Dr. Ben Carson: Biden's inflation crisis – here's the price we'll pay if we don't get spending under control

America’s fiscal house is not in order. The government spends trillions more than it takes in every year. For decades, our politicians have been more concerned with making speeches and raiding the treasury than sound economy” target=”_blank”>economics< held by the public increased more than 400% – rising from $5 trillion in 2008 to nearly $22 trillion by the end of 2020. Sadly, there are few to no political incentives for our politicians to act responsibly. But there is no free lunch, and the reckoning for our country’s fiscal profligacy is rapidly approaching in the form of inflation.

economy, or increases in general price levels of goods and services consumed across the economy, results when there is an increase in money available to spend, but not a corresponding increase in goods and services to spend it on. As Milton Friedman famously observed, “Inflation is always and everywhere a monetary phenomenon.”

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Recently, there has been a substantial spike in federal spending, exceeding $8.5 trillion (that’s eight-and-a-half million million, or $8,500,000,000,000) each of the past four quarters, and twice exceeding $10 trillion in a quarter. Congress decided that this spending was necessary to stave off the ill effects of the pandemic. 

But, as famed economist Thomas Sowell noted, there are no solutions, only tradeoffs. And Congress’ spending binge will almost certainly result in substantial inflation (and this is before taking into account the Biden administration’s proposed additional spending on infrastructure and other programs). 

It may be possible to create the illusion that there is a “free lunch” – avoiding at least the pangs of the most nebulous side effects – in the short run.  But, in the long run there is an inevitable adjustment to individual decision-making based on changed economic circumstances.

Further, politicians can benefit from inflation (notwithstanding the fact that Federal Reserve Chairman, Jerome Powell, has been openly campaigning that the central bank’s priority is to stimulate inflation), given preferences to use deficit spending in the short run, though this solution exacerbates questions of inter-generational fairness, such as why should tomorrow’s taxpayers fund today’s consumption. These issues should not be ignored. Today’s borrowing will saddle future generations with substantial debt, and negatively impact their standard of living.

The present and coming inflation will disproportionately harm the poorest among us.

Inflation is on the rise. The measure of inflation, called “core consumer price index,” in April increased to its highest level in 13 years, to 4.1%, and this is after an increase to 2.6% in March, which was the highest level since 2018. These increased measures of inflation are showing up even before a “full” reopening of normal activity across the U.S. economy. And given April’s shocking employment report, we should be watching this increase closely. No one wants to return to the bad old days of the 1970s, with high inflation and high unemployment. 

Worse still, the present and coming inflation will disproportionately harm the poorest among us. Inflation erodes purchasing power, and individuals with lower incomes and lower wealth rarely benefit from the “upsides” of inflation such as wage growth – which is least likely to accrue to less productive, lower skilled, lower wage workers – or higher equity and asset prices. Low interest rates and rising price levels generally erode the purchasing power and wealth of households, and harm those who save small amounts, since interest rate returns are effectively outstripped by inflation.

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Inflation can also lead to conditions that perpetuate dependency on government assistance programs. Generally, inflation has unequal effects, including the “modest, stable” price level increases supported by the conventional view of Federal Reserve intervention, with low-income, older households hit the hardest. This is because prices for goods consumed by low-income households are often more sensitive to inflation than are goods consumed by high-income earners. Consumption data between 2004 and 2015 show that prices of products purchased by households in lower income quintiles increased faster than prices for products purchased by higher income quintiles. 

And once inflation starts, it is hard to predict when it will end.  Where inflation is spurred or maintained by low interest rates, some can benefit, and those people will want it to continue. If inflation goes down, government borrowing costs may rise. Equity prices increase with inflation, so stock owners would see their wealth erode if inflation were to lower substantially. 

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The mortgage system and housing markets have also benefited from the low rate environment, so homeowners may be interested in home prices continuing to go up, even though those rising prices exacerbate housing affordability concerns for others. 

 A wise man once said “The first lesson of economics is scarcity. The first lesson of politics is to disregard the first lesson of economics.” That is more true today than ever. Hopefully, those in Washington will realize the error of their ways and return to fiscal discipline before the monster of inflation becomes too large to tame, and we are left holding the tail of the proverbial tiger.

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