More On: Deficit Spending
Watching the displays on a petrol pump while filling your car's tank might cause a panic attack. Buying a secondhand automobile nearly always necessitates taking out a second mortgage. In terms of mortgages, the middle class is being priced out of the housing market as house prices continue to rise. Many price hikes have gotten out of hand.
How did we end up here? Most costs were quite consistent a little more than a year ago, particularly in the years before the Covid-19 outbreak. However, global price inflation has lately reached a 40-year high.
The late economist Milton Friedman contributed to the understanding of 1970s inflation and stagflation. His explanation contributed to the robust economic recovery of the 1980s, which was grounded on the ideas of limited government and good monetary policy, resulting in a rapid decrease in what had been rampant, double-digit inflation.
Inflation Is a Financial Phenomenon
According to Friedman, "inflation is always and everywhere a monetary phenomena." The ostensibly natural disaster is really a man-made one created by the Federal Reserve (Fed) printing too much money. These monetary and inflationary fundamentals are not novel.
Those lessons, however, are being ignored by some in the economics profession. People like Stephanie Kelton have been supporting Modern Monetary Theory (MMT), which is essentially the inverse of what Friedman advocated and history revealed. This theory says that the federal government's present deficit spending isn't a problem since it can and should be fixed by the Fed printing money to finance it without fear of inflation as long as the US dollar remains the world's reserve currency.
President Joe Biden has not publicly backed MMT, but he is also not a fan of Friedman. Instead, he is pleased to have many primarily younger Democratic members of Congress argue for MMT, which gives a handy and supposedly scholarly justification for increasing government expenditure without openly raising taxes. It has a comparable political appeal to Keynesianism, which was introduced over a century ago, and MMT is just as wrong.
However, proponents of MMT are true on one point: the Fed can create money to cover the debt and avert a default. However, when adjusted for inflation, this assumption is untrue. Making money to pay off debt devalues the currency. Investors earn a reduced real return on their government debt holdings as a result.
Furthermore, whether they hold government bonds or not, everyone suffers from inflation. Inflation is effectively a tax since it deprives individuals of buying power through no fault of their own. Everyone who earned a 7.5 percent rise in the previous year likely assumed they'd be able to buy more things, but they were duped. Inflation climbed at the same rate, hence there was no actual increase.
False Claims That Taxation Is the Answer
However, proponents of MMT argue that enormous budget deficits are what enable individuals to save money. They argue that if it weren't for the deficits, people wouldn't have any money to save. At first sight, the epidemic seemed to back that up. People got government transfer payments and stored a large portion of them owing to uncertainty. However, as people's reliance on the government dwindles and costs rise, their savings are being drained.
Now that inflation is out of control, MMT supporters feel that tax hikes are the major (if not the only) solution. They argue that inflation is produced not by the Fed printing too much money, but by individuals having too much money to spend; taxing would eliminate excess liquidity, hence halting inflation.
MMT, on the other hand, does not explain why it is only inflationary when individuals spend money and not when the government spends it. Creating money by acquiring government debt, for whatever reason, does not raise prices for scarce resources. The hypothesis seems to be more of a belief than science, something that must be believed rather than shown.
MMT ideology, in particular, is based on mathematical correlations between economic variables such as private and public savings and debt rather than a solid theoretical construct, and thus crumbles easily when tested with good economic theory. Furthermore, these partnerships seem to be utilized to generate cash for their big-government policy objectives, such as a federal employment guarantee, universal healthcare, and other expensive measures.
Inflationary Pressures Can Be Alleviated Through Taxation
However, MMT is not wholly incorrect in its use of taxes to combat inflation. Higher taxes may decrease inflation if they are used to pay for deficit spending, which should be done by spending less, rather than the Fed funding it. That, however, is much too detailed an explanation for MMT, which uses far larger brushstrokes.
Regardless, MMT cannot change the fundamental facts of monetary policy, which are that inflation originates from just one source - the Fed. When the Fed prints money faster than the actual economy expands, prices increase; it's as simple as that.
To reduce the uncertainties and distortions caused by Washington's disastrous policies, there should be binding fiscal and monetary regulations based on solid economics rather than ideology. This should entail simply modifying the money supply to keep prices steady and increasing government expenditure by less than the rise in personal earnings.
Almost two years after President Biden stated that "Milton Friedman isn't driving the show anymore," the late economist is obviously the last man standing. Perhaps the president will think carefully the next time he speaks badly of the deceased.