Inflation, government spending and the bumpy road ahead

Martin Cantor
BridgeTower Media Newswires

The latest economic numbers are out, and they are not pretty. They present an inflationary economy that can no longer be called “transitory” as once proclaimed by Federal Reserve Chairman Jerome Powell. In fact, Powell has signaled that the Federal Reserve will begin shifting its policy to control inflation from a policy of printing and pumping nearly $6 trillion since the beginning of the pandemic to stimulate the economy and encourage hiring. It’s about time.

Consumers, which account for 70 percent of the nation’s gross domestic product have been brutalized by an October 2021 inflation rate of 6.2% - the highest in 31 years, a consumer price index that is 4.3% higher than October 2020 and gasoline prices that have increased by 49.6 percent in one year. And as American families prepare for Thanksgiving, waiting for them at supermarkets are meat, poultry, fish and eggs priced 11.4% higher than last year.

Additionally, as winter sets in, the cost of staying warm will increase as a barrel of oil now costs $85.41, up from $40.15 a year ago.  Oil cost reductions are unlikely since demand by automobile and air travel has increased while the supply of oil has decreased. America produces less oil while importing higher priced oil, and the Organization of Petroleum Exporting Countries and independent oil producers led by Russia are reducing supply because they want higher oil prices to compensate for what they lost during the pandemic when there was less demand for oil.

But oil is only a small part of the inflationary pain. Could government spending have played a role? Certainly, during 2020 when the economy was shut down followed by a recession, government spending in support of American families and businesses was warranted. However, the 2021 American Rescue Plan might have tipped the economic balance into inflation, and the conceptual framework for that spending evolved during the last presidential campaign when Modern Monetary Theory became, for progressives, the holy grail.

The central idea of MMT is that governments, with government-issued currency that is not backed by a physical commodity such as gold or silver, can and should print as much money as is needed to spend because governments cannot go broke or be insolvent unless a political decision to do so is taken.

MMT gives a cold shoulder to any inflationary impact. Thus, the rationale for the $5.4 trillion of federal spending since March 2020, comprised of the Fed infusing $120 billion a month into the economy since the onset of the pandemic, the enactment of the $1.9 trillion ARP and the $1.2 trillion infrastructure plan. The total of government spending explodes to an unfathomable $7.2 trillion when the $1.8 trillion Build Back Better social spending plan being debated in Congress is included.

As the inflationary train barrels ahead, the Congress remains unconcerned. Seems the only adult in the room who understands the gravity of the spending spree is West Virginia Senator Joe Manchin (D), who recently tweeted “By all accounts, the threat posed by record inflation to the American people is not ‘transitory’ and is instead getting worse.”

Ironically, inflationary high prices are taxes on the same American families that our government wants to help. Manchin is right. It’s time to pay attention to inflation, which by most accounts will be here for a while.

—————

Martin Cantor is director of the Long Island Center for Socio-Economic Policy and a former Suffolk County economic development commissioner.