Commentary: Beware the inevitability of inflation
This article first appeared in the St. Louis Beacon, Jan. 5, 2010 - At the height of his economic crisis in the early 1970s Richard Nixon said, famously: “We are all Keysians now.” Let me use that quote as a springboard to discuss the natural enmity that exists between a government and its people regarding monetary policy and the economy.
John Maynard Keynes was an English economist who said that in hard economic times a government should spend government dollars to “stimulate” the economy and put everyone back to work. Our dear president, Barak Obama, has bought into this theory, and he is spending “stimulus money” like a drunken sailor.
As a Big Meanie/Republican/Libertarian/Conservative, I, of course, must confess in all fairness that W. did exactly the same thing.
But the purpose this column is to examine a president’s ulterior motives.
It is axiomatic that a president is always focused on his popularity and support. Those who assert that people, in general, almost all of the time, act other than in their own direct self interest, need to have their heads examined.
It is also axiomatic that in the quest for popularity and support, a president worries desperately about image more than reality. Thus, under the pressure of an economic crisis, he concludes he must appear to be doing something. We can imagine the alternative headline:
THOUSANDS OF JOBS LOST
FORECLOSURES RUN AMOK
PRESIDENT SAYS: 'DO NOTHING'
The president’s rivals will say: “The president may not have a plan, but I do…” The press will listen to and report on the rival’s ideas, and the public will be attracted to the new “man of action.” (The president has another insidious motive for spending money, which is to reward government largess to friends, family and insiders, but that is a different column.)
When the president faces the pressure to appear to be doing something, Keynesianism is a particularly handy alternative. We have, for example, the recent rhetorical phrase “shovel-ready jobs.” A shovel-ready job is supposed to be a bridge or something that everyone agrees is needed but that has heretofore been thought not quite teed up and ready to go. The president asserts that he will cut the red tape and build that bridge. The bridge workers are delighted, and the public thinks, in some general way, that if all we are doing is speeding up the start date of some needed project that makes sense.
The problem arises, however, from the cumulative effect of spending too much money on too many bridges all at one time.
In one’s own home spending more than one’s income leads to directly to poverty. In the world of government, spending more than the treasury’s income leads to poverty by currency depreciation. It has to. If the government takes in a trillion in taxes and spends $2 trillion, then more dollars are chasing the same stuff and prices will rise.
What does inflation do to an economy? It destroys it. Inflation erodes the buying power of people’s wealth. And when hard working people figure out that working hard to accumulate a nest egg (or, hopefully, get filthy rich for the benefit of themselves and their progeny), is a waste of time, they stop working. And when the hard working people stop working, the economy comes to a crashing halt.
This plays out at all levels, but perhaps most importantly at the micro level. While sometimes we think that the economy is about giant success stories like Google, in the day-to-day world, the real action is in small operations. The owners of small businesses make the best decisions they can in the hopes of earning a profit and keeping the doors open. In the course of trying to improve their business, they innovate and often grow. This provides employment and increases the standard of living for all. The process is not mysterious. It is what occurs when people are left alone and under conditions of a stable government.
But if the people believe that private property will not be protected, or if they believe that war or civil unrest is ahead, they are unlikely to engage in this economic activity. Let us keep in mind that history bears this out.
Left wingers wring their hands and say that the standard of living isn’t going up and the rich are stealing everything, but they are ignoring the good news of the middle class. Some rich people are thieves, of course. But just look at the last few years.
The telecom revolution has changed communication completely, so that it is more accessible and less expensive. That is an increase in the standard of living. Other examples abound. Food as a percentage of a family budget has gone down and down, and the chow has gotten better and better.
Interestingly, the more productive we are, the more productive we are. By that I mean that as the economy becomes ever more diverse and more people have knowledge of how things work, the more the innovators can use each other’s innovations to make further innovations. This system has created the vast middle class in America, which, along with its history of freedom, is its greatest strength.
Will small business creators work and bear risk if the currency is going to be no good? At first only one or two innovators answer no. But then others see what the first ones are doing and soon the economy is kaput.
An insidious detail is that over and over in history governments have figured out that they can spend money today, thereby looking good with the public, and suffer no immediate inflationary effect. Inflation, at least at first, just doesn’t happen right away. The president’s best plan for popularity and support is thus to spend money like a drunken sailor but also shove the problem onto the next guy in power.
And so the president spends money madly, which is good for him in the short term but horrible for the people in the long term. Only his successor, and the people, suffer.
And that is why the government and the people are enemies when it comes to currency and the economy.
Let us conclude with optimism. Even as our government leaders are doing exactly the wrong thing – they should be doing nothing - never in history has a nation faced this problem while having both a vast middle class and a history of political freedom. Our people may yet decide that they would rather pursue lives of individualism instead of becoming ever more reliant on their fellow citizens for their own support. And thus our people may yet elect leaders who will protect the currency for the long term benefit of the people, and we may stumble our way out of this mess.
Bevis Schock is an attorney in private practice in Clayton.