THE GHOST OF MILTON FRIEDMAN IS HAUNTING PRESIDENT BIDEN:
Friedman’s view used to be somewhat crudely summarized as saying that inflation comes from “too much money chasing too few goods” and that neatly captures the situation here. The inflation that is damaging the Biden administration so badly, to say nothing of the finances of ordinary Americans, is playing out just like Friedman would have predicted. When it comes to monetary economics, Friedman certainly is still running the show.
Related: Blame Insane Government Spending for Inflation.
Many people still blame today’s inflation on snags in globe-spanning supply chains. The chief proposed solution is to dismantle decades of globalization and bring production home. Some are also pushing for measures to offset inflation, including robust child subsidies and tax rebates for gas and food.
These proposals are rooted in a misunderstanding of the true cause of inflation: namely, government-induced demand. More spending, therefore, will only fuel the inflation fires.
Over the course of the pandemic, the Treasury Department issued roughly $6 trillion, $2.7 trillion of which was monetized by the Federal Reserve. Americans were sent $5.1 trillion through various programs, including individual checks and unemployment bonuses. Overall federal debt has since risen by about $6 trillion.
This response assumes the 2020 recession was sparked by a demand shock leading to a fall in aggregate demand, rather than the strangling of aggregate supply caused by the pandemic and lockdowns. Under these circumstances, sending people and companies money was never likely to impact output. Instead, it greatly inflated demand for the durable goods still being produced.
Even by the Keynesian economic standards that prompt this sort of fiscal response, COVID-19 relief was larger than any “output gap”—the difference between what the economy is producing and the most it could produce. In March 2020, the gap was $2.3 trillion, and that year alone, the government spent $3 trillion through several relief bills.
More: Biden Is Clueless About Inflation. New video from Reason TV, though the title is two words too long:
UPDATE (FROM GLENN): Related: Don’t pretend that high prices and American suffering are a ‘bug’ for the establishment — it’s a historic feature.