Americans are hearing a lot about Jan. 6, 2021, as a Congressional committee holding public hearings builds a definitive account of the riots at the U.S. Capitol that day. But another momentous event occurred just one day earlier, when Democrats notched upset wins in two Georgia Senate races, giving their party a thin majority in both houses of Congress. While overshadowed by the Jan. 6 mayhem, those Georgia elections helped fuel inflation—which now threatens Joe Biden’s presidency—in ways nobody could foresee at the time.
That unexpected majority allowed Democrats to pass the American Rescue Plan in March 2021, with no Republican votes. The ARP flooded an additional $1.9 trillion in stimulus money into the economy, after Congress had already provided $4 trillion worth of COVID aid in the prior 12 months. The ARP included familiar types of relief—stimulus checks, extended unemployment benefits—plus Democratic priorities such as new health care subsidies and a more generous child tax credit.
A few economists warned that the ARP could cause an inflation spike, but most doubted that, including virtually all of President Biden’s economic advisers. The inflation rate at the time was just 2.7%, and inflation hadn’t been a serious problem since the early 1980s. Those advisers, including Treasury Secretary Janet Yellen, knew that after the last recession, from 2007 to 2009, the government hadn’t done enough to boost the economy, which sputtered along for years. The fiscal firepower they endorsed in 2021 was supposed to trigger a faster recovery.
The problem now, of course, is that inflation has soared to 8.6%, the highest level since 1981. This probably spells disaster for Democrats in the November midterm elections, where they seem certain to lose control of the House, with the Senate a close call. Biden himself faces a credibility problem, since last summer, he told voters rising inflation would be a temporary problem. He was wrong, and his sagging approval rating—now under 40%—is the punishment.
The ARP was hardly the only cause of inflation. COVID-related supply-chain disruptions created scarcities of many products, pushing prices up. Global energy producers slashed capacity after huge losses in 2020, and they’re reluctant to produce more now, even with prices high. Russia’s war against Ukraine and the subsequent sanctions on Russia have made global energy markets even tighter, with U.S. gasoline prices up by $1.50 per gallon since Russia invaded on Feb. 24.
Yet Yellen and other Biden administration officials now concede the huge spending bill they championed has contributed to inflation, by giving consumers more money to buy goods that were already growing scarce. It’s impossible to disentangle which cause produced how much inflation. But even if the ARP accounts for just 1 or 2 percentage points out of 8.6, it stands out as an economic move that has backfired on Democrats and raised legitimate questions about their handling of the economy.
Trump gives a gift to the Democrats
The irony is that the loss of those two Georgia Senate seats seemed like an unforced error for Republicans at the time, and one that Donald Trump himself perpetrated. The vote took place in January 2021 because in the general election two months earlier, no candidate hit the winning threshold of 50%, forcing both races into runoffs. Republican David Perdue, running for reelection, had drawn nearly 2 percentage points more votes than his challenger Jon Ossoff in the November race, and he was slightly ahead in polls on the eve of the runoff. Yet Ossoff won by more than a point.
In the other race, Democratic challenger Raphael Warnock beat Republican incumbent Kelly Loeffler by 2 points. Analysts noticed that Republican turnout dipped from the first race to the second, by enough to give both races to the Dems. Even some Republicans attributed that to Trump’s bogus claims of election fraud, which may have convinced some Republicans their vote wouldn’t matter. Trump also forced both Perdue and Loeffler to campaign on his own election lies, lest he publicly bash them or withdraw his support. That may also have turned off voters who might otherwise have backed the two Republicans.
That Senate sweep in Georgia seemed like a gift to Democrats at the time, and it suddenly seemed possible they could enact a sweeping partisan agenda. As we know now, however, the ARP was the high-water mark. Since then, Democrats have bickered among themselves about how to expand the social safety net and enact a green-energy transformation, with very little to show for it. None of that legislation has passed, as Democrats couldn’t muster the votes for a bill and worries about inflation came to dominate everything else. Biden thought the ARP would be hugely popular, but now it almost looks like self-sabotage.
It's a parlor game to ask if the Democrats would be better off in a counterfactual world in which Trump were normal and Republicans won at least one of those Georgia Senate races, giving them control of the Senate and the full ability to block Democratic legislation. The ARP would never have passed. We’d still have some inflation, perhaps 6% or 7% instead of 8.6%, and gas prices would probably be nearly as high as they are now. We might also not have the benefits of that extra $1.9 trillion in spending, which among other things includes an unemployment rate that has fallen much faster than expected toward normal, pre-pandemic levels.
The parlor game could also be a teaching moment for Democrats as they ponder how to win future elections. Their 2021 rescue plan was popular within their own party, but it largely stopped there. Democrats assumed voters would demand benefits they enacted on a temporary basis—such as the expanded child tax credit—become permanent. But that subsidy expired at the end of 2021 with little fanfare, and there’s no clamor from voters to reinstate it. Many centrists and Independents, meanwhile, felt a third stimulus check went too far, especially amid reports that it helped fuel last year’s crypto boom.
Economists someday will do a pretty good job netting out the pros and cons of the ARP and assessing whether it helped or hurt the economy, on balance. That may help determine how the government responds to the next downturn, when a lighter touch might be in order. For now, Democrats may have given Republicans a gift of their own.