Tag Archive for: DeficitSpending

The Long Odds of Solving the Budget Crisis

Estimated Reading Time: 6 minutes

The budgetary crisis in the US has reached a critical phase. The debt ceiling fight about to unfold will simply be the latest phase.

Experts say it is irresponsible to “play a game of chicken” with the debt ceiling. In the past, this means, Congress should increase the debt limit without resistance.

The Democrat Congress has played a game of chicken with a blowout budget and now we will be told the only reasonable thing to do is fund it. But the debt ceiling can be used as a lever to get spending concessions. To use it in this way is considered by Democrats as more dangerous than excessive spending. Is it really worse than a giant omnibus bill passed in the dead of night? A bill, hardly anyone even read? Are all previous spending decisions forever untouchable? Under pressure, can’t Congress go back and cut some spending? If Congress was balancing the budget we would not have to raise the debt ceiling in the first place. Let that last point sink in.

Is not raising the debt ceiling like facilitating a “spendaholic” and giving him the booze for another bender? Unlike the failed attempt to stop the spending done last session, the new Republican House majority will not be frozen out of the process.

It is too bad it comes down to this but every previous attempt to restrain spending has failed so why not use this tool for leverage to get some budgetary sanity? It is only because of a lack of alternatives that we find ourselves where we are in this process.

Yes, it runs the risk of destabilizing markets and politics but so does national bankruptcy. It is only a question of when we get destabilized.

As we recently pointed out,  we now have a series of positive, self-feeding feedback loops operating simultaneously and largely outside of normal political control. Any one of these trends such as the increase in interest costs or the demographic crisis hitting Social Security would be sufficient cause for alarm. But to have so many negative trends operating at the same time is really quite unique and dangerous.

The political machine in the US certainly has tried on occasion to restrain itself but deficit spending has been the norm since the mid-1960s with the adoption of the Great Society. Much of the expansion of government is simply an extension of that original idea. And the Great Society itself was an addition to FDR’s New Deal.

Some may fondly remember the Balanced Budget Act of 1997, which briefly gave us a short interlude of balanced budgets because Bill Clinton and Newt Gingrich had some maneuvering room after the end of the Cold War. Then there was Pay Go, a Congressional rule that any party suggesting an increase had to show from whence they would get the money. And remember the spending caps? Congress has broken free of all of these attempts to restrain them.

Nothing tried previously has worked, in part because America decided that it desired a very large and very expensive government. After a few budget surplus years in the late 1990s, we got back to the long-term deficit spending trend which has now reached the parabolic stage. That is why the debt ceiling fight is now so important. There may not really be an alternative to having this fight right now.

Conservatives and Libertarians see government playing a diminished role in the personal life of Americans, greater freedom, greater personal responsibility, and a smaller and less expensive government. Except for funds to defend the homeland and run the courts and the like, they see a small  Federal Government. The bulk of the social safety net should be on a state level because states must balance their budgets because they don’t have the power to print and borrow as does the Federal government. Further, if states become too oppressive, citizens can move.

As attractive as we think that vision is, it has not been embraced by the American people for a long time. Pitting self-responsibility against free stuff from the government has been hard to sell.

Some say it is because we have done a poor job of explaining our vision and the consequences of progressivism. It is true we have been shut out of institutions such as schools, the clergy, and the mainstream press.  It does not alter the outcome. We are losing.

We think it goes deeper than even that. Our voice is being heard, maybe not to the extent we think it should.  But the sad fact is the public is not buying what we have been selling. Americans have not wanted a small government and self-responsibility. They want a welfare state. They want to be taken care of and they don’t want to pay for it.

Progressives and Liberals want an almost total government with a government providing welfare, healthcare, education, child subsidies, a huge military for international intrigue, changing the climate of the earth, reformulating families and sexual relationships, a national security state, and a censorship state, a reparations state, a union with both labor and capital in a fascist like structure. Government should play a role in every aspect of life and individuals are to be cared for by the state.

This by its nature, requires a huge and expensive government. Democrats remain convinced it can be funded by taxing the rich, without negative consequences to productivity and incentives. They also maintain the fiction that all this can be achieved without compulsion.

