This is a reprint of the original article, published in The Dispatch.
“Inflation is always and everywhere a monetary phenomenon.” So said Milton Friedman, and so say his monetarist acolytes. If you ask a particularly reactionary kind of economist (my kind of economist!), he or she will tell you that what inflation actually means is an increase in the money supply, that what we usually mean when we say inflation—a general increase in prices—isn’t inflation at all, but only a consequence of inflation. Inflation, from that point of view, means inflating the money supply. You know—like this:
If you held the money supply constant while the economy grew, then you’d get deflation, or relative deflation, i.e., a money supply that is smaller relative to the size of the economy. In principle, there isn’t anything necessarily wrong with that: Deflation rewards savers (because the money they hold increases in value relative to goods and services) and punishes borrowers (who have to pay off yesterday’s debts in today’s more valuable dollars), while inflation penalizes savers (because the money they hold decreases in value) and rewards debtors (who get to pay off yesterday’s debts in today’s less valuable dollars). There’s just the question (again, in theory) of whose ox is getting gored, of who is getting subsidized and who is in effect getting taxed by monetary policy. In reality, experience suggests that deflation has significant undesirable economic effects, the general idea being that as real prices fall, households and firms are likely to put off purchases—why pay $100 today for something that will be $90 in a week?—leading to reduced economic activity, driving real prices down even farther—the dreaded “deflationary spiral.” That’s the conventional, widely held understanding of the situation, though there are dissenters. As the Polish economist and politician Jacek Rostowski wrote 20 years ago in the New York Times:
There are five ways in which deflation is supposed to plunge the world into a spiral of economic contraction. First, once deflation has started, falling prices will make people put off spending, causing prices to fall further. Second, with prices falling and the value of debt fixed in nominal terms, the real indebtedness of households and firms will grow, acting as a drag on the market, as in Japan since 1990. Third, nominal interest rates cannot fall below zero because companies and households always have the choice of holding cash, which gives a zero return. Banks cannot therefore offer interest rates below zero to depositors so cannot charge negative nominal interest rates on loans. The demand for loans will fall, shrinking the banking sector and the economy with it. Fourth, because nominal interest rates cannot turn negative, central banks will be powerless to offset the effects of deflation. Finally, with prices falling and nominal interest rates stuck at zero, real interest rates will keep increasing, turning the deflationary screw.
In fact, all of these supposed effects either do not matter much, or are the result of inflation being lower than expected, or happen because institutions have not yet adjusted to a potentially deflationary world. They are not the inevitable result of falling prices.
For example, we have experienced falling nominal prices in computers and telecommunications for decades, and although we may think twice before buying that new computer, we buy it in the end. We are not putting off those long-distance phone calls at all. That is because it is quite difficult to put off the consumption of many services. And with services accounting for three-quarters of many advanced economies, most activity will be protected from significant delays in purchases.
The Puritan in me rather likes the idea of a monetary policy that rewards thrift and discourages indebtedness, but it is likely that the Puritan in me is not a very good economist—he did not do me any good as a struggling undergraduate, I can tell you that much—and that the moralizing temptation often leads us into some bad policy postures. And so I generally take the view that the wiser thing to do is to have the Federal Reserve pursue price stability with a little bit of inflationary wheel-greasing, i.e., to do more or less what the Fed has been doing for the past several decades with a reasonable degree of success. (Save your emails, please—my definition of “a reasonable degree of success” accommodates performance that is far, far from perfection.) My main complaint about the Fed is with its so-called dual mandate, which marries the pursuit of price stability to the political priority of full employment. Best to have the Fed do only the one thing and do it relatively well rather than pursue two sometimes incompatible policy goals and do so relatively poorly. I am enough of an optimist to believe that it is possible to have a government (oh, I know, “independent”) agency that does one thing well but am not superstitious enough to believe in government agencies that do two things well, for the same reason I don’t believe in unicorns or little green men or self-financing tax cuts.
A little bit of inflation is tolerable. Everybody is used to it. As usual, the poison is in the dosage.
If you’d like an update on the rapidly deteriorating fiscal position of the U.S. government, I highly recommend my friend Jonah Goldberg’s recent Remnant podcast with Brian Riedl, a senior fellow at the Manhattan Institute working the debt-and-deficits beat. “Eat your spinach,” the subheadline says—it is pretty good spinach. (Larry Kudlow used to refer to me as “an eat-your-spinach guy” on debt and taxes, and I embrace the ethos.) Riedl is appropriately despairing, noting that the deficit effectively doubled in size in fiscal year 2023, that higher interest rates are driving up the share of today’s spending to finance yesterday’s consumption, that we already are near the point of debt-service consuming $1 out of every $3 in taxes paid and are on our way to spending 90 cents of every dollar paid in taxes on debt service, and that the politics are against doing what is needed to put the federal government on more stable fiscal footing (and, hence, to put the country on more stable economic footing), which will necessarily include cuts to entitlement benefits (mainly in Social Security and Medicare) and higher middle-class taxes. As Riedl says, the politics of fiscal reform—which is to say, bipartisan cowardice and stupidity—means that the most likely outcome is that nothing will be done until the bond market forces action, either by demanding much higher interest rates on U.S. government debt or by effectively refusing to lend the U.S. government more money at whatever rates are on offer.
What happens then?
The usual answer given is “monetizing the debt,” which really means “monetizing the unfunded liabilities.” Caught between two howling mobs—the bond market on one side and Social Security beneficiaries on the other—the federal government will have powerful incentives to try to finesse its way out of the dilemma by making sure both the bond mafia and the oldster mafia get paid by simply exnihilating money into existence. These being digital times, Washington won’t even have to fire up the printing presses over at the Bureau of Engraving and Printing. There are some technical maneuvers involved but, basically, Uncle Sam can have an extra $100 trillion more or less by declaring that there’s an extra $100 trillion in the Treasury—by creating money.
