Small: Inflation is cause for extreme caution on state use of ARPA funds

Inflation is cause for extreme caution on state use of ARPA funds

By Jonathan Small

In 2020, Oklahomans overwhelmingly voted for Donald Trump and to keep the Oklahoma Legislature in Republican control. Obviously, Oklahoman voters didn’t get their wish regarding the presidency, but state policymakers can still do their part to offset the disastrous fiscal policies of the Biden administration.

President Biden’s American Rescue Plan Act (ARPA) is a major contributor to out-of-control inflation, so Republican policymakers need to exercise extreme caution before pumping more ARPA funds into the state economy, which could make inflation even worse.

In March 2021, the Biden administration and the Democratic-controlled Congress passed the $1.9 trillion American Rescue Plan Act. The program was supposed to mitigate the economic problems created by COVID shutdowns in 2020. Instead, it generated inflation and effectively slashed family wages.

The reason is simple. The money supply was being increased while the availability of goods and services faltered. When more money chases the same amount of goods, prices are bid up, and quickly. Thus, today’s inflation rate is above 8 percent, a level not seen in four decades.

ARPA included $1,400 payments to most Americans and expanded unemployment benefits, which contributed significantly to inflation.

But ARPA also included $360 billion for state and local governments. Oklahoma’s legislative leaders recently called a special session to spend our state’s share of that money. But if policymakers quickly spend that ARPA cash without a careful plan, it may simply further pump up the money supply and associated inflation.

If the end result of state spending of ARPA funds is that more “new” money is again chasing the same amount of goods and services in the state economy, Oklahoma families would be better off if policymakers left some ARPA funds sitting idle.

Fortunately, state policymakers have already taken one step towards truly improving the lives of their constituents by agreeing to hold a special session focused on tax cuts, which also sets the stage for future, transformational tax reform that will spur private-sector investment and job creation (which also increases the supply of goods and services and chokes off inflation).

In contrast, ARPA spending is not pro-growth. At best, it’s mere redistribution of money from the more nimble and economically beneficial private sector to government planners. And at worst, it can be economically destructive.

ARPA’s role in inflation has been noted not only by conservatives, but even some prominent liberal economists. Larry Summers, a former Obama administration official, was among those who warned that ARPA could cause an inflationary increase in prices.

What Oklahoma needs is private-sector growth, not increased government planning and spending. The former is the only path to increased prosperity for all.

Jonathan Small serves as president of the Oklahoma Council of Public Affairs.