Blame Insane Government Spending for Inflation

Today’s inflation is often blamed on problems in global supply chains. One solution to the problem is to end decades of globalization, and return production back home. Others are calling for inflation-relief measures, such as strong child subsidies and tax incentives for food and gas.

These suggestions are grounded in an ignorance of what causes inflation. It is the government-induced demand. Inflation will be fueled by more spending.

The Treasury Department was responsible for approximately $6 trillion in issuances, of which $2.7 trillion were monetized through the Federal Reserve. Through various programs including unemployment bonus checks and individual checks, $5.1 trillion was sent to Americans. The federal overall debt has increased by $6 trillion since then.

According to this response, the 2020 recession was caused by a demand surge that led to a decline in aggregate demand rather than the resulting strangling of aggregate supplies by lockdowns or the pandemic. Sending money to companies and people was not likely to have any impact on production. This increased demand for durable products that were still being manufactured.

Even by the Keynesian economic standards that prompt this sort of fiscal response, COVID-19 relief was larger than any “output gap”—the difference between what the economy is producing and the most it could produce. The gap stood at $2.3 trillion in March 2020. In addition, $3 trillion was spent by the federal government through relief bills that same year.

Democrats approved the $1.9 trillion American Rescue Plan in March 2021. At the time, the projected output gap was $700 billion through 2023—the period when most of the spending would take place. The bill was therefore two to three times larger than it should have been, considering that the economy had been mostly reopened, and was growing fast, with unemployment falling from 14.8 percent in the previous year to 6 percent.

A few center-left economists, as well as Sen. Joe Manchin (D–W.Va.They warned that an excessive new infusion of spending could cause overheating and inflation. These warnings were dismissed, or mocked. In the end, everyone involved in the Fed’s decision-making process was oblivious to the important role played by fiscal policy and monetary policy.

Numerous new researches have confirmed that inflation today is not caused by supply, but demand. This doesn’t mean that supply-chain chokepoints were not important, which was originally caused by a global shutdown and sudden shift toward goods from services.

We wouldn’t be facing such severe supply chain problems without the government-driven increase in durable goods demand. Robert Koopman, World Trade Organization says artificially inflated demand was responsible for up to two-thirds supply shortages.

Global supply chains, second, are obviously global. If supply-chain issues were the true cause of inflation, then we’d see the exact same inflation rates in all industrialized nations. However, we do not. Inflation levels in many industrialized countries are lower than those of the United States. They also had lower COVID-19 spends.

France, South Korea, Norway and others have lower inflation rates than 4 percent. The governments of these countries spent only 10 per cent of their GDP to provide fiscal stimulus to combat the pandemic. This compares to approximately 26 percent for the United States.

You also need to know the difference between supply restrictions, which raise the price of certain goods relative other goods, as well as inflation, which is when prices for everything (including labor) rise. Contrasts and supply shocks don’t produce the same wide-ranging price rises as true inflation. Also, the price-level rises caused by supply-side stress are not continuous month-to-month; these are temporary jumps that fade as soon as the supply shock passes.

Today all prices and wages are increasing, even though they may be rising faster than usual. Inflation is also persistent. Overblown fiscal and monetary policy are the main reasons. To tackle the problem, strong Fed actions are required as well as significant fiscal restraint from Congress. Without both of these, inflation is likely to persist and cause severe harm to those most economically vulnerable.

Accordingly, the calls for subsidizing gas and housing as well as child care will need borrowed money. The problem is in fiscal excesses, which make affected markets less efficient, increasing the chance of an even greater stagnation.

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