Which is to say, by means of inflation—in the older sense of the word.
Americans have been learning to hate inflation (in the popular sense of the word, meaning higher prices) after many years of not thinking about it very much. It is interesting how modest an increase it takes to get Americans’ attention. In 1984, the inflation rate was a little higher than what it was for the 12 months ending in December 2023—it was 3.9 percent back when Ronald Reagan was running for a second term and 3.4 percent as of December. (Excluding food and energy, the rate in December was 3.9 percent; a significant decline in gasoline and diesel prices made the overall number a little better.) Of course, inflation had been 12.5 percent when Reagan was elected in 1980 and 13.3 percent the year before that, so 3.9 percent inflation smelled like victory. But you can look at a lot of years in U.S. history when inflation was as high or higher than it is today and appreciate that those years are not remembered as being times of economic crisis—and some of them were pretty good. Inflation was 3.4 percent in 2000, at the height of the boom that sustained Bill Clinton’s political prospects, and 4.7 percent in 1968, when the economy was growing and Americans were on their way to landing on the moon. On the other hand, if you look at such fondly remembered economic times as the Eisenhower years, you’ll see very low inflation: an annual average of only 1.27 percent from 1952 to 1961.
So there’s a lot going on when it comes to setting the economic mood of the country, and inflation is only one factor among many. But it is an important factor. Inflation during the first three years of Joe Biden’s presidency (and here, please imagine that I have fully restated my caveats about presidents not being magical god-kings who determine economic conditions) ran more like 5.6 percent. So today’s 3.4 percent is on top of an already inflated baseline. “Things are getting worse, but the situation is not deteriorating as rapidly as it was during my first three years in office” isn’t a hugely confidence-inspiring sales pitch.
Recent sunny headlines notwithstanding, there are some reasons to suspect that future inflation reports will be worse than the most recent ones, not better. The difference between the Fed’s usual 2-percent inflation target and today’s 3.4-percent inflation may not seem like a lot, but it very well may be enough to cost Joe Biden reelection in November—never mind that a lot of the inflation that we have seen in the Biden years was baked into the cake during the Trump administration. As Riedl points out, if you judge presidents by the new spending that was taken on because of legislation they signed during their presidencies (as opposed to spending driven by already established programs or economic fluctuations), then Trump is the biggest offender in modern history: “President Trump signed legislation and approved executive actions costing $7.8 trillion over the decade—compared to $5.0 trillion for President Obama and $6.9 trillion for President Bush, and he enacted these costs in just a single four-year presidential term, compared to his predecessors’ eight years in the Oval Office.” Sure, Trump had the COVID-19 pandemic—and Obama had the subprime meltdown, Bush had 9/11, etc. Everybody in politics has a sad story to tell about why he and his party had to spend so much money. Events, dear boys, events, etc.
Everybody knew that under a hypothetical future scenario in which the government attempted to monetize/inflate its way out of a debt crisis, there would be a political price to pay. But now we have some experience to suggest that an anti-inflation revolt would pick up steam right around a (relatively) modest 5-percent to 7-percent level, nothing like what we might expect in a scenario in which Washington is trying to suffocate its Social Security, Medicare, and tax problems under a tsunami of rapidly depreciating U.S. dollars wished into existence. The inflate-away-the-crisis model has always assumed that monetization would be the path of least political resistance, but there’s good reason to doubt that it would be. The problem is that the sensible answer—and, really, it is ultimately the only answer—is a painful bipartisan compromise that will represent the path of maximal resistance until political calculation is entirely overtaken by events. Given the way in which every interest group, ax-grinding society, and populist demagogue attempts to “fiscalize” its pet issue—I reference here the people who don’t actually give a fig about balancing the budget but insist that we’d be well on our way toward solvency if only we’d starve the welfare malingerers or round up the Mexicans or cut off aid to Ukraine or seize Jeff Bezos’ assets, etc.—we can probably expect up-ratcheting fiscal pressure to produce some genuinely imbecilic and dangerous policy responses ranging from expropriation to attempted autarky. Every cheap demagogue has some kulaks he’d like to see liquidated as a class.
Depending on how you add up the numbers, the current unfunded liabilities for the federal government are between four and five times U.S. GDP. Unfunded obligations for Social Security and Medicare alone now exceed $600,000 per household. What that means, in a practical sense, is that these obligations are unlikely to be met. And that’s fine—the whole idea of entitlement reform is coming up with a plan to go about not meeting those obligations but doing so in an orderly way. The average net worth of a U.S. household is just over $1 million (the median is just under $200,000), and there isn’t an economically or politically practical way to seize 60 percent of Americans’ net worth to fund two programs. If you think about it, doing so would be asinine: Seizing the majority of Americans’ wealth to fund what one reasonably straightforward income-support program and one lightly disguised income-support program would be a poor policy in any case, but in this case, an enormously disproportionate share of that wealth and a disproportionate share of the benefits are associated with the same people, the nation’s wealthiest demographic: oldsters.
Good luck with that!
Kevin D. Williamson is national correspondent at The Dispatch and is based in Dallas. Prior to joining the company in 2022, he spent 15 years as a writer and editor at National Review, worked as the theater critic at the New Criterion, and had a long career in local newspapers. He is also a writer in residence at the Competitive Enterprise Institute. When Kevin is not reporting on the world outside Washington for his Wanderland newsletter, you can find him at the rifle range or reading a book about literally almost anything other than politics.