AMAC Exclusive – By David Lewis Schaefer
In a speech to the AFL-CIO last week, Biden unrepentantly remarked that he didn’t want to hear “lies” about his “reckless spending” since it was “changing people’s lives.” His remarks perfectly captured why inflation has become such a persistent problem in American life today, and why it is unlikely to go anywhere anytime soon – namely, that Biden himself either won’t acknowledge or doesn’t understand the role of his own policies in causing this crisis.
Early in his administration, Joe Biden proclaimed that we weren’t living in the age of Milton Friedman anymore. Perhaps the Friedmanite insight that Biden (or his speechwriter) had most in mind was the observation that inflation is “always and everywhere a monetary phenomenon.” That is, inflation in the strict sense is the result of governments generating a surplus in the supply of money, which results in money-holders bidding up the supply of goods.
Friedman’s observation was not a novelty. In his 1748 classic The Spirit of the Laws, the great French philosopher Montesquieu explained how the Spanish colonization of South America, which was used chiefly to extract gold for shipment home, ultimately impoverished rather than enriched Spain. Since gold has relatively few uses itself, its chief function (just like today’s fiat currency) was as a medium of exchange for real goods.
As the supply of gold rose, prices – but not the country’s real wealth – rose correspondingly. Hence Spain’s wealth and political influence declined within a century, even as the wealth and power of the free, commercial regimes of England and Holland rose. Simply giving away money to people does not in the long run make the recipients or their host country richer – a centuries-old truism that is still instructive today.
Biden’s rejection of Friedman’s teaching served as a justification for enacting vast new spending programs, ostensibly for COVID relief, even though the worst of the lockdowns had already been lifted. In actuality, the $1.9 trillion “American Rescue Plan,” the $1.2 trillion “infrastructure” bill, and the proposed $3+ trillion “Build Back Better” Act were setting the United States up for the same economic woes that plagued the Spanish centuries ago. Though Senate Republicans were able to block Build Back Better (for now), more than $3 trillion in spending in a matter of months after the trillions in spending during the COVID lockdowns was enough to send the country into the inflationary spiral we are witnessing today.
Biden claimed that increasing the amount of Federal giveaways would actually help to combat inflation, since the recipients would be better able to afford paying higher prices for goods. Reportedly, as an additional appeal to voters, the administration is looking at canceling billions of dollars in college student debt – a benefit that would flow largely to upper-income taxpayers and again leave lower-income Americans (many of whom did not go to college) footing the bill.
Now, however, facing an electorate increasingly troubled by inflation that has reached a 40-year high, the President and sympathetic academic supporters have moved closer, in a sense, to Friedman’s insight. As the Associated Press reported last week, “Biden faces a delicate trade-off as he tries to help his fellow Democrats in the November elections,” needing consumers “to pull back just enough so inflation eases,” though “not so much that the economy risks plunging into a recession.” Hence “the problem with inflation” is that despite rising prices, Americans “have yet to significantly cut back” their spending. (For instance, according to the Energy Department, gasoline usage has fallen only 1.8% during the past year, despite the enormous increases in fuel prices.)
Betsey Stevenson, a University of Michigan economist sympathetic to progressives’ big-spending agenda who worked as an adviser in the Obama White House, similarly called on Americans to reduce their spending so as to “allow supplies to catch up.” Acknowledging that high gas prices might be engendering “broader dissatisfaction,” she observed that “cars seem to be important to people’s sense of control,” depriving them of the ability “to just hop in your car and go where you want.” In other words, the underlying problem isn’t government policies (ranging from higher deficit spending to restrictions on oil and gas drilling and transmission), but rather a psychological one: American consumers are control freaks. They want to enjoy the freedom to go where they want – including, to work!
So maybe inflation is a monetary problem after all: a money supply increasing faster than the supply of goods. Note, however, that the Biden administration and its Democratic allies have given no sign of considering a Friedmanite solution to the problem: cutting government spending. As Biden made clear in his AFL-CIO speech, more government spending is the only solution to every problem facing Americans today.
Instead, it must be consumers who curb their spending to combat inflation. To hear Biden tell it, it’s up to “patriotic” Americans to help out the administration by relaxing their “sense of control” over their lives and learning to live on less (just temporarily), even as Democrats push to increase federal spending without any effort at “control.” And while the current administration may not be able to achieve the right balance between too much and too little spending, it’s counting on individual citizens to make those precise calculations.
But the administration – and Democrats in Congress – may soon find that the calculation voters make is to swiftly remove them from power.
David Lewis Schaefer is a Professor of Political Science at College of the Holy Cross