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Opinion
Jared Dillian

California’s $17 Billion Rebate Plan Is Economic Illiteracy

The last thing the US economy needs is more inflation, but the state’s bid to send checks to its citizens will only bolster prices. 

California Governor Gavin Newsom has a populist response to inflation that won’t work. 

California Governor Gavin Newsom has a populist response to inflation that won’t work. 

Photographer: Josh Edelson/AFP via Getty Images

California Governor Gavin Newsom may be surprised to hear this, but his inflation rebate plan is not good economics. In a time when the inflation rate is cresting above 8%, handing out $17 billion to California residents has the potential to make inflation even worse. And it probably will.

The intent of the rebates, which will total as much as $1,050 per resident, is to ease the impact of inflation. The thinking is that prices have risen, so why not hand out cash to help people compensate? A nice idea, except consumers have a high marginal propensity to consume windfalls of cash, especially lower-income consumers, and almost all the money will be spent, increasing aggregate demand and pushing up prices even higher. It’s not hard to see how this could contribute to an inflationary spiral — inflation accelerates, the government hands out more cash, which pushes up prices even more, which encourages the government to hand out even more cash, and so on. This is how cost of living increases in wages and benefits helped keep inflation high in the 1970s.