Economist Milton Friedman’s long-ago lesson on inflation coming back to bite Biden
The final word on the cause of inflation was delivered, in the view of many, by Nobel prize-winning economist Milton Friedman.
“Inflation is made in Washington because only Washington can create money,” Friedman said in a 1978 lecture that has gained currency again on social media. “It’s always and everywhere a result of too much money, of a more rapid increase in the quantity of money than in output. Inflation in the United States is made in Washington and nowhere else.”
The inflation rate has soared in the past two years to a peak of 9.1%, sapping families’ purchasing power and spurring higher interest rates that have contributed to recent bank failures. President Biden and his advisers have blamed inflation on the pandemic, supply-chain problems, the war in Ukraine, corporate greed — just about everything but high spending by his administration and congressional Democrats.“Do I take any blame for inflation? No,” Mr. Biden told reporters last month. “It was already there when I got here, man. We were in real economic difficulty. That’s why I don’t.”
Despite the economic turmoil and job losses during the pandemic, the annual inflation rate stood at a low 1.4% when Mr. Biden came into office. It has averaged 6.2% over the two years of his presidency.
Washington has thrown several trillion dollars into the economy to help Americans and businesses recover from the pandemic. The first aid package, the $2 trillion CARES Act, was signed by President Trump in March 2020.
Mr. Trump signed another spending and relief package in December 2020 totaling $2.3 trillion. That legislation included $284 billion in “paycheck protection” funds and $600 direct payments to many Americans. Mr. Trump wanted the direct payments to be higher, at $2,000 per person.
The massive relief in the final year of the Trump administration was followed quickly by the $1.9 trillion American Rescue Plan, signed by Mr. Biden in March 2021. It included direct payments of $1,400 to most Americans and extended $300 weekly boosts in unemployment payments. That was followed by a $1 trillion bipartisan infrastructure law signed by Mr. Biden in November 2021, a $750 billion Inflation Reduction Act signed by Mr. Biden in August and a $1.7 trillion government spending bill in December.
To help keep the economy afloat during that time, the Federal Reserve increased its balance sheet to nearly $9 trillion to facilitate more loans and other rescue programs.
Just as Friedman foretold, all that money flooding into the economy caused inflation, said E.J. Antoni, an economic researcher at the conservative Heritage Foundation.
“Although spending before that was high, it was never anything like what we have today,” Mr. Antoni said. “So that is a key part of what’s going on.”
Mr. Trump added about $6.7 trillion to the national debt over four years, a 33% increase, but inflation never rose above an annual rate of 2.9% during his presidency. Mr. Antoni said that’s partly because it takes time for the extra money to have an impact on supply and demand forces and partly because the economy was growing robustly before the pandemic hit in early 2020.
“That essentially created this cushion that could absorb an increase in the money supply without actually resulting in a proportionate increase in prices,” he said.
David Winston, a longtime adviser to congressional Republicans, has devised a “presidential inflation rate” indicator that ranks recent presidents on how well they tackled inflation. Using statistics from the Bureau of Labor Statistics, the Winston Group calculated that overall prices have increased 15% under Mr. Biden to date in categories such as food, energy and rent.
In an article in The Hill, Mr. Winston said that at the same point in their presidencies, Mr. Trump had an inflation rate of 4.1%, President Obama had a rate of 4.8% and George W. Bush had a rate of 4.6%.
Another factor that is increasingly affecting inflation is the nation’s high level of debt, said John Cochrane, senior fellow in economics at the Hoover Institution. During a podcast last month hosted by the think tank, Mr. Cochrane said the national debt of about $32 trillion is creating more uncertainty in the economy about the government’s fiscal stability.
“As opposed to too much money chasing too few goods, it’s too much debt chasing too few goods,” Mr. Cochrane said. “At bottom, it is not about money as a special asset distinct from bonds. It is about the value of government liabilities.”
He said tax cuts in 1982 and 1986, during the Reagan era, led to strong economic growth and the nation’s fiscal outlook improved.
“Tax revenues start pouring in when the economy takes off,” he said. “So this was a joint monetary-fiscal stabilization, if there ever was one, and the fiscal part is important. What you need is faith that this is a serious country that will repay its debts, that’s growing strongly, the government isn’t going to be in trouble — those government bonds are a good investment. … If you tighten monetary policy and you don’t fix the fiscal problem, inflation comes back. When you fix monetary and fiscal policies together, inflation goes away, and often painlessly.”
In his 1978 lecture at Kansas State University, Friedman sounded as if he were anticipating the Biden administration’s all-of-the-above explanation for the causes of inflation. He said any blame for inflation that is placed anywhere but on Washington’s policymakers “is wrong.”
“Consumers don’t produce it,” he said. “Producers don’t produce it. The trade unions don’t produce it. Foreign sheikhs don’t produce it. Oil imports don’t produce it. What produces it is too much government spending and too much government creation of money, and nothing else.”
His audience applauded, but Friedman stopped the clapping. He said everyone in the audience bore responsibility for Washington’s addiction to spending.
“The reason why we have too much … spending and too much printing of money is because you people want it, you and I,” he told them. “We’re citizens. We run this country. If Congress has been voting higher and higher spending, why? Because it has been politically profitable for them to do it. If they have been voting higher spending and not voting the higher taxes to pay for it, why? Because it’s been politically profitable to do it.”
He concluded, “We would all like to get something for nothing. And so the political process has been leading to Congress increasing spending, not increasing taxes, and financing the difference by the hidden tax of inflation. I think we are unwise, but let’s not blame the others. The problem, you know, [is] in that famous statement of a cartoonist, ‘We have met the enemy and thehttps://www.washingtontimes.com/news/2023/mar/27/economist-milton-friedmans-long-ago-lesson-on-infl/y is us.’”
He was speaking during the Carter administration, when inflation averaged 11.8%.
https://www.washingtontimes.com/news/2023/mar/27/economist-milton-friedmans-long-ago-lesson-on-infl/
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