The Paradox of Inflation
Top Stories of the Year: #3
Today I continue counting down the top stories of 2022 as covered in The Tracinski Letter. At #4 was the conservative Supreme Court’s transmogrification of “originalist” jurisprudence into mere traditionalism. At #3 is the left’s big folly of the year: the return of inflation.
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In going back over my coverage of inflation this year, I found more than I expected, but mostly buried as sub-points in larger news roundups, not as stand-alone articles. I think that’s because I already wrote about the essential issue years ago. Back in 2019, I analyzed the philosophical logic-pretzel of so-called Modern Monetary Theory, as stated by Stephanie Kelton, then the economic advisor to Bernie Sanders.
The carpenter can’t run out of inches The stadium can’t run out of points The airline can’t run out of [frequent flyer] miles And the USA can’t run out of dollars
My response:
As to whether the US government can run out of dollars—just watch us. We can run out of dollars because we can run out of goods on which dollars are a claim. Again, this assumes that dollars are not a mere fantastical abstraction but are claims on actual wealth in the real world, which is where dollars are actually used. It assumes that just because you can imagine a government spending unlimited dollars to pay for unlimited things doesn't mean it's actually possible.
As a kind of a book-end on that observation, I very recently noted the progress of Modern Monetary Theory through the Pipeline of Insanity that brings crackpot ideas into the political mainstream.
[T]here is a pipeline that carries these ideas from the craziest corners of the universities, to a small core of left-wing political activists, to the online echo chambers of social media, to the more strident online media sites, then to the younger staffers at venerable mainstream publications, and from there to the platforms of Democratic Party politicians….
The second idea to emerge through the pipeline of insanity was “Modern Monetary Theory.” MMT was a fringe idea even among left-leaning economists, but it was irresistible to the activist left and catnip to politicians because it assured them that the government can never run out of dollars. So they could keep spending untold trillions on the whole Big Government wish list and never worry about inflation.
That is exactly what Democratic politicians did (with a lot of help from Republicans)—right up until inflation hit.
My comments on inflation throughout the year had a simple, continuing theme, one that is very appropriate for an Objectivist: A is A.
Early in the year, I quoted a revealing question from center-left commenter Ezra Klein.
There was a long period when it didn’t just feel, the economic data showed, that expansions were not reaching people on the margins. And it felt, finally, like we were reaching people on the margins. We were putting a lot of firepower to do that. But even in this terrible time, this horrifying pandemic, we were giving people who needed it quite a bit of help.
And then for that to then turn into this horrifying inflation problem, which is now eating back those wage increases, potentially going to require much sharper action from the Fed—I recognize the world doesn’t have to please me, but it is maddening.
My response: “To put this in philosophical terms, inflation is not the product of anything so mundane as monetary or fiscal policy. It is the product of putting ‘I want’ over ‘It is.’”
I had a similar comment about the Biden administration’s last, scaled-down “stimulus” spending bill, which they had the gall to name the “Inflation Reduction Act.”
[F]rom the name, to the context, to the various things they are trying to do in it, it’s this carnival of evasion of reality. Washington, DC, is the land of A Is Non-A.
And I took on the fantasy of “greedflation.”
Every side has a problem with conspiracy theories…. The newest one on the left is called “Greedflation”: the idea that inflation is caused by corporations arbitrarily raising their prices because they are greedy and driven by profits. Unlike times of low inflation, in which corporations are motivated by generosity and don’t care about profits.
This whole idea is a joke, except that people in power take it seriously and are acting on it.
In the middle of the year, I provided the simplest summary I could of how we got here.
The story of recent price inflation can be put in very simple terms, and it goes something like this.
