Today’s Inflation: The Causes and Cure

( The opinions contained in guest opinion pieces are the author’s and may not reflect the views of RedState.com. )

Aaron Hedlund and Andrew B. Wilson

Suppose a helicopter flies over a small, remote village and drops $1,000 in bills from the sky. The villager grabs the money and goes out to find ways to spend large amounts of cash. Are their lives transformed?

No said Milton Friedman. He first used “helicopter money” as a parable in 1969 to illustrate the inflationary and illusory effect of “free” money. The additional money could only increase prices as long as there was no change in supply and provision of goods or services within the village.

It is not surprising that the Nobel Prize-winning economist was shocked to find a modified version of his cautionary tale being brought to life by current Washington, D.C. policymaking. Since the spring of 2021, the federal government has operated a giant fiscal and monetary helicopter operation aimed at dropping trillions of dollars of new money into an economy no longer even in crisis. Meanwhile, inflation has surged to a 40-year high.

The federal government also spent trillions of dollars in 2020, yet inflation remained low. What is the answer? In 2020, there were no helicopter drops intended to encourage people to spend. Instead, the terrible specter and death of an epidemic combined with “stay home” government orders caused people to choose not not to spend and they were prevented from working. The economy was left in a state of semi-coma. The federal aid programs were intended to protect the financial health of small businesses and families and increase the connections between employees and employers. It was expected that the economy would recover quickly and without long-term harm when it came to full recovery. It was awakened. After the steepest GDP drop in modern history in the second quarter of 2020 when the economy contracted at an annualized rate of more than 30 percent, the third quarter witnessed the sharpest GDP rebound in modern memory. By early 2021, GDP was essentially back on track, and the economy was mostly open for business.

So what caused inflation to suddenly start shooting up in the spring of 2021?

It began after the helicopter was no longer a rescue mission. However, it continued to drop airdrops as though they were goodwill missions in the absence any emergency. It began to look like Friedman’s “generous cash bombardment” that does nothing. It’s much worse. Today’s futile mission is a serious threat to our nation and state because of its sheer size.

The Fiscal and Monetary Roots of Inflation

When President Biden signed the $1.9 trillion American Rescue Plan bill into law in March 2021, the economy was well into a robust recovery. It didn’t need a huge drop in money. The demand was high, with consumers bursting for cash eager to return to their normal lives. The administration decided to abandon fiscal discipline at this time. To pursue sound fiscal and monetary policies, it abandoned the implicit agreement between the Federal Reserve and the Executive Branch.

In normal business, the Federal Reserve sets the inflation target. The White House and Congress, on the other hand, are expected to increase their efforts to limit spending and reduce public debt. The problem is where the federal government indulges in excessive spending. Inflation becomes both a fiscal problem and a financial one. People who believe that the newly issued debt will not be paid off by future surpluses will reasonably assume that the government will use high-flying, chronic inflation to solve the problem of repayment. This would mean that the money value will fall. Although it would be devastating for everyone’s savings, pensions, and paychecks, the destruction of the currency will also result in the loss of all of their money.

Bear in mind here: U.S. federal debt as a share of Gross Domestic Product now totals more than 100 percent of U.S. Gross Domestic Product, up from 35 percent 12 years ago. This makes it much more costly to rely on higher rates of interest in order to combat inflation.

To make matters worse, the so called Rescue Plan is part of an antiwork and antienergy agenda. It has severe curtailed supply and inflamed labor shortages.

There is no one easy cure, but just as in the early 1980s, when inflation was last this high, the solution should include a closely related trio of monetary, fiscal, and economic reforms.

• Don’t wait for inflation to drop by itself. The Federal Reserve should do all it can to control inflation, regardless of any short-term discomfort that comes with raising interest rates.
• Federal officials need to stop placing blame on “price gouging”, and “corporate greed.” This is completely absurd. They must change their thinking and behaviour to be part of the chain of causality. They need to reduce unaffordable entitlements, give up trying to choose winners and losers and limit their power and influence in the markets. This is best left to free citizens working in their capacities as consumers and workers.
• Lastly, this refers to a pro-growth program that lowers the debt-to GDP by increasing its denominator. This is achieved through supply side reforms that promote work, energy production and innovation.

Aaron Hedlund, chief economist at Show-Me Institute where Andrew Wilson is senior fellow, is

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