Inflation Is Not The Biggest Thing Happening In The Economy Right Now

Family poverty has substantially declined thanks to the child tax credit

By Arthur Delaney

Original article:

WASHINGTON ― Rising prices have crushed consumer sentiment and become a major political story as President Joe Biden struggles to enact the broad social policy agenda that helped him win the White House last year. 

But inflation is actually just one of several big economic stories happening right now. There has also been a big reduction in child poverty ― and Congress could make it permanent.

The same fiscal policies that are partly blamed for high inflation produced a 40% reduction in child poverty in July, according to researchers at Columbia University’s Center on Poverty and Social Policy. The one-month decline was steeper than any year-to-year change in child poverty from 1967 until 2020, when Congress first sent out stimulus checks and boosted unemployment benefits in response to the coronavirus pandemic.

Since July, the reduction in family poverty has been mostly sustained by monthly payments worth as much as $300 per child. The payments have lifted between 3 and 4 million children above the poverty line each month. 

“The sheer magnitude of just that number is not what we normally see on a regular basis, especially from a single policy,” Megan Curran, director of policy at Columbia’s Center on Poverty, said in an interview. 

Democrats are planning to continue the payments through next year as part of the Build Back Better social spending bill that they hope to pass in the coming weeks. If Democrats succeed in entrenching the policy, it would represent a dramatic shift for the American welfare state in favor of families.

One of Democrats’ biggest obstacles is inflation, with news that prices rose 6.2% since last October prompting fresh warnings from Republicans and even some Democrats that Build Back Better is a bad idea. 

“From the grocery store to the gas pump, Americans know the inflation tax is real and DC can no longer ignore the economic pain Americans feel every day,” Sen. Joe Manchin (D-W.Va.), a pivotal Senate vote, said in a tweet last week

Higher prices weaken the spending power of every paycheck, but for most families with children, the monthly child tax credit payments more than make up for that erosion. In October, Moody’s Analytics estimated that for households earning the U.S. median income of about $70,000 a year, higher inflation costs them $175 a month. The child payments are worth $300 for each kid under 6 years old and $250 for kids under 18; that money comes on top of wage growth that is already outpacing inflation for lower-income households.

In Washington, reducing poverty means pushing family incomes above an arbitrary threshold corresponding to the number of people in the household. For the actual people affected the extra money can be a lifesaver; low-income families report using the child payments mostly for necessities like food, clothing and shelter. Monthly survey data from the U.S. Census has also foundthat households with children reported notable declines in difficulty obtaining food and meeting basic expenses before and after child payments went out, changes that were absent in households without children. Research suggeststhat people who grow up poor tend to earn less money, have worse health outcomes and a higher likelihood of winding up in trouble with the law.

In short, the new child tax credit payments are cutting down on real human misery by partially making up for the labor market’s indifference to parents, who have more expenses and less flexibility to work at whatever jobs might be available.

Sen. Sherrod Brown (D-Ohio) listens during a business meeting with the Senate Committee on Veteran Affairs on Capitol Hill on Oct. 20 in Washington, D.C.
Sen. Sherrod Brown (D-Ohio) listens during a business meeting with the Senate Committee on Veteran Affairs on Capitol Hill on Oct. 20 in Washington, D.C.

Sen. Sherrod Brown (D-Ohio) said the new policy isn’t getting its due in the national conversation about the economy. 

“We don’t talk about it enough, and, not to tell you what to do, but you guys don’t cover it enough,” Brown said, referring to the press. “The discussion is, ‘Democrats can’t pass these next two bills,’ instead of the discussion being, ‘Look what the child tax credit has done.’” 

Brown said that “90% of families in my state who have kids under 18 have gotten at least a $3,000 a year tax cut. And that should be said over and over and over.”

Ally Rykiel has received $550 per month since July for her two kids age 5 and 11. She had another baby in October, though she has not yet been able to update her family’s information with the IRS to get another $300 for the new child.

Rykiel, 33, said her family hasn’t particularly noticed inflation, partly because she and her husband don’t drive, partly because they recently moved to Richland, Washington, to be with her family, and partly because they shop for food at different grocery stores and are used to finding different prices for similar goods.

Still, the cost of food has been a burden ― especially after her husband took off four weeks from work to help with the baby and received no pay from his employer. The child tax credit has been helpful. 

“If we didn’t have that, we would have had nothing,” Rykiel said. “Counting on that $550 in the middle of the month has been huge. We just expect it now.”

The child benefit policy might not deliver to the fullest extent Democrats said it would. It was supposed to slash poverty by 40% annually, but because they structured the payments as advance refunds of the child tax credit, and because low-income households aren’t required to file federal tax returns, the Internal Revenue Service has been unable to reach millions of eligible households. As a result, the poverty reduction from the child tax credit has ranged between 25% and 29% each month since July, according to estimates from Columbia’s Center on Poverty and Social Policy. 

The federal government determines the official poverty rate on an annual basis; the center produces its monthly poverty estimates by comparing household budgets to a poverty threshold one-twelfth the size of the annual one. For a two-parent, two-child household, that monthly poverty line is about $2,300 per month. If Democrats continue the benefits through next year as planned, the monthly poverty reduction could translate to a similar annual impact, at least according to the federal government’s supplemental poverty measure that accounts for cash payments from the IRS.

A political problem for the child tax credit is that because economists say inflation has been caused partly by increased consumer spending colliding with supply problems ― with the increased consumer demand resulting partly from Congress giving everyone more money ― Republicans can skewer the child tax credit as just another thing causing inflation, rather than something that mitigates its impact for most households.

“The economy has an inflationary problem ― this makes it worse,” Sen. Lindsey Graham (R-S.C.) told HuffPost earlier this month, referring to the child tax credit. “The more you expand government, the more money you put in the system, the more inflation you’re gonna have. Now’s not the time to do these policies.”

The cash payments do boost aggregate demand, said economist Dean Baker, co-founder of the Center for Economic and Policy Research, but to such a small extent that it shouldn’t contribute much to inflation. Baker has argued that the burst of inflation this year will likely wane as companies resolve supply chain problems and increased demand for durable goods subsides. 

“I see this as a story where people are actually doing pretty well with higher pay and many getting the CTC, but they are hearing about inflation in the media 24-7, so they think the economy is going to hell,” Baker said in an email.

Many people do think the economy is going to hell, with consumer sentiment falling to its lowest level in a decade in November, according to the University of Michigan’s surveys of consumers. And people’s moods could be consequential for what happens with inflation, because if consumers expect higher prices and in return demand higher wages, a self-perpetuating cycle could develop. The University of Michigan’s Richard Curtin said his consumer surveys show people believing their own income gains will be wiped out if inflation continues. 

“Nominal income gains were widely reported but when asked about inflation-adjusted gains, half of all families anticipated reduced real incomes next year,” Curtin wrote. “The reactions of consumers to surging inflation should be no surprise, as it has been reported during the past several months.”

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