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Don’t Be Distracted: Fiscal Policy Drives Our Inflation Surge

Posted on Tuesday, March 15, 2022
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by Outside Contributor
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Inflation

On Thursday, new consumer price index data was released and reached its sharpest year-over-year spike in four decades. Between domestic pressures and world events, the problem isn’t going away anytime soon. Yet, astonishingly, policymakers and economists still cannot reach a consensus on the drivers of this particular inflation. While various factors are at play, one is U.S. fiscal policy.

In a recent interview with ABC News, the president proclaimed, “The reason for the inflation is the supply chains were cut off.” Meanwhile, progressive policymakers are increasingly pushing illusory theories about corporate greed as the primary driver.

Upon closer inspection, both claims are false. The supply chain was not cut off; it’s been struggling to keep up with excess demand. As former Obama administration economist Steven Rattner notes, “Blaming inflation on supply lines is like complaining about your sweater keeping you too warm after you’ve added several logs to the fireplace.”

With an economic mainstream dominated by Keynesian theorists who focus on demand issues, the go-to solution for policymakers whenever the economy hits a bump in the road is massive fiscal stimulus. But when the pandemic struck in 2020, we didn’t face falling demand. The problem wasn’t that most people needed money; it was that people simply weren’t going out and spending it.

As people shifted their consumption patterns away from services and towards goods, the government printed and borrowed $5 trillion and handed it out through a series of economic stimulus legislation. At first, Americans saved the newly minted cash, but eventually began to spend as the economy reopened. This is one of the reasons we’ve experienced heightened levels of inflation. We have lots more dollars to spend on a finite amount of goods.

Another explanation for why unprecedented increases in government spending fueled a burst in inflation is rooted in expectations about future deficits and the growth of public debt.

After stimulus spending during and after the 2008-09 Great Recession, policymakers spoke up about plans to pay back the debt. Commissions were established in an attempt to achieve fiscal sustainability. In 2010, deficits were forecast to average about 3 percent of GDP, and the debt was forecast to reach 84 percent over three decades.

This time around, there has been a complete lack of political commitment to pay down a public debt that now exceeds the size of the entire economy. The latest forecasts have annual federal deficits growing to a level exceeding 13 percent of GDP in the coming three decades, with debt reaching more than double the size of the economy.

Expectations about a government’s ability to pay down debts over time can drive inflation trends, especially since so much of our debt must be rolled over in the short term. What’s more, without serious plans to pay down federal debt through raising revenues or cutting spending, then the only option left is to inflate away the debt by devaluing the dollars owed. This is a real risk for short-term bondholders.

Another risk is that the Federal Reserve is too late to the game. Almost two years since the initial economic shock, and at a time when the economy is overheating, the Fed is still buying government debt and holding interest rates near zero—policies put in place when it was trying to stimulate the economy.

The Fed plans to start raising rates in March, but it could be too little, too late, especially if officials rely more on rhetoric and expectations than action. Unfortunately, if inflation persists—which it likely will as long as some of that extra cash still hasn’t gone through the economy, including $500 billion from the American Rescue Plan—the Fed’s solutions will be much more fiscally painful to implement than in the 1980s when we last fought major inflation. The debt ratio today is four times higher, which means significant hikes in interest rates would blow up the government’s debt servicing payments. The consequences would be painful and politically unpopular.

If doubts about paying down debts remain and Congress continues its unpaid spending, inflation may continue. Fed actions will not be enough to control it without a real congressional commitment to reducing the budget deficit.

That leaves us with some hard questions. If inflation persists well into 2022, will the Fed accelerate its tightening in order to comply with its 2 percent inflation target, even if it means throwing cold water on the economy? Will policymakers have the stomach to restrain spending? If not, expect heightened levels of inflation well beyond 2022.

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Hal
Hal
2 years ago

I guess many Americans still haven’t come to grips with “inflation” is just a way to tax the citizens and hide the truth that it is just a way to raise taxes and avoid at least some of the criticism of the governed. Until there is a meaningful and enforceable way by Constitutional Amendment to require lawmakers to have to heed a balanced budget amendment, it will historically be more and more used to avoid fiscal accountability. And inflation is just a Communist technique adopted by modern day politicians to avoid accountability and boost their seeming accomplishments. Like it or not, our future heirs are gradually sliding into a Communistic version of governance.

Kim
Kim
2 years ago

Even if inflation doesn’t increase throughout 2022, we’re still left with the damage that already has been done. Will prices return to pre-biden levels? I doubt it, which means we’re stuck paying higher prices for most items. Because the wholesale price index increased 10% last month, I don’t see any relief in the near future.

Hal
Hal
2 years ago

Inflation is the method by which government raises taxes to support their political goals and purposes (many or most of which aren’t supportable by the public citizenry if they knew the truth). Yes, it appears our political representatives have now unabashedly gained full control of the voting system to the point that it is a farce. Like the old French pirate Lafitte (sp?) said when he was supporting the USA against the British in the War of 1812 when asked what he thought about the USA’s governmental system, He responded that it would work well until the politicians learned how to bribe the people with their own money. THEY HAVE LEARNED!!

