Newsom's hair of the dog: $17B in stimulus to tame inflation

AP Photo/Rich Pedroncelli

Can anyone tell me what happens when government dumps significant consumer stimulus into an economy with demand issues? Oh, let’s not always see the same hands. 

If you guessed “inflation,” you probably either passed an Econ 101 class back in the day, or simply watched what happened after Biden got his $1.9 trillion stimulus/relief bill passed in March 2021. Now Gavin Newsom wants to alleviate the impact of the inflation hangover Biden created with this hair-of-the-dog response:

About 23 million California residents will receive “inflation relief” checks of up to $1,050 after Governor Gavin Newsom on Thursday signed a $308 billion state budget that includes the payments.

The checks are part of a $17 billion relief package that will also suspend the state’s sales tax on diesel fuel and provide additional aid to help people with rent and utility bills, Newsom said in a statement. The inflation-relief checks are tax refunds that will send a total of $9.5 billion back to state residents.

The agreement comes as California drivers face the highest gasoline prices in the U.S., with the average price for a gallon of gas in the state at $6.27 on Friday — or about 29% higher than the national average. Earlier this year, Newsom had proposed sending stimulus checks of $400 per vehicle to state residents, with a cap of two vehicles. But other lawmakers had pushed for a plan that would provide bigger checks to people who earn less.

Note: Initially the headline read $23 billion, which was the calculation you get when you multiply 23 million by $1,050.00. Those checks will be up to that amount, however, and the stimulus will be $17 billion overall. I’ve corrected the headline as a result.

Which actually changes nothing except the amplitude of what will follow. Let’s just start with gas prices. Why is gas so expensive in California? Part of the answer is the high level of state taxes on gasoline, which is about to get worse (more on that in a moment). Another significant issue is supply, however, because California requires a special formulation for its gasoline to deal with smog issues. At the same time, California has also restricted the refining of gasoline within the state, and the state has shifted some of the refining capacity to other outputs, with this overview from CNN three months ago:

A major factor in the current price surge is an unscheduled outage at a major refinery in Torrance, California three weeks ago, which made an already tight market for gasoline that much tighter, said Doug Shupe, spokesperson for the Auto Club of Southern California. …

The US Energy Information Administration data shows that refining capacity in western states at the end of last year fell 12% from the end of 2019, ahead of the pandemic, and down 22% since the end of 2007, ahead of the Great Recession.

Some of those refineries closed for financial reasons during those tough economic times. Now some are being converted to process renewable fuels, such as the Marathon Petroleum refinery in Martinez, California. That Bay Area facility stopped refining petroleum products in 2020 and will soon reopen as a renewable diesel refinery.

Refining capacity has declined over the last 30 years in California. EIA data shows it at its lowest point, down nearly 9% over the last three years alone and almost 11% over the last decade:

California can buy gasoline from other refiners in the region, but PADD 5 regional capacity isn’t doing much better:

The upshot is that there is a supply problem with gas, exacerbated by population growth over the same period that creates more demand pressure. Adding a massive influx of stimulus into just this market alone will create more demand pressure, which will in turn force prices even higher. Newsom’s “solution” will only make this situation even worse.

Even more incoherently, Californians will get this rebate at exactly the same time that gas taxes will go up another three cents a gallon. Even if Newsom and other California lawmakers can’t do math and connect dots, their constituents can — and are wondering why Newsom and the legislature wants to dump more stimulus while raising gas taxes at the same time:

“That’s crazy, I don’t really see the reason for that, you know?” said San Jose resident Kenneth Roach.

With the gas tax increase now in effect, it’s an extra 3 cents per gallon. For example, if a driver has a 15-gallon gas tank, it will now cost them an extra 45 cents every fill up.

“I commute two hours total every day, so I feel all of the increases,” said Berkeley resident Hailey Guinn. …

“I would prefer to have the gas tax lower and then skip the rebate,” Guinn said.

“Not only because of Ukraine and gas prices, but I feel like gas prices also went up because of the stimulus checks we were getting. For me, I’m happy we got the money and everything, but that really did raise up the prices for a lot of things,” Roach said.

That’s exactly right, but the impact will be much broader. Just like Biden’s stimulus bill in March 2021, it will create more demand in a demand-heavy market without doing a thing to add supply — in gasoline or in anything else. Since fuel prices are a force multiplier for inflation along the goods-distribution chain (and some services as well), that inflation will escalate significantly, eroding the buying power of California’s households long after their stimulus checks have been spent.

It’s almost literally going to toss gasoline on the inflationary fire.

Incidentally, there are whispers that Newsom might challenge Biden for the nomination in 2024. If so, then we can expect the idiotic policies to remain the same, but with a different idiot in charge of them.