Inflation’s Puppeteer: The Government

In 1960, Nobel-winning economist Friedrich Von Hayek said, “History is largely a history of inflation, usually inflations engineered by governments for the gain of governments.”  During the last four years, consumers have seen the price level increase cumulatively by over 15 percent due to inflation. This means that Bidenomics has added an extra $9,000 per year in expenses for the average household.

During the previous administration — the Trump years — the Consumer Price Index (CPI) saw a mere 1 percent cumulative increase. While the Covid pandemic influenced this figure, excluding that one year, the overall price level increase still was only about 2 ½ percent. It’s important to note that inflation isn’t the price level — it’s the rate of increase in prices.  A reduction from 9 percent to 3 percent doesn’t imply a 6 percent decrease in prices; it means prices will still continue to rise at 3 percent.   As Von Hayek aptly put it, this is an inflation “engineered by governments.” (READ MORE: Biden Points the Bill (and the Blame) Elsewhere)

Think of the macroeconomy as a vast circular flow. Your earnings represent a portion of your employer’s profits, and when you spend your wages, they become another’s profit. This cycle, while not exact, maintains a pretty good balance. However, when the government steps in and deficit spends — essentially paying for things with money it didn’t earn — inflation is what happens close to the circle.

Most Big Government do-gooders don’t understand the connection between increased government spending and inflation, or maybe they just don’t care.  The Treasury runs a deficit when the amount it spends exceeds the amount it collects in taxes, and it borrows the difference by selling bonds. This means the government is spending money it didn’t earn through the production of goods and services. That’s why we say inflation is “too many dollars chasing too few goods.”

Within three months of assuming office, Biden signed the American Rescue Plan Act — a colossal $2 trillion undertaking that, despite its name, did little to rescue the economy. To put this into perspective, the total deficit spending for the entire first three years of the Trump administration was about the same amount as this single act. According to our circular flow concept, injecting such a massive amount of money into the economy without a corresponding increase in production should lead to inflation. Here are some statistics to double-check our circular flow.

In the twelve months following the bill’s signing, U.S. personal income increased by 3.7 percent.  During the same period, worker productivity (output per hour) actually decreased by 1.5 percent.  Adding those together we get 5.2 percent as the total change in income per output produced.  During that same period, inflation increased by, you guessed it, 5.3 percent.  It’s funny, but not funny how that works out!

But this isn’t the story we’re being sold. The Administration tells us that greedy corporations are what’s causing inflation. Corporations may be greedy, but they shouldn’t take the fall for this one. Let’s check this fake news from the Left.  If we exclude things like housing and transportation because many other variables, like interest rates and wars, affect them (i.e. they are volatile), we can focus on consumer spending — the prices for all the things you buy at, say, Walmart.

Walmart is big, makes a lot of money, and seems like an excellent candidate to be a greedy corporation.  I’ll concede that things at Walmart cost more today than they did four years ago, but that doesn’t tell me if those price increases are a cause or effect of inflation.  The way we have to think about it is to question if Walmart is making more today than in the past.  Again, sure they are, but it’s not that simple.  How do we know if their higher dollar net profit is due to price gouging or the devaluation of our currency due to inflation?

To really figure this out, we have to look at their return on investment.  This is how much Walmart makes in income as a percentage of what they have invested in stores, inventory, and infrastructure.  It’s akin to the percentage you earn in interest on money you have in the bank.  During the Trump years, Walmart returned a cumulative average of about 18 percent per year on its investment.  During the Biden years, it been exactly 18 percent as well.  Nothing to see here, folks! (READ MORE: Biden Gaslights America on the Economy)

It’s the government causing inflation by deficit spending, not greedy corporations, and not wages rising slower than productivity.  We hear from the administration about the “war on inflation,” but you’d think if they were genuinely earnest about it, they would do something. Well, they did!  The Inflation Reduction Act was pushed through a little over a year ago, and by its name, you’d think that, finally, something was being done about rising prices.  You’d be correct — it calls for almost another $1 trillion in government spending!  What did Von Hayek say again?

Kevin Cochrane is an economist, former senior banking executive, and regularly published national columnist.  He is currently a visiting professor at the University of the West Indies in Barbados and has taught economics for the past two decades in the United States.

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