Rolling debt out to the future plays into the Progressives’ hands. They get to promise the benefit and the cost is pushed mysteriously onto everyone through inflation and the debt onto future generations. No wonder the American people think a welfare state can be a free lunch.

The Progressive view has largely prevailed, and the conservative forces have put up ineffectual rear guard action.  We have not convinced people this financial shell game will end in ruin.

Democrats have their own internal divisions but they are much less consequential. Democrats largely move lockstep with one another and centrist elements have largely been purged from the party.

So-called nonpartisan organizations such as the Concord Coalition, The National Taxpayers Union, and the Committee for a Responsible Federal Budget crank out very interesting commentary and statistics but they too have also been ineffectual at stopping the spending and the piling up of debt.  

In the end, the American people are largely at fault for desiring the warm embrace of government payments without the real desire to pay for it. They wish to borrow production from the future for the benefit of today, largely forgetting what burden they leave on future generations.

Sadly, it seems no amount of argument seems able to innoculate us from the very real human foible of wanting things for free. Get what you can for yourself, as long as someone else is paying for it. It never dawns on many who that someone else would likely be.

We are sorry to reach such a dour conclusion but even if we are wrong, we are likely now too far along in the process to stop it before serious consequences hit.

The hope is the coming financial crisis itself will awaken some common sense in the populace and the crisis itself will be the catalyst to finally get reforms that put America back on a sound financial path. However, the pain of such a crisis is no guarantee the political ball will bounce our way. Often such crises simply make the government even bigger and more draconian because the crisis will require self-responsibility from a population that has forgotten what that is.

Educating the public is the best way to ensure the political ball bounces into the possession of those wanting freedom and limited government and that it does not bounce into the hands of those that want total government intervention.

In that regard, the Concord Coalition put together a list of lessons after observing years of budget battles that the American people need to understand.

  1. Fiscal Policy Remains Unsustainable
  2. Demographics Drive Our Long-term Fiscal Challenges
  3. Popular Options, Like Cutting Waste, Fraud and Abuse or Growing Our Way Out of Debt, Are Not Enough
  4. The Independence and Credibility of the CBO Are Essential
  5. The American People, if Presented with Credible and Understandable Information, Can Make Tough Fiscal Policy Trade-offs
  6. Making Health Care Programs Sustainable Depends on Controlling Costs
  7. Doing Nothing Is Not a Plan to Fix Social Security
  8. Trust Fund Accounting Obscures Fiscal Problems of Social Security and Medicare
  9. It’s Important to Distinguish Between Short-Term Cyclical Deficits and Long-Term Structural Deficits
  10. Bipartisan Policy Changes Can Put the Debt on a Downward Trajectory
  11. It’s Easier to Correct Overshooting on Deficit Reduction Than Undershooting
  12. A Balanced Budget Amendment to the Constitution is Not Necessary for Responsible Fiscal Policy
  13. Tax Cuts Don’t Pay for Themselves
  14. The Debt Limit is More Trouble Than It’s Worth
  15. Mandatory Spending Growth Means the Budget Debate is Increasingly Focused on a Shrinking Part of the Budget
  16. The Broken Budget Process Should Be Refocused on Long-Term Planning
  17. Expressions of Concern About the Deficit Are Not Always What They Seem
  18. ‘Tax Expenditures’ Should Be Considered Large Spending Programs
  19. PAYGO is an Important Standard
  20. Both Sides are Guilty of Budget Gimmicks
  21. Changes in Borrowing Costs Can Have a Dramatic Impact on the Federal Budget
  22. Entitlement Reform Should Reduce Subsidies for Those Who Don’t Need Them
  23. Budget Process Changes or Trigger Mechanisms Can Not Substitute for Political Will
  24. Sequestration is a Bad Way to Make Budget Cuts
  25. Everything Needs To Be On the Table in Budget Negotiations


