It seems someone told Congress that deficits cause inflation but forgot to mention why (or Congress didn’t listen to the explanation). How else to explain the anti-inflation law of 2022 with a serious expression?
The massive spending package that Senate Democrats will vote on Saturday provides funds for health careTackling climate change and controlling prescription drug costs in exchange for tax hikes largely focuses on deficit reduction that will have no impact on inflation.
The label “inflation mitigation” is used to justify a hodgepodge of special interest payments that have absolutely nothing to do with inflation.
It is excessive money printing – the printing of more bills by order of the Federal Reserve, reducing the issue value of the bills already in circulation – and not the deficit that causes inflation. Controlling inflation requires controlling the money supply.
But Sen. Joe Manchin, DW.V., the driving force behind the Inflation Reduction Act, claims he torpedoed an earlier spending package (Build Back Better) with some of the same components because he feared it would contribute to skyrocketing inflation — and now claims the bill on the table will help stem it.
Instead, the label “inflation reduction” is used to justify a hodgepodge of special interest spending that has absolutely nothing to do with inflation. In addition to raising taxes unnecessarily to reduce the deficit, the law proposes to force drug companies to lower prices. However, the money that now remains in people’s pockets will still be in circulation, and even if drug costs are reduced, it will have no impact on headline inflation. Global warming does not cause inflation either, although it does lead to heated debates.
It’s true that deficits — how much more money the government spends each year than the revenue it receives, mostly from taxes — can sometimes cause inflation because they can put pressure on the Federal Reserve to print money to fill the gap close. But that’s not why Federal Reserve Chair Jerome Powell printed the excess money that has led to our current predicament.
Instead, he printed money from March 2020, fearing the Covid pandemic would crash the economy, and he wasn’t thinking Printing that money would create inflation. He was wrong on both counts.
Powell increased the money supply by around $6.2 trillion since the pandemic began (a 40 percent increase in cash and other assets that can be easily converted into cash in the economy). A 40 percent increase in the money supply over three years, by my calculations, causes prices to rise by about 30 percent, which equates to about 10 percent inflation for three years. Unfortunately, we seem to be on track for the first year.
The Inflation Reduction Act aims to reduce the deficit by $300 billion. Even if it were important to plug the deficit, $300 billion won’t be a bunch of beans in this calculus.
Although some historians would like to point out former Federal Reserve Chairman Paul Volcker’s complaints about the deficit when he famously tried to tame inflation four decades ago, that was not the focus of his policies. And in fact, the deficit grew 1.55% of GDP in 1979 to 5.72% in 1983, so he clearly wasn’t counting on reducing the deficit to bring down inflation.
Instead of this, Volker reduced the money supply through an interest rate Increase from 13.77% in October 1979 to 19.08% in January 1981. Deficit control did not control inflation, then or now.
But the Anti-Inflation Act isn’t just misnamed because it doesn’t live up to its title — it’s likely to make inflation worse by increasing the cost of producing goods and services and reducing their overall supply. The higher cost and resulting reduced supply of goods means that the money circulating in the economy is being used to buy fewer goods, driving up the price of goods, leading to higher inflation.
For example, the legislative push to remove carbon from manufacturing is precisely the kind of wasteful spending that drives up the cost of producing goods. And while receiving the Green Spending Bill’s subsidies will lower the cost of buying these types of goods, rising demand is likely to push the price back up.
It’s hard to understand why Congress thinks this would reduce inflation. What is needed is more supply or less demand, not more demand. The law seems to get this point exactly wrong.
Ironically, the one part of the bill that could help reduce inflation is the part most Democrats don’t want there: promoting fossil fuel production. This could help lower prices by creating more supply and lowering the cost of producing goods, allowing lower prices to be set.
Manchin’s resistance to Build Back Better for inflation reasons was just as flimsy as his support for the anti-inflation law for inflation reasons is now. It seems that inflation is the new buzzword used to justify any action, whether it actually lowers prices or not.
Powell is largely to blame for the inflationary mess, and only he can really fix it. But it’s unlikely to do so anytime soon as it has a lot of money to remove from a fragile economy and its main concern is likely to be not pushing the economy deeper into recession by raising interest rates too much.
https://www.nbcnews.com/think/opinion/inflation-bill-sinema-manchin-senate-horribly-misnamed-rcna41712 The inflation bill backed by Sinema and Manchin in the Senate is terribly misnamed