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Andrew B. Wilson & Aaron Hedlund
Imagine a helicopter flying over small villages dropping $1,000 worth of bills. It is a happy scoop that villagers take and they go looking for other ways to spend their large amounts of cash. Does their life change?
Milton Friedman denied that. He first used “helicopter money” as a parable in 1969 to illustrate the inflationary and illusory effect of “free” money. As long as prices did not rise, additional money was only a means of increasing supply and distribution.
The Nobel Prize-winning economist would have been shocked to find a modified version of his warning tale being used in Washington, D.C. policymaking. The federal government launched a massive fiscal and monetary helicopter operation in order to inject trillions of dollars into an economy that is not even in crisis since the spring 2021. The inflation rate has reached a record high for 40 years.
While the federal government has spent trillions in dollars over 2020, inflation remains low. So, what’s the deal? There were no helicopter drops in 2020 to promote spending. Rather, because of the awful specter of a new and deadly pandemic, combined with government “stay at home” orders, people elected It is notTo go out to spend and to be physically restricted from working. The economy became semi-senile. Federal assistance packages were created to support the family’s financial well-being and the relationship between the workers and their employer. The economy was supposed to recover as soon as possible, with as little long-term impact as possible, when the right time comes. It was awakened. The third quarter saw the greatest GDP recovery in recent memory. After experiencing the worst GDP decline in modern times in 2020’s second quarter, when the economy shrank at an annualized rate greater than 30%, it recovered sharply in the third quarter. The economy was almost back to normal by the beginning of 2021.
What caused the inflation spike in spring 2021?
The helicopter was no longer a rescue mission and the airdrop continued as though it were an aid mission. Then, the mission came to resemble Friedman’s idea of a seemingly “generous” cash bombardment that accomplishes nothing. But it’s worse than that. Because of its size and scope, today’s purposeless mission has done real damage to the economy and represents a considerable threat to the long-term best interests of the “village,” or, truly, our state and nation.
The Monetary and Fiscal Roots of Inflation
In March 2021 President Biden signed $1.9 trillion into law for the American Rescue Plan. The country was already in strong recovery. It didn’t need a huge drop in money. Consumers were eager to get back to normal and had plenty of cash. Demand was strong. The administration decided to abandon fiscal discipline at this time. The implicit agreement between executive and Federal Reserve branches and elected government was abandoned by the administration to continue sound monetary-fiscal policies.
Normal course of events, the Federal Reserve sets the inflation target. The White House and Congress must then scale back their efforts to limit spending and increase public debt. Where that breaks down, however, is when the federal government’s appetite for spending runs amok. This is when inflation can become both a fiscal as well as a monetary issue. If people perceive that newly issued public debt to finance the government’s spending plan will not be offset by future budget surpluses, they reasonably expect that government will rely on chronic, high-flying inflation to take care of the repayment problem in the simplest and most brutal way: by destroying the value of money. Of course, destroying the value of the currency would also destroy everyone’s pensions and savings and the value of paychecks.
Remember that U.S. federal credit as a proportion of gross domestic product now exceeds 100 percent. The Gross Domestic Product has increased from 35% 12 years back to 35 percent. This makes it much more costly to rely on higher rates of interest in order to combat inflation.
The so-called Rescue Plan, which was part of an antiwork and antienergy agenda, has created artificial constraints on production and output, as well as severely curtailing supply.
While there are no single cures for all problems, as was the case in the 1980s, when the inflation rate was highest, it is important to consider a combination of fiscal, monetary and economic reforms. It means:
- Do not wait for inflation to drop by itself. No matter the pain and inconvenience that may result from raising interest rates, the Federal Reserve should do all it can to control inflation.
- Top federal officials should stop pointing the finger of blame at “price gouging” and “corporate greed,” which is complete nonsense. The chain of causation requires that they change the way they think and behave. They need to cut down on unaffordable entitlements and stop picking winners and losers. Their power, influence and destructive desire to interfere in markets should be left to the collective wisdom and knowledge of all citizens, whether they are consumers or workers.
- It also means a progrowth agenda to reduce debt-to GDP by increasing its denominator. This is achieved via supply-side reforms which encourage innovation, energy production and work.
Aaron Hedlund serves as chief economist for the Show-Me Institute. Andrew Wilson is a senior fellow.
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