Is Joe Manchin right about inflation?

Many pronouncements and predictions by well-regarded people have been made upon the nebulous subject of inflation.  Most believe that it is caused by government expenditures funded by unrestricted issuance of public debt.

Joe Manchin, the Democrat senator from West Virginia, having recently declared himself opposed to recent Democrat "Build Back Better" spending plans, is taking intense fire from his comrades.  He argued it is reckless that government spends more as inflation soars.  Mr. Manchin may well be right in placing the root cause of inflation squarely on government expenditure.  One would have to reach far back into the past to find a politician getting it right on economics.

Most know of and embrace Milton Friedman's revered but misleading dictum: "Inflation is always and everywhere a monetary phenomenon."  Certainly, inflation is invariably a case of too much money chasing too few goods, but the maxim does not automatically translate into the idea of a rising supply of money amid a stagnant supply of goods.

It is well known that government can create mountains of debt in providing public goods.  Thus, most erroneously imagine public debt as the cause of inflation.  However, the facts seldom coincide with the claims.

Inflation rates in the United States erupted in the late '60s and kept to a maximum nearing the late '70s as federal debt to GDP declined from 38.6% to 32.5%.  Inflation rates then declined during the Reagan '80s as the amount of federal public debt expanded at an unprecedented rate, moving from 32.5% of GDP in 1980 to 54% in 1988.  In the last twenty years, the United States witnessed a large accumulation of public debt under the Bush, Obama, and Trump administrations.  Federal debt climbed from 55% of GDP in 2002 to 105% in 2019.  Yet, amid rising public debt, countless predictions of broad and soaring inflation have failed to yield the expected result.  It is certainly true that inflation measures are deliberately manipulated and muted by devious government hands.  Even so, one could only describe the inflation observed as a creeping influence rather than "runaway."

Firms and individuals incur debt when undertaking commercial and private ventures.  Mindful of profit and returns, they build, design, engineer, and manufacture, performing a variety of economically worthy pursuits in supplying goods markets demand.  If produced well, the enterprising persons enjoy the expected rewards for their efforts from desirous consumers.  If the undertaking sours, it is hoped the person or firm survives the financial injury.

Government is not as conscious of returns as the rest of us.  With little cost and benefit analysis, failed public investment is standard practice for Washington, D.C., and other centers of government.  When government borrows and spends, little value is expected.

If government were to imitate the example of firms and individuals, borrowing to produce worthy public goods at moderate costs, would one still think of public debt as the cause of inflation?  If government halved its expenditures but supplied the same value in public goods and services, would not the action free up resources for enterprising businesses and individuals — a stimulus to real economic growth?

Some have claimed that the inflation experienced in the U.S. in the '70s sprang from rising demand for oil, the most fundamental and ubiquitous of all commodities.  Such demand amid restricted supply purportedly ignited and propelled an increase in the price of oil and all goods reliant upon it.  Others argued that it was cost-push inflation, where the costs of production inputs soar, compelling large increases in prices of output.  Still others appealed to demand-pull, in which an excess of demand forces up prices, thence those of production inputs.  But what is proposed as the cause of inflation is in fact the cause of recessions.  Stable money amid a stable supply of goods equates to stable prices.  If some prices rise, others fall.  A general price rise is another matter entirely. 

It is agreed that one method of arriving at too much money chasing too few goods is a broad augmentation of the amount of money in existence amid a stagnant supply of goods.  However, another circumstance, a stable supply of money amid a declining supply of goods, may also bring us to such a result.

Suppose an economy consists of 100 people engaged in producing valued goods, public and private.  A recession occurs that renders 10 workers unemployed.  The supply of goods consequently diminishes to that supplied by the still employed 90.  To utilize idle resources, the government decides on a $100,000 job creation project consisting of 10 workers digging holes in the morning and filling them in the afternoon — an undertaking of overtly little worth.  Funds are borrowed directly from local citizens, and the project commences.

The dig and its assorted workers certainly consume materials and equipment, but the good offered by the project is something no one needs, no one values.  If none had bothered to show up while receiving pay, the result would have been the same.  But 100 persons, both unproductive and productive, have funds to buy goods produced by 90.  With reduced production amid a stable supply of money, prices must rise.

If the funds were taxed from local citizens, the circumstances and results would not differ.  The government would strip resident citizens of the funds and transfer them to the project's 10 beneficiaries.  Then all would buy valued goods produced by the other 90 workers.  Reduced production amid stable money must force up prices.

Many economists and financial thinkers complain that government borrowing crowds out private investment.  But the complaint applies regardless of whether funds were garnered by taxation or borrowing.  The money procured from both sources could have been expended in buying homes or enlarging or building new plants.  Instead, government commandeered it for public undertakings of little value.  Elevated tax rates and revenues are as much a factor in crowding out private, production-enhancing investment as funds borrowed by government.

So what is really going on when the economy produces inflation, as it did when it soared through the '70s and as it does now in the COVID era?

The old Soviet state is illustrative of many economic problems facing Western nations.  Full employment and full bank accounts were standard in this former government-directed economy.  The large bloc of nations was blessed with an unprecedented richness in resources, persons of exceptional scientific and artistic creativity, an educated and knowledgeable workforce, and military technology to rival that of the United States.  Yet such an abundance of prospects and resources could barely provision the Soviet peoples with staples — could barely provide its people with a third-world supply of goods.

Was such broad and inveterate failure a result of the accumulation of excessive public debt or inflation of the cost-push or demand-pull variety?  Did it matter if public expenditures were funded by a combination of taxes and debt?  If researchers spent more time studying this colossal disaster, we may be much enlightened in how to treat our own economic ordeals!

Gary Marshall is a public finance researcher living in Winnipeg, Manitoba, Canada.  He can be reached by email at or through his website at

Image: Third Way Think Tank via Flickr, CC BY-NC-ND 2.0.

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