America Is Facing a Cycle of Doom But Nobody Seems To Care

Estimated Reading Time: 4 minutes

Editors’ Note: We think the author is spot on – that our political elites, the media, and the public at large are currently living a delusional life. They simply do not recognize the serious nature of our financial situation. The markets however are starting to see the problem. Not only have we had the worst bear market in equities since the crash of 2008, but the US ten-year treasury has also turned in its worst performance in history. The standard portfolio recommended by financial planners of 60% stocks, and 40% bonds, has posted the worst performance in 100 years. Mortgage rates are now over 7% and a housing slump has begun. Real wages have fallen for 18 months. Bidenomics have made all of us poorer very rapidly, yet the Democrats continues to focus attention on January 6th and abortion. But you can’t have a government destroy that much wealth in the private sector without further serious consequences. In a social welfare state like ours, when the economy slows, more people will qualify for benefits, and fewer people will be employed paying taxes. Deficits will rise as social spending increases and tax receipts decline. The interest paid on existing debt and new debt will soar because the debt is both larger and the costs to finance it are higher. That will add to the deficit. The baby boom is hitting Social Security hard and the system has gone cash flow negative, i.e. more benefits are being paid out compared to Social Security taxes paid in. Medicare and Social Security will need a bailout and that will add to the deficit. The author is correct – we are headed for a doom loop. As voters, we must punish any of our Senators and Representatives that voted for the Democrat’s wild spending and we must insist Republicans also return to their roots of fiscal responsibility. No more going along to get along. We need some adults in the room and we need them now.


America’s political class can no longer put off the inevitable. They soon will have to pay for their insanely reckless fiscal practices.

It’s not going to be pretty. America’s debt has reached an appalling $31 trillion. Annual interest payments will exceed $1 trillion this year. Debt service is well on its way to crowding out other priorities, a trend that will only accelerate.

Unfortunately, a steep rise in interest rates occurred near the end of the biggest spending binge ever. Economists are warning we are nearing the dreaded “doom loop“ in which interest costs can be covered only by more borrowing which further drives up interest expense, creating a vicious cycle.

There is a weird, almost preternatural calm about our dire fiscal future during this campaign season. There is much consternation about inflation, public safety, the border, and other critical issues. Yet politicians and the media hardly mentioned the debt crisis, so the public seems to assume everything is under control.

It isn’t, not by a long shot. Uncle Sam issued $7 trillion in new debt to finance the recovery from the Covid pandemic and our panicked overreaction to the disease. It’s too bad we can’t take back that $7 trillion.

Much of it was stolen by fraud and bureaucratic bumbling. Funds went to school districts that haven’t spent them so far, to finance the indolence of those who preferred not to work, and to Democrat pet projects like “climate change“. Millions of voters in no distress whatsoever got checks, as did some illegal immigrants.

Many economists predicted that injecting that much cash into the economy would cause inflation, especially since supply was limited by weakness in the labor market, fuel shortages, and supply chain problems, They were mostly ignored but turned out to be absolutely correct. After decades of relative price stability, we are now experiencing 8% inflation, with no end in sight.

Millions of non-economists are experiencing what that does to your standard of living. Suddenly, food, fuel, and shelter have become existential concerns to millions of Americans and the economic future looks dim.

Inflation also increases government spending. Social Security benefits are inflation-adjusted, resulting in an 8%, $100 billion increase. Total government healthcare costs will grow from $710 billion last year to $915 billion.

Financial markets cannot ignore the cloud of government debt hanging over our economy. A serious recession will almost certainly soon be upon us. Already, declining stock and bond values over the past nine months assure a steep decline in capital gains tax revenue, another contributing factor to the deficit.

The Federal Reserve Board is doing the only thing it can to address inflation, which is to raise core interest rates. That also directly adds to the national deficit, increasing the interest cost and driving up the balance, since no other source of funds is available.

So, to summarize, unnecessary Covid related spending of $7 trillion has combined with chronic overspending. which caused inflation, which increased borrowing costs, which drove up the deficit, thus precipitating a recession that will deprive the government of revenues to pay down the surging debt load. Way to go, guys.

The response of the Biden administration has been denial. Our president claims the economy is thriving. A monthly .1% drop in the inflation rate was the pretext for claiming inflation was in decline. The national debt is never mentioned, nor are the untold trillions in future promises we have made to senior citizens and others.

