To stop inflation, cut government spending

Price inflation has rapidly eclipsed COVID-19 as an economic concern, and with good reason.  To combat the problem, it's important to be clear about exactly what is causing it.

Federal fiscal policy — taxes and spending — and regulation have an enormous effect on the value of money.

The current situation has everyone on edge.  Consumer prices rose by 6.2 percent over the past 12 months, the worst increase since 1990.

Unleaded gasoline costs 57 percent more than it did a year ago.  Home heating bills are expected to be 54 percent above last winter's, used cars and trucks cost 26.4 percent more, the average price of a one-bedroom apartment has increased by 20 percent, and house prices rose at a 17.3-percent annual rate in October.

"Over the past 12 months, average hourly earnings have increased by 4.9 percent," the Bureau of Labor Statistics reports.  That means that the average person's inflation-adjusted earnings decreased over the past year.

Much of the blame belongs to the U.S. Federal Reserve System, the nation's central bank, which sets interest rates and generally determines the nation's money supply.

The Fed has been reckless and unmoored since going all in for monetary expansion in 2008.  Its decisions have created large economic distortions, such as equities (stocks) currently being overvalued by some 32 percent as reported by economist Robert Genetski.

Nonetheless, the economy was able to absorb the new money until Biden took office.  There are three big reasons for this: the Trump administration's encouragement of supply-side expansion (especially energy production), banks increasing their monetary reserves, and nearly $1 trillion of COVID-19 relief funds having gone unspent.

As the Fed pumped large numbers of dollars into the system last year to avert a liquidity crisis and potentially long depression because of the COVID-19 lockdowns, banks did not respond by lending all that money to the private sector, which was not in any condition to make big investments in new production while several states had their populations in lockdown.

Instead, banks stowed that money away as reserves.  In fact, bank reserves rose at an astonishing rate last year.

The inflationary effect of the stimulus bills and monetary expansion were countered in part by a deflationary increase in bank reserves.

The economic stimulus bills increased federal spending enormously in 2020, but the economy absorbed the blow by increasing production as the lockdowns eased, with economic growth reaching a record annual rate of 33.1 percent in the third quarter of 2020.

Biden and Congress then reversed everything in a matter of months by vastly increasing regulation and raising government spending to record-setting levels with $1.9 trillion in new spending in a bizarre effort to "stimulate" an economy that had already recovered from last year's pandemic shocks. That was followed by a $1.2-trillion "infrastructure" bill.  What's more, the House passed Biden's Build Back Better Act, another $1.75 trillion of social and climate spending.

Unlike the Fed's monetary expansion, which banks can counteract as noted above, federal spending puts money directly in people's hands.

Meanwhile, Biden has suppressed the supply of goods and services by reducing production of oil and natural gas to a trickle and suppressing the labor market through vaccine mandates and the unconstitutional extension of unemployment benefit bonuses long after the pandemic lockdowns had been largely lifted.

"We already have nearly 11 million unfilled jobs thanks to super-generous welfare benefits," writes economist Stephen Moore.

Domestic oil production is now about two million barrels a day below the levels reached during the Trump administration.  After the U.S. achieved energy independence under Trump, Biden is now begging OPEC to increase oil production.

Biden's suppression of fossil fuel production means cost-push inflation caused by rising prices of petroleum and natural gas — which are important inputs for manufacturing, transportation, electricity generation, and other economic sectors — will further worsen overall inflation.

Inflation had been largely tamed for decades before Biden took office with narrow but ruthless Democratic control of Congress.  The Fed has no attractive options for controlling inflation at this point: raising interest rates — the classic inflation-buster that proved so successful in the early 1980s — would surely crash the economy.  Nobody wants that.

The most important correctable factor causing the current inflation is federal fiscal and regulatory policy, and the solution is tax cuts, spending cuts, restoration of energy production, and canceling of employment-suppression policies.

The "misery index" — inflation plus unemployment — is already rising, and it will almost certainly become dire if the government does not reverse course.

Unfortunately, that is exceedingly unlikely, given the present makeup of Congress.  On the plus side, voters are unlikely to let Biden and the congressional Democrats off the hook for unleashing the inflation genie.

S.T. Karnick is a senior fellow and director of publications for The Heartland Institute.

Image: Wikideas 1.

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