“Those who fail to learn from history are doomed to repeat it,” seems an appropriate quote to describe Governor Gavin Newsom’s plan to fight inflation in California. Here’s another that works just as well: “The definition of insanity is doing the same thing over and over again and expecting different results.” Newsom, it seems, believes handing out free money to millions of people will somehow combat the broad-based inflationary pressures gripping the Golden State. And so, the state is now set to hand out stimulus checks like the Biden administration allegedly hands out crack pipes.
California Dreamin’ of Bad Economics
Gov. Newsom and Democratic legislative officials agreed on a $17 billion relief package that includes $9.5 billion in inflation relief checks. This means that an estimated 23 million state taxpayers will receive as much as $1,050 by early next year, potentially setting the table for other jurisdictions to establish comparable plans.
“California’s budget addresses the state’s most pressing needs, and prioritizes getting dollars back into the pockets of millions of Californians who are grappling with global inflation and rising prices of everything from gas to groceries,” Newsom said in a statement. “The centerpiece of the agreement, a $17 billion inflation relief package, will offer tax refunds to millions of working Californians. Twenty-three million Californians will benefit from direct payments of up to $1,050. The package will also include a suspension of the state sales tax on diesel, and additional funds to help people pay their rent and utility bills.”
So, how does it work, and who qualifies? The program will be set up based on income tiers. People with less than $75,000 in income, or $150,000 if married and filed jointly, will get up to $350, plus $350 if they have at least one dependent. In total, joint filers with one dependent could find the maximum sum of $1,050 in the mail in 2023.
Meanwhile, filers with incomes of up to $125,000, or $250,000 if married and filing jointly, could see a $250 check, with another $250 for a dependent. Individuals with incomes up to $250,000, or $500,000 if filed jointly, may enjoy a $200 check, with another $200 for dependents. Anything higher than these incomes will not see a penny in refunds.
Ultimately, the program will operate similarly to the Economic Impact Payment stimulus checks that were doled out in the early days of the coronavirus pandemic. The funds will be deposited into taxpayers’ bank accounts or mailed out as debit cards.
The Economics of Inflation Relief
Proponents of the measure purport that this is perfectly acceptable because the payments will be a part of the 2022-2023 state budget and structured as tax refunds since California enjoyed a surplus of $75 billion. Supporters also contend that this is necessary because of soaring gasoline prices, which are north of $6 per gallon on the West Coast. However, once again, Newsom and the Democrats are not understanding what contributed to the 40-year-high price inflation in the first place. Do they really believe the White House’s mendacious “Putin’s price hike” campaign? Perhaps. Or maybe the move is politically expedient for a state leader who holds a 50% approval rating, according to the Public Policy Institute of California (PPIC).
After the US government and the Federal Reserve injected the economy with trillions of dollars’ worth of liquidity, public policymakers created an environment of too much money chasing too few goods. Essentially, when politicians and bureaucrats shut down an economy, and consumers receive thousands of dollars in free money, demand for scarce goods and services will inevitably skyrocket. Ditto for the stock market. Armchair traders and institutional investors were flush with cash from Uncle Sam and poured this money into Amazon, Apple, Tesla, Netflix, and every other security on the New York Stock Exchange, creating astronomical asset inflation.
While Newsom’s plan might be a drop in the bucket on the inflation front, the primary issue now is that more states are likely going to mirror this policy, from Connecticut to Maryland to New Mexico. Governors will either start sending out stimulus checks or suspending gas taxes – or both. Whatever the case, both measures would exacerbate the cost-of-living crisis, particularly for energy, since it would artificially elevate the demand for a market that is extremely tight. The solution is to stop adding money to the marketplace, be it by turning off the printing press or halting any fiscal stimulus initiative at the federal or state level.
More Money, More Problems
Unfortunately, in the aftermath of the COVID-19 public health crisis, the United States has created a new generation of junkies addicted to the principles of something for nothing. This will be the new normal in any type of economy that experiences the slightest of hiccups. The next question is: Should the consumer price index (CPI) fail to fall below 8% before the end of 2022, will the Biden administration start thinking about another round of $1,000 stimulus checks to prevent a Republican takeover of 1600 Pennsylvania Avenue? Wait a minute. What is that sound? Oh, that’s right: Money printer go brrr.