Inflation, Immorality, and Destruction
“Act in such a way that you treat humanity, whether in your own person or in the person of any other, never merely as a means to an end, but always at the same time as an end,” ( E. Kant )
Inflation during the four years of the Biden administration left the average American worker with 20% less spending power then when Biden took office. The Biden administration was misleading the public when it proudly trumpeted that inflation was under control in 2023. It is at best called “hubris” when one claims success while inflation is still at more than 4% and ravaging most households. Despite the passage of time, I remain at a loss as to what to call U.S. officials’ initial claim that inflation was “transitory.” The leadership at the Fed and the Department of Treasury had to knew that inflation and its adverse consequences were not going away regardless of what they were telling the public. Despite a lot of evidence, the Biden administration refused to acknowledge that the Federal Reserve’s mismanagement of the money supply resulted in a level of pain that was felt by the majority of Americans. I hold out no hope that the present administration, with its broad disregard for individual rights, will act any differently.
Some years ago, Milton Friedman attempted to stop the government’s mismanagement of the money supply by designing a strict process. He promoted the “k-percent rule” as a way to get the growth of the money supply under some control. His theory was that limiting the Fed’s ability to increase the money supply to between 3-5% each year would benefit the economy because inflation would be “low” and predictable. The growth of the money supply would be somewhat controlled by tying it more closely to the pace of economic expansion.
But Friedman had fallen prey to the misdirection that aggregate views of the economy will always create. Money is not neutral either in the short run or long run, and though a more predictable and lower level of inflation might do less harm, it will still cause much harm. The new money created under the k-percent rule would enter certain sectors first, causing prices in those areas to increase before others. False signals would mislead the public and lead to poor investments by investors and entrepreneurs. Actions involving unnecessary risks would be undertaken. Additionally, even a predictable 3-5% annual increase in the money supply would create an artificial market boom because interest rates would fall below the natural market level. Name the process any letter you want but inflation remains a seizure of and redistribution of individual wealth, and any economic boom it promotes will always result in a damaging bust. The negative effects of those busts are not just financial, they change the way people look at life. To ignore those effects and purposely continue down the same path is an act of aggression against individuals.
Inflation and the booms and busts it causes eventually create downturns in the most basic elements of human behavior. During periods of high inflation and recessions, birthrates fall noticeably as Americans affected by the loss of wealth, income, or employment either postpone or decide not to have children at all. Families are in some ways simply not created as marriage rates fall. Reports by medical outlets point to higher levels of psychological distress caused by job loss, financial ruin, and the diminishment of social status. Those factors lead directly to an increase in suicide rates. (During the 2007-2009 Great Recession, suicide rates rose by about 5%.) Domestic violence levels increase as the stress on families rise. One regional study found that during one economic downturn, hospital visits as a result of partner violence tripled. Child mistreatment also rises resulting in an increase in “out of home” placement of children. Even dogs and cats suffer as the number of pets surrendered to animal shelters rise, resulting in greater numbers of animals being euthanized..
The most long lasting effect is the damage to young adults. Young people entering the labor market during and for several years after the downside of a business cycle feel the effects of “labor market scarring.” Typical downturns result in 6-16% reduction in starting pay rates. That disadvantage stays with the individual over time taking between 10-15 years before eventually fading. While college graduates experienced significant earnings penalties, the reduction in income was even greater for those with a high-school degree or less. Beyond economics, we find that those younger individuals in addition to lower income suffer from high rates of midlife mortality, drug overdoses and other deaths of despair. Even today poverty rates remain higher for people who came of working age during the 07-08 recession.
Why are we surprised that so many young people have lost faith in our economy? It has become clear to them that in an effort to maintain political control over the population, the government is willing to sacrifice their well-being.
Clearly when economists only look at aggregate figures, they forget that economic mismanagement does not just change numbers in an equation. Far too many “leading” economists fall into the trap of what I call the “gated community theory “ of economics. When you spend all your time on a college campus or in contact with politicians and wealthy individuals, you are insulated from the true effects of inflation on the working class.The failure of economists to consider the plight of the working family creates an elitist bias to their work. Economist Paul Krugman would learn a lot less about the economy sitting next to the Obamas at a barbecue on Martha’s Vineyard than he would at the grocery checkout line. Watching shoppers try to balance the choice between record high beef prices and skyrocketing coffee prices would give my colleagues in academia a far better understanding of the effects of the government’s failures than discussing CPI trends or contractionary fiscal policy in the faculty lounge.
It has been over 400 years since a group of Spanish priests known as the School of Salamanca brought us the Quantity Theory of Money. While hordes of economists have since diagramed thousands of equations and produced shelves full of books, the nature of money has not changed. Money then and money now is a commodity whose value, like any other good, is subject to the forces of scarcity and demand. The more money there is, the less it will buy. Yet that basic information has not caught up to the 400 Ph.D. economists employed by the Federal Reserve’s Board of Governors.
When the government increases the money supply, it redistributes wealth without the permission or the direct knowledge of the people it affects. Economists may want to pass judgement on the theories of their colleagues in Washington, D.C., but they also need to challenge the morality of those actions. This failure to consider the immoral nature of economic intervention by the government is a glaring failure of the economics profession and as a former teacher of the subject I accept some of the blame.
As the Nobel Prize-winning Austrian economist Friedrich Hayek suggested, ultimately the solution to inflation and other monetary mayhem is to get the government out of the business of money. Separate money and the state, just as our ancestors had the wisdom to separate church and state. When it comes to money, just let the free market reign.
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