Instead, Biden issued a probably unconstitutional executive order “ canceling” unpaid college loans – i.e., transferring the liability to taxpayers. It was terrible public policy, penalizing those who had behaved responsibly and incentivizing student indebtedness in the future. It spent yet more money in a desperate attempt to bribe some votes for the midterm elections.

Yet there seems to be little taxpayer resentment. Why should they care? Their taxes aren’t going to increase. The obligation will be added to the great river of debt passed on to future generations -you know, those little people who don’t vote yet

They will inherit an America feeble and impoverished, that will have forfeited its greatness because of our greed and selfishness. STOP THE SPENDING!


Thomas C. Patterson, MD is a retired Emergency Medicine physician, Arizona state Senator and Arizona Senate Majority Leader in the ’90s. He is a former Chairman, Goldwater Institute.

10 Absurd Examples of Corrupt Pet Projects and Handouts Congress Slipped Into Its Latest Massive Spending Bill

Estimated Reading Time: 3 minutes

Basically, nobody would support funding these things if they were put to a vote on their own.

In a sad commentary on the state of America’s priorities, the $1.5+ trillion spending legislation passed by Congress last week barely made headlines. Little attention was paid to the 2,700-page spending bill or the fact that it was released at 2:30 a.m. on the day of the vote, meaning most members of Congress voted on it blindly without even having skimmed the legislation. 

In a less dysfunctional country, this would be an outrage. Yet there’s even more scandal lurking beneath the surface-level incompetence of our elected officials.

The latest budget bill features an astounding 4,000 “earmarks,” pet spending items slipped into the fine print that fund projects and handouts to special interests in members’ home districts. The money funneled to earmarks totals a whopping $10 billion. (To put that number in context, it’s roughly one-fifth what the federal government spent on COVID-19 vaccine and treatment development.)

The full list of earmarks is 367 pages long. It’s far too long for most journalists—let alone an average American who doesn’t follow these things for a living—to actually go through in detail. However, a look at a few highlights gives you an idea about the kinds of things our money is spent on through this corrupt process.

Here are 10 of the most absurd earmarks in the latest spending legislation.

  1. $995,000 for a project on “soil health” at New Mexico State University, requested by Senators Martin Heinrich and Ben Ray Luján of New Mexico.
  2. $1.5 million for “tree restoration” in Ohio, requested by Senator Sherrod Brown of Ohio.
  3. $1 million for the “Multicultural Innovation Center” at the Rhode Island Black Business Association, requested by Senator Jack Reed of Rhode Island.
  4. $60 million to “renovate” the research facilities at the University of South Alabama College of Medicine, requested by Senator Richard Shelby of Alabama.
  5. $160,000 to study the “sustainability” of astronaut food at Lincoln University in Pennsylvania, requested by Senator Bob Casey of Pennsylvania.
  6. $109,000 for facility improvements to a local arts center, requested by Senator Patrick Leahy of Vermont.
  7. $200,000 to provide tech support for women and minority-owned businesses via the Vermont Center for Women & Enterprise, requested by Senator Bernie Sanders of Vermont.
  8. $2 million for a pilot program to try an electric-vehicle-based ferry system in Alaska, requested by Senator Lisa Murkowski of Alaska.
  9. $600,000 for the YMCA of Southern Arizona, requested by Congresswoman Ann Kirkpatrick of Arizona.
  10. $110,000 for a food truck and refrigerated van for the Spanish American Center in Massachusetts, requested by Congressman Jim McGovern of Massachusetts.

As you can see, these are pet projects and crony handouts for special interests, not essential items that require federal funding. Out of all 4,000+ earmarks, few seem like things that need to be funded by taxpayers at all—let alone at the federal level.

Can anyone explain why a Virginia taxpayer like me should have to pay for Alaska’s electric ferry experiment? Or why a Californian should have to pay for Spanish food in Massachusetts or tree restoration in Ohio?

