The ongoing fiscal and monetary waltz featuring the Biden Administration’s over the top agenda driven spending (endorsed by the misguided followers of New Monetary policy) and the Federal Reserve’s Keynesian demand-oriented endeavor to curb inflation by raising interest rates, thereby, slowing strangling the economy, has been a glaring example of terminal stupidity. The left leaning socialist pundits, such as Bidens’s primary economic advisor, Jared Bernstein, who is trained as a sociologist and not an economist, believe the myth that the American government can spend at will without consequences because they can print their own money without consequences. This effort by left leaning political economists and sociologists to legitimize untethered fiscal irresponsibility by government may have almost a scant scintilla of validity in the very, very, very short, run but the consequences come home to roost much sooner than those pundits prognosticate (who myopically perceive virtually no consequences).
These pundits bemoan the work of Milton Friedman who emphasized that corporate governance should be limited to limited to the maximation of long run profit bound by the guidelines established by existing statutes, as enforced by the SEC, FTC, FCC, etc. and pointed at excess money in the money supply and government spending as the cause of inflation. As the political axis of the Democrat Party spins more and more toward the Marxist ideals of central control, pure economic theory is being challenged in a manner that is making centrist Keynesian economists (actual economists) and classical economists (including the followers of Milton Friedman) sound a similar alarm, although with some nuances.
The argument against the primary role of corporate governance being long run profit maximization is rooted in social and political theories, not economic. Well-established economic theory postulates that the pure competitive model is unquestionably the optimal path to maximizing total social welfare. The protection of free and fair competition was the impetus to the creation of the antitrust statutes and the associated regulatory agencies to enforce fair competition in the market. Milton Friedman was correct in not espousing the imposition of sociological constraints on private corporations not specified by existing statutes. If such guidelines are deemed to be necessary, an adjustment of the existing statutes through the legislative process, enforced by the appropriate regulatory agencies, is the optimal way of addressing such concerns.
The push back against Milton Friedman’s position that increases in the money supply, other than to reflect economic growth, is the sole cause of inflation bears some validity given his insistence that it is the sole cause. Imbalances between supply and demand, not attributable to the money supply, such as severe supply chain disruptions, the creation of excessive stifling regulation and the hyper green war on fossil fuels are some examples of other possible inflationary causes. There is also little doubt, however, that in most cases, money supply issues coupled with irresponsible fiscal spending play an integral role driving both short run and long run inflation. The recent record setting inflationary period, that history will label as Biden’s legacy to America, is a prime example of how untethered Federal agenda driven spending can wreak financial havoc on low- and middle-income taxpayers (who are least capable of weathering such a storm). When big government goes on an agenda driven spending spree that is funded entirely by taxes collected, the loss to the economy is substantial, but restricted to the efficiency difference between government decision making and the spending and investment decisions made in the free market by consumers and producers. When that agenda driven spending exceeds collected taxes, that deficit spending is deleterious for the economy in many more ways. Not only is the spending less efficient than the free-market decision making it displaces, it constitutes a direct addition to the money supply and the total federal deficit. In this case the loss to the economy also includes inflation and an increase in the debt service related to the federal deficit.
Now that we are approaching another presidential election (July 2024), politics’ role in the narrative surrounding the direction of the economy and inflation will crescendo. The Federal Reserve Chairman, Jerome Powell, has publicized that the Federal Reserve is not political, but that claim must be viewed with a large dose of skepticism, especially during presidential election years. The most recent CPI and PPI figures, though slightly tamer, are not sufficiently low for the Fed to lower rates before the end of the year without signaling that they are willing to accept a rate of interest above the 2% target or at least a much longer period of time for the interest rate to drop to the target rate.
In an attempt to change the narrative of inflation that is indelibly attached to the Biden Administration, Joseph Stiglitz a hard-core Keynesian, persuaded sixteen other Nobel Prize winning Keynesians (especially the highly partisan left of center Paul Krugman) to lend their name to a letter that portends the return of inflation and a possible recession if former president Trump becomes the next president. They were vague in their references regarding reasons, but Moody’s Analytics was more specific making references to tax reductions, increased tariffs and the exodus of foreign immigrants These statements were presented without any real analysis of historical evidence, such as the success of the 2017 tax cuts (pre pandemic) and the more favorable trade deals that emanated from negotiations following the imposition of tariffs by the Trump Administration. As a free market and free trade advocate my first impressions of the tariffs imposed by Trump were not entirely positive, but I realized that the ultimate purpose was to force an equitable trade environment between the United States, China and other trading partners.
The 2017 tax cuts not only spurred growth they did so without creating inflation. It makes sense that pushing growth from the supply side during the present period of excess demand will have a favorable effect on prices as increased supply will start to correct the imbalance between supply and demand. Curiously, none of the clearly partisan critics of supply side policies addressed the two most critical policies that have created inflation and need to be addressed – prudent energy policy and irresponsible fiscal spending. The most glaring irony of the dual prognostication of inflation and recession if Trump becomes the next president is that some of Trump’s proposed policies intended to reverse Biden’s policies that created inflation is projected by the far-left pundits to increase the probability of an economic slowdown. Think about how perverse it is to argue that policies that did not create inflation or led to a recession during the first Trump Administration, when coupled with the curtailment of irresponsible agenda driven spending, which was one of the primary drivers of Biden’s multidecade record inflation, could put downward pressure on domestic economic growth or even lead to recession. Keep in mind that government spending especially deficit spending is the least efficient portion of GNP or GDP, which has accounted for an upsized percent of growth during the Biden Administration tenure to date. Clearly cutting off agenda driven spending will put downward pressure on GDP and GNP in the short run. This, however, would be countered by more efficient private sector decision making, which will flourish in a proper pro-growth environment.
Finally, the reduction of undocumented immigrants in the country will not instantly lead to wage inflation in critical skill areas. The clever wording of Moody’s analytics which refers to the proposed removal of many illegal migrants as the exodus of foreign immigrants, makes it seem that these undocumented immigrants are only a benefit, when the social cost of their presence is many billions of dollars. This argument is pure deception, and the losers are the low-income American workers squeezed by the flood of low skilled illegals that have been allowed to enter and stay in the county by the Biden Administration.