Friday, November 19, 2021
The notion that increased government spending doesn’t carry the risk of inflation, said Michael Jay Boskin, an economics professor at Stanford University's Hoover Institution, “is economically illiterate.” Increased government spending adds to the total demand for goods and services, he added, “such that we are risking inflation, and the Biden administration seems to be trying divert attention. There is a risk that inflation may become entrenched. It's hard to imagine a worse outcome than an inflation spiral.”
Chairman of the president’s Council of Economic Advisers from 1989 to 1993, Boskin notes that “a very large fraction” of the relief payments the federal government sent out in 2020 and 2021 was either saved or has yet to be spent. “That is a lot of government spending floating around the system now in the pockets of consumers and the budgets of state and local governments,” waiting to further flood the economy.
On the question of inflation, illustrations of the concept abound. A flood of dollars chasing too few goods. The monetary supply as an overflowing bathtub. But anti-tax conservative Stephen Moore prefers a more colorful one: “dumping gasoline on a forest fire.” A member of former President Trump’s economic task force, Moore questions the Biden administration’s explanation for inflation, specifically the idea that the problem is pent up demand post-pandemic. “Because if that’s the case, why did we spend $2 trillion earlier this year,” he said of the American Rescue Plan. “It doesn’t make any sense.”
The White House likely won’t heed his warnings or those of any naysayers. Analysis from Reagan and Bush alumni — let alone Trump advisers — certainly isn’t in fashion in this administration, especially since, as Biden noted more than a year ago, Milton Friedman “isn’t running the show anymore.”
Inflation is a very complicated topic. I worry quite a bit about inflation, but then I'm a worrier. There are arguments that we will manage to avoid persistent inflation due to the vast amount of Eurodollars in the international monetary system, as well as the theories on the Right of the more conventional sort. Then there are new factors, such automation and the Great Resignation. We shall see whether we like it or not.