I’d hold my breath waiting for a good answer, but then I’d probably pass out. Basically, nobody would support funding these things if they were put to a vote on their own, or even as a part of smaller legislation that could be properly scrutinized. That’s why they aren’t, and why earmarks are so inherently corrupt.

The famed economist Frédéric Bastiat once deemed the government “the great fictitious entity by which everyone seeks to live at the expense of everyone else.” And though you couldn’t tell from the way Congress behaves, there is no blank check from which the federal government can draw. 

When our elected officials funnel billions of taxpayer dollars to their corrupt handouts, that money must, directly or indirectly, come out of our pockets. Americans shouldn’t stand for a political class that wants to live at our expense—or more precisely, since the federal government is more than $30 trillion in debt, living at the expense of future generations.


This article was published by FEE, Foundation for Economic Education and is reproduced with permission.

Covid-19 Economic Zombification

Estimated Reading Time: 6 minutes

Editors’ Note: Discussion of “Minsky Moments” may strike the reader as obscure. However, it is noted in this article that the whole world, including real estate much of the private corporate sector, has become more leveraged than before the 2008 financial crisis. With the sharp rise in inflation,  global central banks have the difficult choice of either letting the inflation run, or increasing interest rates and reducing money supply growth, the very fuel which is supporting the record-setting debt expansion. Either choice could be upsetting to financial markets. Economic trauma always takes on greater power when financial leverage is excessive. Just as debt expansion fuels the boom, its contraction can fuel a bust. Thus, for those of us with money in markets, either building our estates or living off our estates in retirement, this issue becomes very immediate. Economic theory cannot time these events precisely but it can tell us the kind of environment in which we are operating. This level of debt, coupled with a sharp rise in inflation, suggests some sort of confrontation is ahead with serious consequences for investors. That confrontation is the Minsky Moment, and it can be very real for those with money at risk.

Economists and finance specialists are warning of the potential arrival of a new “Minsky moment” in increasing numbers. The last time this term was used with such conviction was in 2008, at the onset of the Great Recession. It seems that 2021–22 could have some parallels with the world’s last severe recession.

The Twentieth-First Century: The Century of Debt

Until now, the 21st century could be called the century of debt, and if things continue the way they are, it could well be called the century of the great debt default. At the beginning of the century, extremely low-interest rates promoted by central banks in practically the entire developed world caused a frenzy of private credit creation and a gigantic financial and real estate bubble that exploded in 2008 with dire consequences for the world economy.

Central banks, heavily pressured by politicians, redoubled their commitment to low-interest rates, causing public overindebtedness to a degree unprecedented in times of peace. In 2020, when the growth model based on the accumulation of public debt and low interest rates seemed to start to weaken, the Covid-19 recession arrived. The worldwide excess of public spending in 2020 has not been corrected, and it does not appear it will be corrected anytime soon. The new public debt is adding fuel to the fire. And the accumulation of it (and also private debt, especially that issued by companies) could be reaching the point of no return.

Global debt reached $200 trillion at the beginning of 2011, while global GDP was $74 trillion (275 percent debt/GDP). In the second quarter of 2021, global debt reached almost $300 trillion with a global GDP of $83.9 trillion (330 percent debt/GDP).

What Is a Minsky Moment?

Hyman Minsky was a post-Keynesian economist who developed a very insightful taxonomy of financial relationships. According to him, the finances of a capitalist economy can be summarized in terms of exchanges of present money for future money. The relationship proposed by Minsky is as follows:

Present money is invested in companies that will generate money in the future.

When companies make a profit, they return the money to investors from their profits.

Income or profit expectations determine the following:

  1. The flow of present money to companies
  2. The price of financial assets such as bonds and stocks (financial assets that articulate the exchange of present money for future money)

Present business income, meanwhile, determines the following:

  1. Whether expectations about past income (included in already-issued financial assets) have been met
  2. How to modify expectations about future income (and therefore, indirectly, the flow of present money to companies and the price of financial assets issued in the present)

Minsky articulates three possible types of income-debt relationship in companies (although he extends the analysis to all economic agents):

  1. Hedge. Hedge finance companies can meet all of their debt obligations with their cash flows. That is, their inflows exceed their outflows. Such companies are stable.
  2. Speculative. Companies can pay the interest on their debt but cannot pay down the principal. They are forced to constantly refinance. These companies are unstable, as any minor problem can bankrupt them.
  3. Ponzi. Ponzi companies do not generate enough income to pay down the principal or pay the interest. They must sell assets or issue debt just to pay the previous interest on their debt. They end up defaulting on the new debt sooner or later. Their chances of survival are minimal.

