Americans should be wary of inflation hawks and their tales about the dangers of inflation, tales that have been recycled many times in American history. Their oft-repeated story is that government spending, rising wages and easy money are driving up prices. Their solution is to cut government spending, raise interest rates, and loosen the job market to make it harder for working people to get higher wages. The three “causes” of higher prices pushed by the hawks, however, have not been the drivers of today’s inflation. Rather it has been energy prices — oil, natural gas, and related fuels — and still uncleared bottlenecks related to COVID-19 disruptions, and war in Ukraine.
Two years ago, in April and May 2020, gasoline was $1.95 a gallon. At $4.12, it is more than twice that now. It was so much cheaper in early 2020 because 21 million Americans, truck drivers, teachers, and others, were out of work, sick or quarantined, and tens of millions were skipping restaurants, movies and vacations. These disruptions meant people were driving less so gasoline prices were lower than they had been in years.
Political leaders of both parties, as Covid came on, had to choose between the pain of a severe recession and the risk of some inflation. Gas and other energy prices could have been kept down if President Trump, President Biden, and Congress had refused to spend money to prevent such a recession. Instead, they used government in 2020 and 2021 to replace incomes that COVID-19 was draining away. Money from the government in people’s pockets allowed the U.S. to weather the COVID-related economic storm, and gradually resume normal activities. The worst was avoided.
COVID -related job loses fell from 21 million in the second quarter of 2020 to 8 million by early 2021. People were driving again, so gasoline prices rose 30 percent to $2.95 a gallon by April 2021. This was the beginning of today’s inflation, but also an important sign of economic recovery. There is still COVID -related inflation because higher energy prices are being passed through into the prices of farm products, transportation and much else. There also are still supply chain and chip bottlenecks, and Russia’s attack on Ukraine has added another $1.25 a gallon to the problem. So far, however, a severe recession has been avoided because of government action. The hawks and commentators now wringing their hands about inflation do not tell their audiences how they would have been hurt if government had not put money in their pockets.
The inflation hawks want Americans to believe that they would have been fine if the Trump administration with Democratic support had not pushed through the CARES Act in March 2020, pumping $2.2 trillion into the economy when COVID unemployment was nearing its peak. They want Americans to believe that they would have been fine if the Consolidated Appropriations Act of 2021 passed after the November elections in December 2020 had not added $900 billion more COVID-related money to the pot. They want voters to believe that things would have been fine if the $1.9 trillion American Rescue Package and the $1 trillion infrastructure bill pushed by the Biden administration had not been passed in 2021. Talking heads on TV, fixated on the inflation hawk’s story, probably don’t understand, and certainly don’t explain to TV-watchers what the political options were: severe recession or some risk of inflation.
American history has many examples of what happens when the inflation hawks get their way. Dozens of American economists in 1930, 1931, and 1932 repeatedly petitioned President Hoover and the Congress to spend money on more generous relief and public works so that the millions who had lost jobs at the beginning of the Great Depression could resume spending. Hoover, however, believed government spending would be counter-productive and inflationary. As unemployment and deflation worsened from 1929 to 1933, rounds of spending and wage cuts pushed prices down 7 percent a year. Instead of inflation, unemployment rose to 25 percent, a disastrous tradeoff.
The 1930s were not the first-time American politicians chose recession and unemployment when rising prices were seen as a danger. President Andrew Jackson in the 1830s was a fierce supporter of gold and wanted to reduce the use of paper money. Ordinary farmers and tradesmen, usually borrowers, liked plentiful paper money. It was issued haphazardly during that period by small local banks that like the financial sector today, certainly needed tougher supervision. Jackson, however, killed the Second Bank of the United States, an institution that might have supervised the banks, and compounded his mistake by requiring that land purchases be paid for in gold. This caused a decade of falling prices that hurt ordinary farmers and “mechanics” who had used paper money to buy land and better themselves.
Huge governmental expenditures for the Civil War were financed with taxes, borrowing, and paper money printed by the federal government called Greenbacks. In 1873, however, “gold bugs,” hard money advocates and the inflation hawks of that era, won their campaign to take Greenbacks out of circulation. Annual deflation of 1 or 2 percent over next 30 years again disadvantaged farmers and other debtors who had to repay loans with money that was worth more than when they borrowed it. William Jennings Bryan, the Democratic candidate for president in 1896, was still decrying the impact of deflation on farmers and labor when he famously said that ordinary Americans were being crucified on “a Cross of Gold.”
Today’s concerns about inflation are echoes from the past. During the Jackson Era in the 1830s, during the 30 years after 1873, and in the Great Depression of the 1930s ordinary Americans suffered far more from falling prices and unemployment engineered by inflation hawks than from inflation. Too little government spending over the last 200 years has caused much more pain than inflation. This is worrying because the inflation hawks are steering Americans in their direction again.
Paul A. London, Ph.D., was a senior policy adviser and deputy undersecretary of Commerce for Economics and Statistics in the 1990s, a deputy assistant administrator at the Federal Energy Administration and Energy Department, and a visiting fellow at the American Enterprise Institute. A legislative assistant to Sen. Walter Mondale (D-Minn.) in the 1970s, he was a foreign service officer in Paris and Vietnam and is the author of two books, including “The Competition Solution: The Bipartisan Secret Behind American Prosperity” (2005).
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