The View From 1776
Thursday, January 17, 2008
Liberals’ Plan to Stimulate Inflation
Liberals propose to follow the same game plan that gave us stagflation in the 1970s.
As success with the military surge in Iraq increasingly belies their claim that the war is already irretrievably lost, liberals have changed the subject from Iraq to the economy and the rising possibility of a recession. Liberal Republicans and Democrats, as usual, prescribe Federal deficit spending and higher taxes on “the rich.”
That is the doctrine of Keynesian economics, which advocates consumer spending as the exclusive highway to full employment and prosperity. According to Keynes, consumer and business savings must be offset by massively increased Federal spending. What the money is spent for doesn’t matter; just flood the market with money created by bookkeeping entries at the Federal Reserve banks.
Keynesian economics failed to end the Depression. Its repetition, as we saw in the bitter experience of Great Society stagflation in the 1970s, discouraged investment in projects of long term value and led to speculations that promised high rates of return in the short-run.
For example, during the 1970s stagflation, is was only marginally profitable to build rental apartments, because the rate of return on those investments was far below the inflation rate. What occurred, instead, was an unprecedented boom in hotel construction, because room rates could be increased every day. By 1980, there was a shortage of rental apartments and an oversupply of hotels.
In the real world, the only road to non-inflationary economic growth is lower taxes, offset by reduced Federal spending, grounded on a stable currency.
Non-inflationary economic growth is not a product of consumer spending. It must be funded by business and consumer savings. Consumers who save will not max out credit cards and add to inflationary pressures. Businesses that save will make long-term capital investment in higher productivity that enables increased production of useful goods and services at lower cost. That higher productivity makes possible higher wages and an improved standard of living for everyone.
Federal deficit spending inevitably spurs inflation, which over time wipes out the purchasing power of people’s lifetime savings. Increased deficit spending is the way to go if we want to eliminate self-reliance and personal responsibility, while training people to turn to government for all their needs. That, of course, is a description of socialism.
Higher taxes reduce incentives to save, the only non-inflationary source of funding to grow the economy. Increased production funded by savings adds to consumer purchasing power when workers and suppliers are paid, without inflating the money supply.
In contrast, higher welfare-state handouts create artificial demand that merely raises prices, because of the time lag between the Fed’s out-of-thin-air addition to the money supply and increased availability of goods and services. That, of course, is a description of inflation.