The study of economics is, like so many other fields of endeavor, fraught with convolutions and layers of double speak that can either explain or obscure truth depending upon the person doing the speaking. One person who is trying to remove layers of misinformation and hype is Norton Garfinkle in his latest book: The American Dream vs The Gospel of Wealth. The following article is based in large part on his excellent book.
Deficits cause massive inflation, true or false?
Well, the right answer is: it depends – we need more information to answer the question. In almost all cases, with some significant exceptions like Weimar Germany, government deficits, or the amount a government spends that exceeds the amount a government takes in, do NOT cause rampant inflation. This is because of two important principals:
1. Most governments like the United States or Great Britain, cannot run out of money because they print the money. But, you quickly ask, if the government prints more money, it causes inflation, right? Because if there is more money, it will make the money cheaper. The answer is no. Because of principal Number 2.
2. Rampant or “hyper” inflation only occurs if an economy has peaked and there is no more demand for goods and services. Then if a country prints more money you have a situation of too many dollars chasing too few goods. People lose faith in the currency and will not hold on to money for fear it will loose more value in the future. But, the United States is not anywhere close to this situation. Companies are able to continue hiring and producing because demand is still high. The problem is that people are out of work and scared. That is when governments must step in with deficit spending to create more jobs and support programs so people will have the purchasing power and confidence to buy goods and services. If a government backs away from deficit spending due to the misplaced assumption that national deficits are bad, the economy will suffer, demand will suffer, and the hyper-inflationary spiral that everyone worries about might actually occur because the government did not step in to create needed jobs to bolster the economy.
There are secondary layers to all of this. Misguided and outright mistruths are being spread about, primarily by conservative think tanks and media outlets spreading fear and misinformation about the danger of large government deficits that will saddle future generations with terrible debt burdens and weaken the economy. The exact opposite is the case. Governments providing jobs will strengthen the economy, not weaken it. The key to remember is that the government is not like a household. A household has to live within its budget or it will go bankrupt. A government can never go bankrupt because it prints its own currency. As long as demand is strong, there will be no danger that inflation will generate a dangerous situation. Demand for dollars will remain high and trust in the value of the currency will remain high. Businesses are willing to hire workers and produce goods and services because there is demand for them. Policies that weaken the middle class ability to generate that demand weakens the entire economy.
So what about those inflation periods that happened in the ’70’s and ‘80’s? The answer is: that was a different kind of inflation caused by the deliberate scarcity or control of the price of oil by the OPEC (Organization of Petroleum Exporting Countries) decisions to reduce their exports and increase prices. There was no actual scarcity of oil at that time; it was a “deliberately manufactured” scarcity. But because the cost of oil impacts the cost of almost everything else, we saw prices increase during that period. The really bad part of the story is that this inflationary period brought back an evil priest class called “supply side” or “free market” economists and politicians like Martin Feldstein and Grover Norquist who succeeded with the Bush tax cuts and an attempt to bring back the “Gilded Age” of the wealthy class prior to 1929.
The Bush era tax cuts for the wealthiest classes along with his two illegal wars immediately eliminated the Clinton era budget surplus, creating the current enormous debt situation that the Republicans are now trying to blame on the Obama administration. However, it is not the debt situation itself that has caused serious economic repercussions but the Republican fanatical belief in the gospel of free, self-regulating capital markets with no government intervention. The Bush policies to either ignore or to actually aid Wall Street financial institution’s corrupt banking and trading practices caused the economic collapse of 2008.
Republicans are now trying to frighten the country into more tax cuts for the wealthiest classes who received windfall profits during the 2008 financial collapse and reduced support for the middle class, claiming that reducing public workers retirement plans, Social Security and Medicare are the answers to the country’s financial problems. With unemployment at record levels not seen since the Great Depression era, it is hard to imagine a more bankrupt or cruel attitude. That many workers believe these lies is due to the smoke and mirror tricks of the corporate controlled media who do their masters bidding.
This is the opposite of what is needed, which is government spending to create more jobs and more support for unemployed and those reaching retirement age. The simple reason is that cutting taxes on the wealthiest class and increasing financial burdens on the middle and lower classes will reduce business ability to provide more jobs or produce more goods and services because there will be no demand (i.e. no money) to buy anything. As the pool of goods shrinks, inflation will almost certainly return to cause further misery.
Yet the liars and high priests of corporate greed continue to blame us: the middle and lower income classes for the problems, as though the small retirement pensions of teachers and firemen are bankrupting the system. Could anything be more ludicrous? Yet people believed that Saddam Hussein had weapons of mass destruction too. Sadly, if a lie is shouted loudly enough and long enough, many people will begin to accept it as reality.
The simple truth is that there is no such thing as a capitalist “free” market economy. A “free” market economy will destroy itself through its own greed as happened several times in this country’s history. A capitalist market economy requires government to provide limits and oversight to protect the public from the rampant greedy speculation that always occurs if no limits are in place. This does not mean “socialism” or “communism” or any other scary label. It means that government must intervene in the capital economy to protect the working people by providing fair labor laws, fair retirement compensation laws, public health care, and affordable quality education for all. Part of government responsibility is to also provide a fair progressive tax structure so that the wealthiest classes, who can easily afford it, pay at a higher tax rate than lower income classes. And if necessary, government must step in to provide jobs when the private sector cannot or will not do so. When a government supports the common people, their confidence and trust will build back to a point where they can provide the demand that is the engine of a thriving economy.
So how can the government provide jobs? The list is long; the creative ideas are out there: alternative energy; rebuilding national infrastructure; public health care; education including the sciences, arts and technology; public transit systems; restoring natural ecosystems; cleaning up our air and water; rebuilding our soil to name but a few. And this means that the government must spend more, not less, in support of the middle and lower income classes, the working people. To do otherwise is to court disaster, pure and simple.
