Big Government's Big Spending Has Boosted Inflation and Killed 3.5 Million Jobs

Chuck Roger

Rising prices are no surprise to anyone who has been following the actions of Ben Bernanke's Fed. Two rounds of "quantitative easing" injected more than $2.3 trillion into bank reserves, and thus to some extent into the economy. The more money chasing products and services, the more those products and services cost.

Bernanke's thinking was that by pumping trillions into the financial system, he could spur lending, investing, and spending via lower interest rates, and thus goose the economy. But the strategy not only hasn't improved the economy, it has also had two major bad side-effects. Increased inflation is one side-effect, discussed below. But first, let's cover a truly nasty side-effect which is being under-reported.

The Fed's foolishness has weakened job markets. A former president of the Atlanta Federal Reserve Bank, William Ford, and an American Institute for Economic Research fellow, Polina Vlasenko, point out that Bernanke's tactics have depressed the interest income of people who rely on savings accounts, CDs, money market funds, Treasury and municipal bonds, and variable annuities. As a result, individuals' income losses are huge. Ford and Vlasenko calculate that quantitative easing most likely caused a $371 billion reduction in personal annual spending, a 2.53 percent reduction in total economic output (gross domestic product, or "GDP"), and a loss of 3.5 million jobs.

With the jobs that would have been created had the Fed not used quantitative easing--positions that would had to have been staffed for companies to meet increased demand driven by increased spending--unemployment might have fallen to around 6.8 percent instead of staying above 9 percent. Ford and Vlasenko estimate that GDP would have increased more than two times faster than the rate that we've seen and "the economy would be well on its way to a vigorous recovery, rather than struggling as it is."

But struggling, and getting worse, the economy definitely is.

Which brings us to the second bad side-effect of Bernanke's quantitative easing. America's GDP now lags below the historical trend. We should be experiencing a deflationary economy. Yet, as Calafia Beach Pundit economist Scott Grannis reports, for the first half of 2011, America experienced inflation at a 3.8 percent rate and accelerating. The Fed Chief's strategy was supposed to stimulate economic activity and stave off deflation. But now the Fed had better be wary of inflation. Grannis analyzes:

Once again these developments underscore supply-siders' belief that growth can only come from hard work and risk-taking. Monetary policy can't create growth out of thin air, and neither can fiscal "stimulus" spending. The swimming pool analogy is very apt: fiscal spending "stimulus" is akin to taking water out of the deep end of a pool and pouring it into the shallow end--it achieves nothing and is simply a waste of effort. Real growth only occurs when people work more and/or someone figures out how to make the same amount of work produce more output.

Grannis's reasoning provides an easy-to-understand explanation of the wrong-headedness of stimulus economics. Federal spending and interest rate manipulation only weaken the economy by moving money from productive sectors to dead ends. Grannis observes:

Too much debt-financed spending only wastes the economy's scarce resources, while simultaneously boosting expected tax burdens. This in turn reduces the after-tax rewards to hard work and risk-taking, which explains why corporations have been so slow to invest their growing stockpiles of cash. Too much easy money only boosts speculative activity (which shows up as higher commodity and gold prices) while undermining the dollar and reducing investment.

Yet no one who has been paying attention believes that the discrediting of government "stimulus" by real events would stop reality-blind Keynesian ideologues from calling for more spending. Were it not for the mega-mega-debt battle--and now the downgrading of U.S. Treasury debt as well as Fannie Mae and Freddie Mac--President Hopey-Changey would now be in full-on preaching mode, demanding additional borrowing to fund additional hundreds of billions in "stimulus" for a cruddy, and getting cruddier, economy that the once-magic man owns lock, stock, and barrel.


A writer, physicist, former high tech executive, and Cajun, Chuck Rogér invites you to sign up to receive his "Clear Thinking" blog posts by email at http://www.chuckroger.com/. Contact Chuck at swampcactus@chuckroger.com.

Rising prices are no surprise to anyone who has been following the actions of Ben Bernanke's Fed. Two rounds of "quantitative easing" injected more than $2.3 trillion into bank reserves, and thus to some extent into the economy. The more money chasing products and services, the more those products and services cost.

Bernanke's thinking was that by pumping trillions into the financial system, he could spur lending, investing, and spending via lower interest rates, and thus goose the economy. But the strategy not only hasn't improved the economy, it has also had two major bad side-effects. Increased inflation is one side-effect, discussed below. But first, let's cover a truly nasty side-effect which is being under-reported.

The Fed's foolishness has weakened job markets. A former president of the Atlanta Federal Reserve Bank, William Ford, and an American Institute for Economic Research fellow, Polina Vlasenko, point out that Bernanke's tactics have depressed the interest income of people who rely on savings accounts, CDs, money market funds, Treasury and municipal bonds, and variable annuities. As a result, individuals' income losses are huge. Ford and Vlasenko calculate that quantitative easing most likely caused a $371 billion reduction in personal annual spending, a 2.53 percent reduction in total economic output (gross domestic product, or "GDP"), and a loss of 3.5 million jobs.

With the jobs that would have been created had the Fed not used quantitative easing--positions that would had to have been staffed for companies to meet increased demand driven by increased spending--unemployment might have fallen to around 6.8 percent instead of staying above 9 percent. Ford and Vlasenko estimate that GDP would have increased more than two times faster than the rate that we've seen and "the economy would be well on its way to a vigorous recovery, rather than struggling as it is."

But struggling, and getting worse, the economy definitely is.

Which brings us to the second bad side-effect of Bernanke's quantitative easing. America's GDP now lags below the historical trend. We should be experiencing a deflationary economy. Yet, as Calafia Beach Pundit economist Scott Grannis reports, for the first half of 2011, America experienced inflation at a 3.8 percent rate and accelerating. The Fed Chief's strategy was supposed to stimulate economic activity and stave off deflation. But now the Fed had better be wary of inflation. Grannis analyzes:

Once again these developments underscore supply-siders' belief that growth can only come from hard work and risk-taking. Monetary policy can't create growth out of thin air, and neither can fiscal "stimulus" spending. The swimming pool analogy is very apt: fiscal spending "stimulus" is akin to taking water out of the deep end of a pool and pouring it into the shallow end--it achieves nothing and is simply a waste of effort. Real growth only occurs when people work more and/or someone figures out how to make the same amount of work produce more output.

Grannis's reasoning provides an easy-to-understand explanation of the wrong-headedness of stimulus economics. Federal spending and interest rate manipulation only weaken the economy by moving money from productive sectors to dead ends. Grannis observes:

Too much debt-financed spending only wastes the economy's scarce resources, while simultaneously boosting expected tax burdens. This in turn reduces the after-tax rewards to hard work and risk-taking, which explains why corporations have been so slow to invest their growing stockpiles of cash. Too much easy money only boosts speculative activity (which shows up as higher commodity and gold prices) while undermining the dollar and reducing investment.

Yet no one who has been paying attention believes that the discrediting of government "stimulus" by real events would stop reality-blind Keynesian ideologues from calling for more spending. Were it not for the mega-mega-debt battle--and now the downgrading of U.S. Treasury debt as well as Fannie Mae and Freddie Mac--President Hopey-Changey would now be in full-on preaching mode, demanding additional borrowing to fund additional hundreds of billions in "stimulus" for a cruddy, and getting cruddier, economy that the once-magic man owns lock, stock, and barrel.


A writer, physicist, former high tech executive, and Cajun, Chuck Rogér invites you to sign up to receive his "Clear Thinking" blog posts by email at http://www.chuckroger.com/. Contact Chuck at swampcactus@chuckroger.com.