It's a given at this point that much pandemic-related fiscal stimulus was lost to fraud. The government flooded the world with money, we were told, to offset the disruption of economies paralyzed by people minimizing social contact and (especially) by mandated closures. Sure, that was a crude "solution" to an avoidable problem. But government officials insist things would have been worse without stimulus.
Is that true, though, given that stimulus money not only padded the pockets of grifters but fueled the surging prices of recent years?
Billions Recovered (of Hundreds of Billions Stolen)
"Since I established the COVID-19 Fraud Enforcement Task Force three years ago, we have charged more than 3,500 defendants, seized or forfeited over $1.4 billion in stolen COVID-19 relief funds, and filed more than 400 civil lawsuits resulting in court judgements and settlements," Attorney General Merrick Garland boasted earlier this month.
Of course, $1.4 billion is only a fraction of the trillions spent by the federal government to stimulate the economy. Then again, it's also only a fraction of the stimulus money that was swiped by scam artists.
"The total amount of fraud across all UI [unemployment insurance] programs (including the new emergency programs) during the COVID-19 pandemic was likely between $100 billion and $135 billion—or 11% to 15% of the total UI benefits paid out during the pandemic," the U.S. Government Accountability Office (GAO) estimated in September 2023.
That was after the Small Business Administration's Inspector General found more than $200 billion stolen from the Economic Injury Disaster Loan (EIDL) program and Paycheck Protection Program (PPP). That represented more than one-sixth of the money disbursed through the two programs.
"The full extent of fraud associated with the COVID-19 relief funds will never be known with certainty," the GAO conceded in a report last November.
It's nice the COVID-19 Fraud Enforcement Task clawed back $1.4 billion. But that's chump change in the context of massive handouts of money.
Stimulating Not Just Con Artists, but Inflation Too
But if you think the trillions spent on pandemic stimulus was a high price to pay for that contented smile on your crooked neighbor's face, you can rest assured that the money bought something else: the rising cost of living relative to income. That's because that flood of dollars fueled inflation.
"The large increase in demand triggered by the fiscal stimulus policy, together with the slow pace of adjustment in production, likely contributed to the current imbalance in the goods market, resulting in the depletion of inventories, pronounced bottlenecks, and ultimately inflation," admitted the Federal Reserve Board of Governors in July 2022.
"U.S. fiscal stimulus during the pandemic contributed to an increase in inflation of about 2.6 percentage points in the U.S.," three economists with the Federal Reserve Bank of St. Louis estimated last year. A big reason, they continued, is that the trillions intended to stimulate the economy were essentially created out of thin air, "borrowed" from the future. "Debt issuance is inflationary when forward-looking agents believe that newly issued government debt is only partially backed by future taxes."
This squares with what economists elsewhere have written about the effects of showering a vast supply of new money on the country.
"Starting in March 2020, in response to the disruptions of Covid-19, the U.S. government created about $3 trillion of new bank reserves, equivalent to cash, and sent checks to people and businesses," John Cochrane of the Hoover Institution and the Cato Institute argued in a 2022 paper. "The Treasury then borrowed another $2 trillion or so and sent more checks. Overall federal debt rose nearly 30 percent. Is it at all a surprise that a year later inflation breaks out?"
Even so, the Fed authors argue that "the large spending supported a strong economic rebound…likely preventing worse outcomes despite the price pressures that may have resulted from the spending."
That assessment, though, is based on assumptions that the money was spent as intended to prop up legitimate businesses and keep worthy people working and spending. It's difficult to see that the calculus works the same way—certainly not, in moral terms—if hundreds of billions of dollars of that money was lost to fraudsters, leaving honest Americans to deal with the resulting eroded value of their paychecks and, ultimately, to pay off the soaring federal debt left behind by the stimulus.
Unhappy Americans Left Feeling the Pinch
Certainly, people aren't happy with the results. Americans have a negative, though improving, view of economic conditions, with 30 percent calling them "fair" and 39 percent "poor," according to Gallup. "More Americans still say they worry about inflation than any of 13 other issues rated," the polling company noted at the end of March. In fact, Americans may be feeling more of a pinch than official numbers suggest.
Attempting to explain deep public dissatisfaction with the economy, economists Marijn Bolhuis, Judd Cramer, Karl Schulz, and Lawrence Summers recently calculated inflation using alternate measures. Under pre-1983 methodology that calculated housing costs differently, "headline CPI would have peaked at 18 percent in November 2022" instead of at 9.1 percent in June 2022 under current methods. They think this "does much to explain depressed sentiment over the last two years."
Perhaps things would have been worse in the absence of stimulus checks. But if we're going to play what-if games, we might be better off imagining a world where politicians refrained from hobbling economies with lockdowns and stay-at-home orders so that there would be no damage to try to offset with magic money handed to anybody who asked. They might even stop short of making things worse.
"We have, now admittedly, a deficit fueled inflation," Cochrane pointed out last week. To avoid further antagonizing a public disenchanted with the economy, "one could start by not pouring more gas on the fire" through "cancelling billions of student loan debt" and running up the federal deficit, he suggests.
That sounds like a more productive course of action than the occasional press release touting a billion dollars or so recovered from hundreds of billions of dollars handed to scammers. But it's almost certainly too much to ask of the politicians who created the situation with which we now live.
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