By James Pethokoukis

If you were to listen to left-leaning EconTwitter and take it really seriously back in early 2021 (which apparently many journalists and even policymakers did) you might think that only hyperpartisan right-wing cranks thought there were significant economic risks to the $1.9 trillion American Rescue Plan. That, even though Congress had passed a $900 billion COVID-19 relief bill just a few months earlier.

Correction: “hyperpartisan right-wing cranks” and economist Larry Summers, former Treasury secretary under former President Clinton and a top economic adviser. He called the ARP “the least responsible macroeconomic policy we’ve had in the last 40 years” due to its inflationary potential. And got blasted for it. Summers was obviously just a behind-the-times, inflation-obsessed neoliberal ignorant of the deficits-don’t-matter, free-spending-for-all new economics of Modern Monetary Theory. Block!

But now we know the inflation call may also have been coming from inside the White House. From Bloomberg over the weekend:

[Treasury Secretary] Janet Yellen, worried by the specter of inflation, initially urged Biden administration officials to scale back the $1.9 trillion American Rescue Plan by a third, according to an advance copy of a biography on the Treasury secretary. “Privately, Yellen agreed with Summers that too much government money was flowing into the economy too quickly,” writes Owen Ullmann, the book’s author and a veteran Washington journalist, referring to former Treasury Secretary Lawrence Summers, who severely criticized the size of the aid plan. . . . A Treasury spokesperson disputed the claims . . . “She worried that so much money in the pockets of consumers and businesses would drive up prices at a time when the pandemic had caused severe shortages of goods that were in unprecedentedly high demand.”

Pretty juicy stuff as economic policymaking news goes. Reminds me a bit about the “The Education of David Stockman” brouhaha when the budget director for the new Reagan administration expressed his doubts about the new president’s supply-side theory of economics in a magazine interview. Back then, it looked like Reaganomics wasn’t working. And right now, it looks like Bidenomics has helped cause an economy-rattling inflation surge that could lead to a recession and huge GOP gains in November and beyond.

Of course, many on EconTwitter remain reluctant to blame the supersized ARP for playing a role in rising prices. Yellen would apparently disagree. As would many other economists who also expressed their inflation concerns last year. Here’s AEI’s Michael Strain.

First, take the amount of goods and services the economy could produce at a sustainable pace if all available workers were on the job and all economic resource were being used at capacity. Then, consider actual economic output, which this time last year was lower than the economy’s underlying potential. The difference between the two is the extent to which economic production is falling short of what it “should be.” Economists call this the “output gap.” . . . Estimates of the effect of $1 of government spending on overall economic output range widely — say, from around $0.50 to $2.50 — and depend on many factors, including the type of spending and the amount of slack in the economy. Call the boost to actual economic output from $1 of federal spending “the multiplier.” . . . Last February, all plausible estimates of either the output gap or the multiplier predicted that the ARP would generate substantial inflationary pressure in 2021 and 2022. . . . We now have data on how 2021 unfolded. Using the same method, if you twist my arm and press me for an answer to the question I posed in the first paragraph, I’d say that around three percentage points of inflation in 2021 were due to the ARP.

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