We got hit by a pandemic that disrupted our economy and caused a slowdown in production. But politicians decided that they didn’t want us to experience the effects of this slowdown, so they pumped trillions of dollars into the economy so we wouldn’t feel like we were in an economic contraction. This didn’t cause inflation at first, because we were still largely reining in our own spending—traveling less, going out less, spending less on most goods. So we saved a lot of that extra money. The result was that we came out of a year of economic downturn with record-high savings—which is exactly the opposite of how things are supposed to work.
But when we began to feel and act as if the crisis was over, what did we do? We started spending that money—before employment and production had recovered sufficiently to actually produce and deliver all of the goods we were buying. What happens when we all start spending more money, but we’re not producing more goods? We bid up the prices of everything.
I also addressed one of the consequences having all of that free money sloshing around: the digital tulip mania of cryptocurrencies, NFTs, and meme stocks, a bubble that is now in the process of bursting.
The other reason I feel as if I have already written about this before is because much of it seems like a footnote to the Paradox of Subsidies, which I have been writing about for a decade. This has come to the forefront with President Biden’s multi-trillion-dollar student loan bailout (which has since been suspended by the courts pending review of its extremely dubious constitutional basis).
When the government subsidizes education, in the form of a bottomless well of student loan money, it gives universities an incentive to raise tuition year after year to soak up all of that cash. So the paradox is that a program designed to make college more affordable ends up making it less affordable—and leaves a generation of students with massive debt.
In concrete terms, I remember Bill Clinton on the campaign trail in 1992 giving speeches on college campuses promising increased access to student loans and getting a rapturous reception from the kids who viewed this as free money from the government. Now, thirty years later, everybody’s asking how students ended up graduating with so much debt. If only someone could have warned them.
Given this history, forgiving $10,000 to $20,000 per person in student loans will only send the message to colleges that they can raise tuition by another $2,500 a year and tell the kids not to worry because eventually the politicians will make all that debt go away. And students will react by borrowing even more.
The Paradox of Subsidies has a corollary in the Paradox of Bailouts. The purpose of a bailout is to eliminate debt, but its long-term effect is to increase it.
We can widen this to describe the Paradox of Inflation, which is summed up in that question from EzraKlein: “We were giving people who needed it quite a bit of help” only for it to “turn into this horrifying inflation problem, which is now eating back those wage increases.” It’s the same treadmill. You spread around a lot of free money to make people prosperous, but this just jacks up prices, so you then have to spread around even more free money, and so on.
I have held out some hope that we will not go into the hyperinflationary spiral that this policy implies. There have been a few harebrained schemes to fight inflation by printing more money, but such proposals have largely been dropped—thanks in part to the thankless efforts of the Democratic Party’s moderates.
Democrats won control of the Senate in 2020 with literally the fewest seats possible. They didn’t even get an outright majority but rely on the vice-president to break a tie for anything that is not bipartisan legislation. Yet they have spent the past year acting as if they have a mandate for the full fantasy agenda of the far left.
By reining them in a little, [Joe] Manchin and [Kyrsten] Sinema are saving the Democrats from themselves. They are, predictably, getting nothing but hostility in return.
Since I wrote that, Senator Sinema has since left the Democratic Party and become an Independent.
But we have reason to doubt that Democrats will learn their lesson, because they would first have to accept that A is A.
Telling people that A is A is pretty much my job here, and it has the advantage of being able to name the basis for some of the events of today years before they happen. I can only do that with the support of my readers. Please consider taking advantage of our Holiday Sale.
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"We got hit by a pandemic that disrupted our economy and caused a slowdown in production." - we got hit by an irrational response to the pandemic, where the government purposely restricted production.
Then, following 'Interventionism' by Ludwig Von Mises and 'Atlas Shrugged' by Ayn Rand, the government compounded this restriction of supply with vast spending, hugely expanding demand.
The response to the pandemic was to elevate 'I imagine' over 'it is', the justifications given for the measures taken were based on innumerate, apocalyptic fantasy, especially that of Neil Ferguson, the undead combination of Floyd Ferris and James Taggart, who wanted this kind of world to make him feel important.