Since excessive inflation is one characteristic outcome of a fiat money system, who is really surprised that such a moment might be on us again? The table would seem to have been set for a long time: Unruly government borrowing. Mounting regulatory burdens and disincentives to business and workers. A decline in labor force participation. The peculiar unwillingness of a large cohort of young men to pursue either work or schooling.
Then came the pandemic and the pandemic spending binge, which shifted public demand away from services (no longer available) to goods that the supply chain struggles to deliver.
the Fed chief, posits a happy ending: Production resumes, goods and services flow in abundance, inflation is transitory. But he knows it’s not that simple. An apparition of central bankers is the dread inflation psychology, but inflation expectations don’t become embedded in consumer heads because of childhood trauma, but because consumers detect a mindset of policy makers to accommodate inflation. And Mr. Powell, whose renomination is pending, must subordinate himself and his monetary decisions to a fast-rising new agenda in Washington: a whole-of-establishment effort to keep
from returning to the White House.
Inflation is like Covid: If it gets loose, it will dominate our politics. It causes great unhappiness but also makes new things possible.
In the 1970s, the inflationary crisis imploded a large government establishment occupied with trying to fix the supply and price of air travel, truck transport, rail services and consumer energy supplies. It imploded a tax system that was found to be constantly promoting people into higher brackets even as their real income and living standards declined.
All in all, quite a revolution in government’s role in the economy began under
and continued under
and was echoed all around the Western world.
Today’s inflation would be hitting an economy with rigidities of its own, mostly of a different kind. Zoning rules depress the supply of housing; licensing restrictions depress the supply of personal services. Wind and solar mandates tax the reliability of the grid. Means-tested entitlements make it less attractive at the margin for Americans to work.
We may discover other vulnerabilities but two gaping ones weren’t part of the story in the 1970s. In 1977 federal debt was 34% of GDP; today it’s 125%. And the share of Americans who’ve experienced direct government aid has quadrupled. It now comprises more than 50% of the population, and that’s before our vast pandemic spending and
Which means a lot could go kerblooey and fast. Rising interest rates could double or triple today’s $400 billion interest bill on the national debt. Overnight, this item could rival Social Security and Medicare as the biggest single budget outlay.
The available options would only compound the public’s unhappiness with inflation: large tax hikes and spending cuts, central bank finance of deficits (leading to more inflation) or heavy-handed measures to force private depositors to hold government debt, essentially expropriating private savings.
Though Social Security benefits nominally are indexed for inflation—a 5.9% increase has been announced for next year—Congress knows well how to claw back benefits by taxing them. For programs like Medicare and Medicaid that deliver in-kind benefits, the even simpler expedient is to cut reimbursements to providers, which users will experience as declining quality and longer wait times.
To the upwelling of voter aggravation, add Congress’s likely targeting of indirect benefits that effectively put almost 100% of Americans on the dole. These include the mortgage-interest deduction and tax-free employer-provided health care.
When voters are angry and at wit’s end as they are when inflation is unraveling their expectations and life plans, new things become possible, good and bad. Evolutionists talk about “punctuated equilibrium.” A bout of society-transforming inflation would certainly get us off an old and exhausted equilibrium and onto a new one that we can hope will prove sustainable in the long run.
Nobody planned our giant experiment in a welfare-cum-administrative state. Its incoherence has long been showing. Many of its features aren’t even about fixing any problem but about satisfying constituencies who want power over their fellow citizens.
All things that live must change and adapt. That includes a fiscal state that so demonstrably has run out of gas that almost everybody, from the most woke to the most Trumpian, senses it in some fashion.
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