“Money in people’s hands for a couple of months last year—in my mind—was a very, very minor factor, in that most of that money has long since been spent and yet you see inflation continue to rise,” the former presidential candidate told CNBC.

The U.S. issued some of its largest stimulus packages ever to help support the economy during the COVID-19 pandemic, including sending stimulus checks worth up to $1,400 directly to all Americans. Direct payments soon became one of the most popular elements of the COVID recovery plan, with strong support from both Democratic and Republican voters.

However, economists are now debating whether that generous fiscal policy is the cause of record-high U.S. inflation, which hit 8.5% in March compared with the year before—a level not seen since 1981. 

Overstimulated?

Economists largely agree on the broad causes of inflation. The COVID-19 pandemic shifted consumer tastes toward goods rather than services, and manufacturers were unable to keep up with demand. More recently, Russia’s war in Ukraine has caused commodity prices, like those for wheat and oil, to spike, adding to inflationary pressure.

However, economists disagree on whether U.S. government support—including stimulus checks—is the reason why inflation in the States is riding higher than in other developed economies.

In March, economists working at the Federal Reserve Bank of San Francisco estimated that U.S. government policy may have added three percentage points to the country’s inflation rate by the fourth quarter of 2021, as compared with a scenario where the U.S. pursued a more “passive” policy, like other developed economies.

Jason Furman, senior fellow at the Peterson Institute for International Economics and a top economic adviser to President Barack Obama, has pinned U.S. inflation levels on the country’s generous fiscal policy, too, telling ABC News on Sunday that “no other countries sent out checks on the scale that we did.”

But some economists disagree, noting the European Union recorded 7.5% inflation in March—not far behind the U.S.—without issuing American-size stimulus checks.

“It’s a global phenomenon. It’s not primarily coming from U.S. stimulus,” Austan Goolsbee, another Obama-era economic adviser, told The New Yorker. 

Direct payments reduce poverty

Yang’s 2020 presidential campaign helped popularize the concept of universal basic income in the U.S., but the COVID pandemic helped to turn the idea into real policy, as both the Trump and Biden administrations embraced direct cash transfers as a stimulus measure to support the U.S. economy.

Direct cash transfers arguably avoid the messy bureaucracy of current welfare systems by giving cash to everyone regardless of status. Guaranteed payments also avoid the political issues of means-tested programs: Since everyone gets money, everyone should, in theory, support keeping the program.

Proponents of universal basic income argue that the policy more efficiently alleviates poverty. Official Census data from 2020 show that stimulus checks and other measures helped reduce poverty during the pandemic. The Census Bureau estimated that the U.S. poverty rate fell to 9.1%, the lowest rate since it started releasing estimates in 2009. The bureau also estimated that without these support measures, poverty would have increased by a percentage point, which would have been the first jump in five years.

Higher inflation could prove to be a downside of universal basic income, but when it comes to direct cash transfers, even the economists at the San Francisco Fed agree that the trade-off between inflation and supporting the economy is difficult to balance.

In their March note, they argue that without stimulus, “the economy might have tipped into outright deflation and slower economic growth, the consequences of which would have been harder to manage.”