Since excessive inflation is a characteristic result of a fiat money system, who is really surprised that such a moment may be upon us again? The table seems to have been set a long time ago: unruly government borrowing. Growing regulatory burdens and disincentives for businesses and workers. A decrease in participation in the labor market. The particular reluctance of a large cohort of young men to work or pursue studies.
Then came the pandemic and the pandemic-related spending spree, which shifted public demand for services (which are no longer available) to goods that the supply chain struggles to deliver.
Jerome Powell, the head of the Fed, postulates a happy ending: production resumes, goods and services circulate in abundance, inflation is transitory. But he knows it’s not that simple. An appearance of central bankers is the dreaded inflation psychology, but inflation expectations are not ingrained in consumers’ heads because of child trauma, but because consumers sense a mental state of mind. policymakers to adjust to inflation. And Mr Powell, whose re-appointment is pending, must subordinate himself and his monetary decisions to a new burgeoning agenda in Washington: an establishment-wide effort to prevent Donald Trump from returning to power. White House.
Inflation is like the Covid: if it gets loose, it will dominate our politics. This causes great misfortune but also makes new things possible.
In the 1970s, the inflationary crisis imploded a large government establishment busy trying to fix the supply and price of air transportation, truck transportation, rail services, and energy supplies to consumers. He imploded a tax system that was found to consistently promote people into higher brackets even as their real income and standard of living declined.
All in all, a whole revolution in the role of government in the economy began under Jimmy Carter and continued under Ronald Reagan, and has been picked up throughout the Western world.
Inflation today would hit an economy with its own rigidities, mostly of a different nature. Zoning rules depress the supply of housing; license restrictions depress the supply of personal services. The wind and solar mandates test the reliability of the grid. Means-tested rights make working at the margins less attractive to Americans.
We can find other vulnerabilities, but two gaping holes were not history in the 1970s. In 1977, federal debt was 34% of GDP; today it is 125%. And the share of Americans who received direct government assistance has quadrupled. It now comprises over 50% of the population, and that is before our vast pandemic spending and Joe Biden’s social ambitions.
Which means a lot of things could go fast and kerblooey. Rising interest rates could double or triple the current $ 400 billion interest bill on the national debt. Overnight, this item could rival Social Security and Medicare as the single largest budget expense.
The options available would only worsen the public’s dissatisfaction with inflation: sharp tax hikes and spending cuts, central bank financing of deficits (leading to more inflation) or tough measures to force depositors to hold public debt, essentially expropriating private savings.
Although Social Security benefits are nominally indexed to inflation – a 5.9% increase has been announced for next year – Congress is well aware of how to claw back actual benefits by taxing them. For programs like Medicare and Medicaid that offer in-kind benefits, the even simpler expedient is to reduce reimbursements to providers, which users will experience as lower quality and longer wait times.
To the surge in worsening voters, add the likely targeting by Congress of perquisites that have effectively put nearly 100% of Americans out of work. These include the deduction of mortgage interest and tax-free employer-provided health care.
When voters are angry and on edge as they are when inflation defeats their expectations and life plans, new things become possible, good or bad. Evolutionists speak of “punctuated equilibrium”. A surge in inflation that transforms society would certainly take us out of an old and exhausted equilibrium and into a new one that we hope will prove to be sustainable in the long run.
No one planned our giant experiment in a welfare and administrative state. Its inconsistency has been shown for a long time. Many of its features are not even aimed at solving a problem, but at satisfying voters who want to have power over their fellow citizens.
All things that live must change and adapt. This includes a fiscal state that is so blatantly short of gasoline that almost everyone, from the most awake to the most Trumpian, feels it in one way or another.
Copyright © 2021 Dow Jones & Company, Inc. All rights reserved. 87990cbe856818d5eddac44c7b1cdeb8Source link