In his most recent letter ("Who is perpetuating a false narrative?" March 31), David Forstadt correctly restated, and now appears to accept, the major point of my March 25 letter: federal spending has since 1933 not been constrained by the amount of revenue it collects, that is, it does not need to raise revenue by taxing or borrowing in order to spend.
As I stated, this insight was well known to the economists who helped guide the economy, without undue inflation, out of the Great Depression, through World War II, and into the 1960s with its massive public works programs and a moon shot. He glossed over that part of my letter. These economic understandings preceded Modern Money Theory (MMT) by about 50 years.
Nobel-winning economist William Vickrey (1914–96) also preceded MMT and in 1996 wrote “Fifteen Fatal Fallacies of Fundamental Financial Fundamentalism.” He pointed out the time was long gone when monetary policy, as espoused earlier by Milton Friedman, could stimulate the economy through lower interest rates increasing sufficient profit-motivated net capital. Friedman’s idea that fiscal policy was to be avoided in favor of monetary controls has been categorically rejected as ineffective.
More myth. Now Mr. Forstadt changes course and claims that using fiscal policy to stimulate the economy by increasing the federal deficit, either by spending more or taxing less, or both, is “both damaging and irresponsible.” Why? According to him, it automatically causes inflation, or as he tries to explain it, people will be “paying more” for stuff. His only evidence: Venezuela.
First, not all nations have monetary sovereignty like the U.S., U.K., Japan, or the Eurozone; some have borrowed heavily in U.S. dollars or other foreign currencies (e.g., Venezuela, Ukraine, Argentina, Turkey, Brazil); some have abandoned their national currency (e.g., all 19 countries in the Eurozone, Ecuador, Panama).
Second, we have evidence to prove that large increases in the federal deficit do not automatically cause inflation: the 2017 Republican tax cut added $2.3 trillion to the deficit without any indication of significant inflationary pressure. Likewise, the 2020 $2.2 trillion CARES Act.
Third, when the economy is performing at less than its full capacity, as it is now, any increase in demand caused by government spending into the economy would be met by capitalists investing to increase supply (hiring more workers, opening up plants and shops). Mr. Forstadt would have you believe that the business world would fall into a deep sleep and let prices rise — no expansions, no new entrants, no competition.
Is this to say that inflation is not a risk? Of course not; however, inflation is not a risk that is currently studied by Congress before it passes any tax or spending bill. It should, and it will discover accelerating inflation is a dynamic process. Price increases do not just happen, certainly not across all categories of consumer goods at the same time, and not necessarily because of government spending.
Knowing how to quell inflation requires analysis. For example, the Supreme Court will be deciding a case by June challenging the constitutionality of the Affordable Care Act. It could throw out provisions protecting pre-existing conditions or some of the cost containment controls around medical reimbursements and prescription drug prices. It is foreseeable that inflation could result when health insurance companies raise premiums and discriminate based on pre-existing conditions and when pharma companies get aggressive with prescription drug prices. The Federal Reserve raising interest rates or Congress passing a tax increase would not lessen that type of inflation.
I encourage everyone to do their own research about macroeconomic principles and policies. Learning about them in the newspaper should only be a starting place.
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