The View From 1776

Democrat Barney Frank, the new chairman of the House Financial Services Committee, has served notice that he won’t tolerate efforts by the Federal Reserve Board to forestall inflation, if such measures might curb employment numbers.

The Wall Street Journal, in a January 13, 2007, article by Greg Ip, reports, When Federal Reserve Chairman Ben Bernanke testifies on monetary policy next month, he is likely to get far more scrutiny than usual......... Barney Frank, the Massachusetts Democrat who took over the House panel this month, said he plans to hold an additional day of hearings in which witnesses, such as economists and labor experts, will give their views on what Mr. Bernanke said.

.......Mr. Frank said the Fed shouldn’t allow a target to result in employment being subordinated to inflation, and he wouldn’t allow the Federal Reserve Act to be amended to allow that to happen.

Why should you be concerned?  After all, inflation, we are told, has not been a threat since the late 1970s and early 80s.  Depending upon what measure is used, inflation currently is running in the vicinity of 2% per year.  That doesn’t sound like much, but consider the effect on a family’s savings over a 35 year working life.

Saving $1,000 each year the family would have nominally $35,000 for retirement.  If inflation were 2% each year, however, the inflation adjusted dollar would be worth only about 51¢ in year 35, and the inflation-adjusted cumulative total of savings would be $25,500, a loss of 27% in purchasing power.  If inflation were only 1% higher each year, the cumulative loss would be 37% in purchasing power.

Why then are liberals and most Democrats so indifferent to the scourge of inflation? 

First, for the Federal Reserve to stop inflation requires tightly squeezing the money supply, as Fed chairman Paul Volcker did in the early 1980s.  But this drives interest rates to high levels in the short run, making it difficult for consumers to borrow and spend.  The Fed today avoids squeezing the money supply, preferring instead to influence total economic activity by the indirect method of nudging short-term interest rates.

Second, liberals aim to maximize welfare state spending, and controlling inflation with a tight money supply and high interest rates make that an expensive proposition.

Third, inflation is a disguised tax increase.  By robbing voters of purchasing power, the government gets free rein on spending, supported by the Fed’s money creation.  Additionally, as inflation progresses, people’s nominal incomes increase along with prices, and they move into higher tax brackets, paying more into the IRS’s coffers.

The origin of this pernicious pattern is Franklin Roosevelt’s New Deal of the 1930s.

Since the 1933 New Deal, the United States has been committed to a form of socialistic collectivism that presumes the role of government to be managing the entire economy as if it were a corporate business.  Beginning with economist John Maynard Keynes’s 1936 “The General Theory of Employment, Interest and Money,” the economic orthodoxy of liberal Democrats and liberal Republicans has decreed that, without intervention by the Federal government, unemployment will rise to dangerously high levels. 

In that hypothesis, people save too much and businesses invest too little to keep the economy from contracting.  The spending gap must be filled by Federal spending, and the Federal Reserve’s job has been to monetize the Federal debt, i.e., to create money out of thin air so that financial institutions can buy government bonds to fiance Congressional deficit spending. 

This paradigm unavoidably imparts an inflationary bias to the economy.  The record shows that, after three centuries of near price stability, the United States has suffered steady inflation since the institution of socialism in 1933 by President Franklin Roosevelt.  According to statistics of the St. Louis Federal Reserve Bank, the Consumer Price Index since 1933 has soared an astonishing 905% as of 2007.

The Employment Act of 1946 made this inflationary bias official policy by committing the government to maintaining full employment via Federal management of the whole economy.  That legislation created the Council of Economic Advisors, who perform as socialist state-planners.

From the politicians’ viewpoint, all new spending programs are feel-good methods to buy votes.  They have no problem with employing excessive numbers of people in the Federal bureaucracy, at higher costs, to enhance the image of helping “the little guy.” The actual effect is the same as giving an addict ever larger doses of crack cocaine. 

There is the added benefit that Federal spending projects employ members of labor unions, who are major contributors to liberal-socialist political campaigns. 

Additionally, under the New Deal’s 1931 Davis-Bacon act, workers on Federally-funded projects have to be paid union-scale wages, no matter how much higher than local wages they may be.  This forces local, private-business employers to pay higher wages, if labor is in tight supply, and in some cases forces them to lay off workers if the resulting costs are too high for profitable operation. 

Here we see state-planning in action, the proverbial bull in the china shop, kicking over restraints against inflation.  The new Democratic-controlled Congress is just reflexively following the orthodoxy of the American Socialist Party.

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