Sharon Ormsby
Sharon Ormsby
2 years ago

This administration and particularly this President likes to lie to the people. Thankfully, most of its citizens are beginning to see the lies, including much of the press that wanting them in office. Hopefully, they will vote out the majority of the blue people in November, it can’t come soon enough for me.

anna hubert
anna hubert
2 years ago

worse then inflation is knowing that the pukes are so sure we are all idiots

Gloria Hensley
Gloria Hensley
2 years ago

Fiscal policy??? How about Biden? How about Pelosi sneaking in her 1:00 am bills which include all Congress getting a 21% raise (while giving the rest of us an increase in monthly expenses)? How about all of the oil that is in our nation, but disallowing any drilling? How about Wall Street? How about the big Pharma who is after money at the expense of the lives of citizens? How about the greedy big businesses who sold out to Communist China? What fiscal policy? You mean the policy of stealing from the people of the U.S. who voted for the ones doing the stealing?

Garye
Garye
2 years ago

Everybody knows it’s the joebama and Marxist democrats clown show policies that have driven inflation!
Don’t buy into their outright LIES and DISTRACTIONS, typical democrat party garbage for the last 50 years.
Oh yeah and don’t forget they tell the Citizens it’s our fault!!
Throw these anti American, dishonest self serving, arrogant Marxist democrats out and teach them a lesson about accountability and responsibility to who they work for!!!
ALL Real Americans have had enough of their failure in office!

C Lydia Boylan
C Lydia Boylan
2 years ago

Congress should pass a bill that establishes an amendment to the Constitution stating that no bill will be passed without the tax paying public reading the entire bill and all its contents. This recent $1.5 trillion (with a T ) is a joke and will set us back for generations to come, bankrupting our children and our grandchildren. My oldest granddaughter just announced the coming birth of my first great-grandchild. Instead of being overjoyed, I am now fearful that this child will live in tax poverty, a slave to the government that gives itself pay raises while over taxing the citizens who have no access to insider trading like they do!

Hal
Hal
2 years ago

I guess many Americans still haven’t come to grips with “inflation” is just a way to tax the citizens and hide the truth that it is just a way to raise taxes and avoid at least some of the criticism of the governed. Until there is a meaningful and enforceable way by Constitutional Amendment to require lawmakers to have to heed a balanced budget amendment, it will historically be more and more used to avoid fiscal accountability. And inflation is just a Communist technique adopted by modern day politicians to avoid accountability and boost their seeming accomplishments. Like it or not, our future heirs are gradually sliding into a Communistic version of governance.

Kim
Kim
2 years ago

Even if inflation doesn’t increase throughout 2022, we’re still left with the damage that already has been done. Will prices return to pre-biden levels? I doubt it, which means we’re stuck paying higher prices for most items. Because the wholesale price index increased 10% last month, I don’t see any relief in the near future.

Hal
Hal
2 years ago

Inflation is the method by which government raises taxes to support their political goals and purposes (many or most of which aren’t supportable by the public citizenry if they knew the truth). Yes, it appears our political representatives have now unabashedly gained full control of the voting system to the point that it is a farce. Like the old French pirate Lafitte (sp?) said when he was supporting the USA against the British in the War of 1812 when asked what he thought about the USA’s governmental system, He responded that it would work well until the politicians learned how to bribe the people with their own money. THEY HAVE LEARNED!!

Sharon Ormsby
Sharon Ormsby
2 years ago

This administration and particularly this President likes to lie to the people. Thankfully, most of its citizens are beginning to see the lies, including much of the press that wanting them in office. Hopefully, they will vote out the majority of the blue people in November, it can’t come soon enough for me.

anna hubert
anna hubert
2 years ago

worse then inflation is knowing that the pukes are so sure we are all idiots

Gloria Hensley
Gloria Hensley
2 years ago

Fiscal policy??? How about Biden? How about Pelosi sneaking in her 1:00 am bills which include all Congress getting a 21% raise (while giving the rest of us an increase in monthly expenses)? How about all of the oil that is in our nation, but disallowing any drilling? How about Wall Street? How about the big Pharma who is after money at the expense of the lives of citizens? How about the greedy big businesses who sold out to Communist China? What fiscal policy? You mean the policy of stealing from the people of the U.S. who voted for the ones doing the stealing?

Garye
Garye
2 years ago

Everybody knows it’s the joebama and Marxist democrats clown show policies that have driven inflation!
Don’t buy into their outright LIES and DISTRACTIONS, typical democrat party garbage for the last 50 years.
Oh yeah and don’t forget they tell the Citizens it’s our fault!!
Throw these anti American, dishonest self serving, arrogant Marxist democrats out and teach them a lesson about accountability and responsibility to who they work for!!!
ALL Real Americans have had enough of their failure in office!

C Lydia Boylan
C Lydia Boylan
2 years ago

Congress should pass a bill that establishes an amendment to the Constitution stating that no bill will be passed without the tax paying public reading the entire bill and all its contents. This recent $1.5 trillion (with a T ) is a joke and will set us back for generations to come, bankrupting our children and our grandchildren. My oldest granddaughter just announced the coming birth of my first great-grandchild. Instead of being overjoyed, I am now fearful that this child will live in tax poverty, a slave to the government that gives itself pay raises while over taxing the citizens who have no access to insider trading like they do!

Secret Service agents rush Donald Trump off the stage.(AP: Evan Vucci)
President Joe Biden greets President of the People’s Republic of China Xi Jinping, Wednesday, November 15, 2023, at the Filoli Estate in Woodside, California.(Official White House Photo by Carlos Fyfe)
President Joe Biden speaks on the phone with Texas Lt. Gov. Dan Patrick to discuss his approval of a FEMA disaster declaration in response to the impacts of Hurricane Beryl, Tuesday, July 9, 2024, in the Oval Office of the White House. (Official White House Photo by Adam Schultz)

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