead of their (I hate the word) landlords.
All the research points to the exact opposite of what you describe. Google “results of giving money directly” produces many more results, what exactly are you referencing?
More like fighting fire with gasoline. And emptying the state coffers right before a recession when California tax revenues will be amongst the hardest hit of any state is an additional stupidity. This should all go into the rainy day fund
Given the size of Californias population and and it’s spending power, the grand effect on the entire country would be higher. I wonder if the rest of the states would have to pay the prices (through rising rates).
By my understanding, the case for stimulus checks leading to inflation comes when the stimulus checks are paid for by printing more money (thus increasing the overall money supply).
This program is not that. This program is providing a tax refund from CA's tax surplus. No new money is being created. The only change is who gets to decide how the money is being spent? (e.g., the state? or the people?)
If CA could have seen the future, they could have achieved the same end by lowering taxes this last year for people in an equivalent amount. Would anyone seriously argue that lowering taxes is inflationary? How about the contrapositive? Would anyone seriously argue that we should fight inflation by _raising taxes_?