Passing blame

What is the cause of inflation?

Inflation has been surging. A roundup of the usual suspects includes:

STIMULUS CHECKS

Blaming stimulus checks is a grab to the past. Two-plus years ago America was hammered by the coronavirus. The evidence includes businesses being closed, schools being in lockdown, masks being worn, interstate traffic declining, and numerous other effects. Congress passed legislation that sent cash payments to individuals and businesses.

The majority of Republicans in Congress voted against the legislation, yet campaigned that they supported the payments.

Some assert that stimulus checks are stimulating inflation. These unfounded claims are similar to claims that the last presidential election was stolen as a result of voter fraud. Numerous federal court cases alleging voter fraud have been dismissed. Assertions that the stimulus checks contributed to the present spurt in inflation should be dismissed, because (like voter fraud) there is no proof.

EXCESSIVE WAGES

Ask any worker (teachers) if their wages are excessive. How excessive wages can be blamed for our current inflation is a complete mystery. Econ 10 courses teach that excess aggregate demand contributes to inflation. Wages are only one of many sources of income that individuals and businesses use for purchases.

Asserting that excessive wages are the cause of inflation is formulated by unread and uninformed individuals who do not know much about America’s capitalism. Just mark this suspect off without further to-do.

DEFICIT SPENDING

Deficit spending is the universal devil. Whatever the economic issue, deficit spending is the source of the problem. However, deficit spending to finance subsidies for crop prices, levee work to prevent floods, rescue funds to repair and expand water and sewer projects, funding for our armed forces, and all other projects financed by deficits are all perfectly acceptable by the recipients of the funds.

All individual projects are OK, but asserting that the total deficit causes inflation is nonsense. Strike this suspect.

PRINTING MONEY

This assertion is based on an economist’s (Milton Friedman) work in the 1960s. After extensive research, Friedman claimed that inflation was solely a monetary phenomenon. In a nutshell, if the money supply increases faster than real output, then inflation results.

This claim has been subject to many research projects since it was first published. Excess growth in the money supply may have some effect on inflation, but how excess growth winds its way to end in inflation is a long and complicated path.

Claims that printing money leads to inflation rest on Friedman’s simple assertion that excessive growth in the money supply is the root cause of all inflation. The evidence from the U.S. rests on defining the period of “excess” growth. It has not been shown that the U.S. suffers from excessive growth in its money supply.

In contrast, evidence from Third World countries — Venezuela and Turkey today — show that rampant growth in the money supply leads to inflation. Simple claims about printing money leading to inflation must first establish that the growth rate of money is excessive relative to the growth in output. This has not been established today. Any discussion that printing money is the cause of our current inflation is based on unproven evidence.

FED’S INACTION

This target is very unusual. The Fed has the responsibility to control inflation and promote full employment.

The Fed adopts policies based on data. Macroeconomic data is published after the data points are observed. Once data become available, the pattern in the data must be identified and confirmed before the Fed takes any action.

Advocates for this suspect examine the historical pattern and assert that the Fed should have taken actions sometime in the past without acknowledging that the Fed did not have the future data in the past.

Certainly, the Fed can prepare forecasts at any time. But all forecasts contain errors.

Do you want the Fed to make policy decisions based on forecasts or sit tight until the data confirms that policy change is required? The Fed’s decisions wait until data confirms that a change is needed.

In summary: Advocates claiming that one or more of the suspects is the cause of the current bout of inflation are uninformed about the causes of inflation. All suspects are dismissed out of hand.

The correct framework for assessing factors contributing to changes in the price level and real output is provided by “Keynesian” economics.