Inflation has affected everyone in the country this year, but it has had a particularly acute impact in California: according a recent article published by a local Los Angeles TV station, food prices are up 13.5 percent and energy prices, including gasoline, have shot up 25.6 percent. With price increases like that, it’s not surprising that the article also reports that inflation is a significant and growing concern for citizens of the Golden State.

California has come up with a very California-like response to the inflation problem. The state is sending out what state legislators are calling “inflation relief” payments pursuant to a tax refund program that was enacted over the summer. All told, some 23 million Californians are expected to receive payments that will range in size from $200 to $1,050. The total cost of the inflation relief package is $17 billion, which will come from a state tax surplus fund. Governor Gavin Newsom said the payments will result in “more money in your pocket to help you fill your gas tank and put food on the table.”

Is sending money out to millions of Californians with the idea that they will promptly spend the funds a good idea? Critics say the plan is “economic illiteracy” that will feed the inflationary spiral by stimulating demand–and, according to the law of supply and demand, when demand increases and supply remains static, prices will increase. If 23 million Californians suddenly are ready to spend their inflation relief payment, it’s not hard to see that having a meaningful impact on the demand side of that basic economic equation.

Inflation is a concern for everyone, but sending out checks doesn’t seem like a wise, long-term, sustainable approach to the problem. The latest inflation data, for a rolling 12-month period that includes September, is supposed to be released this week. If it shows that the inflation rate has increased, will California simply shell out additional payments?

Stimulation Follies

High gas prices these days are a continuing shock to drivers. But what’s even more shocking, in my view, is the fact that some lawmakers propose to deal with the skyrocketing pump prices by sending more “stimulus” checks to residents, who can then use the money to pay for the expensive gas.

In Congress, Democratic lawmakers have proposed a bill that would send as much as $300 per month to families as long as the average price for gas in the country exceeds $4 a gallon. And in California, which has the highest average gas prices in the nation, Governor Gavin Newsom proposes to send $400 in direct payments per vehicle, capped at two vehicles, to all Californians.

We’ve apparently gotten to the point where the reflexive political response to every problem is to send checks to people. You can argue about whether such “stimulus” checks make sense in the face of a recession, or when people lose their jobs due to government-ordered pandemic shutdowns, but does any rational person actually think they are a sensible way of dealing with high gas prices?

Elementary economics teaches that commodity prices respond to the law of supply and demand and are a classic example of Adam Smith’s “invisible hand” that guides the setting of prices. The best way to deal with high gas prices is to increase the supply (something that will necessarily happen, in the absence of restraints on production, as producers seek to cash in on high prices) while letting the high prices have their inevitable dampening effect on demand. Consumers can modify their behavior to minimize their need for gas–by car pooling, by using public transportation, by consolidating their trips to the store, and by cancelling that driving vacation this summer, among others–and if they do so the “demand” side of the equation will fall. With increased supply and reduced demand, the “invisible hand” will move prices lower.

Stimulus checks to deal with high gas prices therefore are a colossally bad idea, because they artificially interfere with the “demand” part of the pricing equation. Consumers who get the checks will be less likely to engage in those possible methods of minimizing their use of gas, demand for gas will remain high as a result, and the demand pressure will help to keep gas prices at an elevated level. Sending stimulus checks as a way of dealing with gas prices is akin to smashing the fingers of the “invisible hand.”

Outside of California, it isn’t clear that the gas price-stimulus check proposal will get much traction; there are signs that Congress may recognize that such spending makes no sense under the circumstances. It remains to be seen whether Governor Newsom can convince the California legislature to adopt his approach–but if he does, Californians can expect to be dealing with high gas prices a lot longer than the rest of us.