According to Minsky, when things are going well in an economy and income expectations are met, corporations begin to err on the side of optimism and excessively increase their debt. This causes a shift from a stable situation (in which hedge companies are the norm) to an unstable one (in which Ponzi companies are the norm). In a Ponzi situation, the economy will experience widespread defaults and a financial and economic crisis.

An economy is said to be in a Minsky moment if debtors are unable to pay down their debts (a speculative situation) or unable to pay the interest and the principal (a Ponzi situation).

Minsky was partly right. He accounts for a common truth of financial crises: issuance of debt was abused in previous periods. As a caveat, though, taking into account monetary and financial state interventions—mainly but not solely those of central banks—perhaps the cause of this degradation of debt quality is not a market problem, or at least not exclusively. The crisis may be exogenous to the market (caused by public authorities) or endogenous but amplified by exogenous factors (public authorities contribute to it).

The Economy Has Been Zombifying for Two Decades

As already discussed, global debt has grown more rapidly than the global economy over the last ten years, so it seems credit quality has indeed degraded. The income needed to pay off debt is growing much more slowly than is the debt itself.

An additional piece of evidence to support this argument is the increase in the number of “zombie companies.” A zombie company is one whose earnings before interest and taxes are less than or equal to its debt service (it coincides exactly with Minsky’s definition of speculative and Ponzi companies, taken together). A zombie is a wonderful metaphor because a zombie moves and appears to be alive but is in fact dead. A zombie company also moves and appears to be alive—it generates activity, employs workers, and produces goods—but in reality is (almost) dead. It is (almost) certain to die given its inability to pay its debt with its own means. The number of zombie companies has increased exponentially in the United States in recent years, according to a Bank for International Settlements (BIS) report. Furthermore, the probability of remaining in a zombie state has increased. And in fact, zombification is a reality in almost every part of the world.

Figure 2

Source: Banerjee & Hofmann

Figure 3

Source: Banerjee & Hofmann

However, the BIS data end in 2017. What has Covid-19’s impact been on an already-zombified global economy?

Covid-19 Hit a Zombie Economy: Now What?

The most recent data on company interest coverage (financing cost/earnings) are from the Fed, and refer to the North American economy. In the figure below we can see that the median coverage ratio began to fall at the end of 2018, which is consistent with our hypothesis that the economy’s growth model, based on cheap debt, was beginning to run its course. The pandemic has hammered the median coverage ratio. Although the ratio has been recovering since the second half of 2020, it is currently at the level seen in 2009, in the middle of the Great Recession.

Even more revealing is the interest coverage ratio of the companies in the first quartile (that is, the 25 percent of companies with the lowest ratio). This indicator has been below 1 since 2012; in other words, zombification has accelerated since then. Keep in mind that a ratio lower than 1 means that a company’s profits are insufficient for it to pay its financing costs (it is a Ponzi company).

The interest coverage ratio for companies in the twenty-fifth percentile reached almost 0 just before the pandemic (their profits had almost disappeared). Since then, the ratio has been negative (these companies recorded losses). Observe that these companies have not recovered, while companies in other quartiles have. Their ratio is currently just above −1, which means that their losses (before interest) are nearly equal to their financing cost. This is a total disaster. At least 25 percent of US companies are financially dead.

Valuation of Zombified Companies

One would expect that these companies would begin to go bankrupt, and this is indeed what is happening. According to the Fed, 2.5 times more zombie companies (as a fraction of all companies) went bankrupt in 2020 than in 2019 (<2 percent in 2019 and around 4.5 percent in 2020).

Curiously, the zombie companies that survived 2020 are seeing their valuation skyrocket. Their aggregate value already exceeds $6 trillion, while in 2019 it was close to $2 trillion.

