Story Stream
recent articles

It’s likely no longer relevant given British Prime Minister Liz Truss’s unfortunate U-turn on proposed tax cuts, but at the very least the episode provides readers with a sense of what the policy debate was like in the 1970s. Left and Right in the 2020s are near-harmonious in their belief that tax cuts cause inflation, or government spending. Please read on. It’s the 1970s all over again. 

In a recent opinion piece, right-of-center New York Times columnist Ross Douthat referred to the tax cuts in Great Britain as “recklessly inflationary.” In the Washington Post, left-of-center columnist Catherine Rampell argued that “giving the public even more cash to spend will almost certainly make inflation worse” in her own critique of Liz Truss’s tax cuts.

Republican George H.W. Bush felt Ronald Reagan’s proposed tax cuts were inflationary, as did Reagan’s eventual opponent for the White House in Jimmy Carter. Voters disagreed, but then policy should never be made by counting heads.  Reality should tell the tale, in which case the rising dollar in the 1980s ridiculed the notion too much economic freedom brought with it currency debasement.  

On the other hand, conservatives who never expressed much disdain for government spending in the decades since the 1970s, have in 2021-2022 found overnight religion about it. Their new favorite economist is left-of-center Lawrence Summers who, like his former conservative opponents, thinks government spending has a multiplicative impact on “demand.”

While “inflation” was never mentioned when conservatives helped President Trump pass his $2.9 trillion, lockdown-subsidizing, coronavirus spending bill in 2020, supposedly President Biden’s $1.9 trillion coronavirus spending bill in 2021 was the match that lit the inflation fire. That Trump promised something bigger if re-elected has seemingly been forgotten, as were decades of indifference to government waste. Some would call it politics.

Whatever the explanation for the sudden parsimony on the Right, conservatives presently argue a la Summers that government spending fosters “excess demand” that drives prices up. Apparently the Biden administration is the cause of the “excess demand.” As a recent editorial from a prominent conservative publication asserted, “The spending decisions of the Biden Administration and Democratic Congress” have “done great harm” on the inflation front. Both sides miss.

Up front, there’s no such thing as “excess demand.” All demand begins with production, or supply. What’s amazing about the conservative arguments of 2022 is that they thoroughly reject the arguments made by conservatives in the 1970s about supply logically preceding demand. Decades after winning an argument rooted in truth, conservatives are now parroting the Keynesian spending multiplier ignorance long promoted by their free-lunch opponents on the Left. Too bad there’s no basis for their transformation.

Government doesn’t produce anything, so it logically can’t increase “demand.” Government can only shift spending power from one set of pockets to another. While government spending is a horrid, economy-sapping tax that shrinks the capital base, the notion that it boosts demand brings new meaning to double counting.

On the other hand, tax cuts that keep money in the hands of those who produced the wealth don’t increase demand either. Again, all demand begins with supply. If we ignore that inflation isn’t a supply/demand concept as is, it can’t be stressed enough that the only way to increase demand is to increase supply first. In other words, supply and demand mirror one another. Kind of a statement of the obvious, but the obvious presently needs stating.

Let’s please think about this with what pundits imagine inflation to be top of mind. A combination of conservative and liberal thinkers believes government spending is pushing up prices, while a different combination of liberals and conservatives believes tax cuts push up prices. Neither does.

Applied to government, does anyone seriously think it taxes away our dollars in order to store them? Such a view assumes that there’s actually a Social Security “lockbox” too. More realistically, what government takes in it spends, not to mention how its ever-growing revenue collections enable even more borrowing by Treasury to fund even more spending. Congress once again doesn’t sit on those dollars as much as it redistributes them for immediate spending; including by government employees who want cars, apartments, and restaurant meals as much as those of us in the private sector.

About tax cuts, New York Times reporter Jim Tankersley reported on expert disdain for Truss’s tax cuts based on “early results” gleaned from the Donald Trump tax cuts that apparently “mostly helped the economy by temporarily increasing consumer demand, an outcome that could prove particularly damaging in the high-inflation environment that Britain and much of the world are experiencing.” Oh dear…

Tax cuts don’t increase consumption as much as they reduce the government’s redistribution of what we produce. Government spending doesn’t increase consumption as much as it increases the government’s control over who consumes. In short, the fruits of production are invariably consumed; the difference being whether Nancy Pelosi, Mitch McConnell and Joe Biden decide what to do with your wealth versus you. The answer should be obvious.

So should it be obvious that there’s no increase in “demand” care of government, or government reducing its take of what we produce. The latter is just politics, while inflation is a devaluation of the currency that has nothing do with either. Oh yeah, the economy soared and inflation collapsed under Reagan amid a rising dollar. Presidents get the dollar they want.

Talk of inflation that includes discussion of tax cuts and government spending is a non sequitur in case anyone cares. They didn't in the '70s. 

John Tamny is editor of RealClearMarkets, Vice President at FreedomWorks, a senior fellow at the Market Institute, and a senior economic adviser to Applied Finance Advisors (www.appliedfinance.com). His next book, The Money Confusion: How Illiteracy About Currencies and Inflation Sets the Stage For the Crypto Revolution, comes out on October 18th. 

Show comments Hide Comments