Figure 5


Markets are now extremely complacent. The fundamentals do not seem to justify their optimism. Zombie companies, which were already a problem in 2019, have not been killed off; indeed they have multiplied. The zombie apocalypse could be closer than we imagine.


This article was originally published by AIER, American Institute for Economic Research and is reproduced with permission.

Left and Right: Both Mistaken on Inflation

Estimated Reading Time: 3 minutes

With inflation hitting a 31-year high, commentators are now routinely giving their opinions on inflation. Unfortunately, most of them—on both the left and the right—are mistaken.

The left initially claimed there was no inflation before switching to its oft-repeated line that inflation is transitory, meaning not long-lasting. But inflation has proved to be quite resilient. More recently, many on the left have taken to extolling the apparent benefits of inflation, such as cost-of-living adjustment (COLA) increases for those on fixed incomes.

NBC correspondent Stephanie Ruhle recently tried to make the case that savings have risen faster than inflation, so people have the money to pay higher grocery bills, and those people are better off. But wages and savings have not kept up with inflation and consumers are worse off now than they were a year ago.

But some on the right have made the same misinformed arguments. Only days after criticizing a competitor’s misleading headline, Fox Business had an article citing record-setting COLA increases for Social Security recipients as a benefit from inflation.

This is no benefit at all. Those on fixed incomes are suffering through a year of rising prices to have their incomes raised some time in the future, and only as much as prices have increased. Meanwhile, anyone with a retirement account has seen its relative value decreased by the hidden tax of inflation.

And both the left and the right of late have ignored the reality of inflation when evaluating economic data.

The most recent retail trade report from the Census Bureau showed retail sales in October being significantly higher than expectations, but more than half of the increase was inflation. After accounting for this, the report was actually well below expectations.

Similarly, most people, regardless of political affiliation or philosophy, seem unaware of how inflation drives asset bubbles—which is contributing to the current growth in house and stock prices.

Those on the right also say deficit spending by the government will add to inflation. This is not exactly true either.

When pressed by a reporter, White House Press Secretary Jen Psaki said, “No economist out there is projecting that this [more deficit spending] will have a negative impact on inflation.” While her claim is completely untrue, since many economists argue precisely that, those economists are also misguided.

Under President Ronald Reagan, the nation had record-setting deficits and amassed record levels of debt, all while inflation decreased. Conversely, in the 1920s, the federal government ran a surplus every year of the decade, but inflation towards the end of that period caused a bubble in the stock market, leading to the infamous crash in 1929.

History—and sound economic theory—tells us that federal deficits are not the primary catalyst for inflation. Excessive government spending certainly has negative consequences, but inflation only arises when the Federal Reserve (the Fed) purchases debt instruments, like government bonds. That has happened whenever the Fed tries to implement monetary “stimulus,” which often happens to occur when Congress borrows excessively. This coincidence has clouded the distinction of which agency is causing what.

President Abraham Lincoln, while ruminating on the Civil War and the perspectives of both the North and South, observed that one side must be and both may be morally in the wrong. Similarly, the popular takes on both the left and right regarding inflation are incorrect; neither side understands the fundamental principles behind inflation.

Only the Fed can cause inflation because only it controls the ability to create money, which it does chiefly by purchasing government debt with money created out of nothing. Likewise, only the Fed can rein in the beast that it set loose.

The one data point in favor of those on the right is the recent rise of Modern Monetary Theory (MMT). It is a bit of a misnomer, as there is nothing modern about it and it focuses less on monetary theory and more on the fiscal policies of taxes and government spending.

Nevertheless, a key feature of the theory is that the Fed essentially acts as the principal financing arm of Congress’ deficit spending. With Lael Brainard as Vice Chair, the Fed will likely pursue MMT. That will make government deficit spending inherently inflationary. At that point, the political right will be genuinely right, but for the wrong reason.

As is often the case, the talking points of both the left and right on inflation are mistaken; it turns out their soundbites are not very sound.


This article was published on December 1, 2021, and is reproduced with permission from The Texas Public Policy Foundation.