How Milton Friedman Can Save Us from Worsening Inflation
As we enter July of 2022, Americans all over the country will begin their July 4th preparations. They will soon be confronted once again with the harsh reality of elevated prices due to continuing inflation. This is no new phenomenon for the Biden administration, which has seen the inflation rate rise from a mere 1.4% in January of 2021 to 8.6% in May of 2022.
Americans are tired of hearing the constantly changing excuses from the Biden administration and supporting members of congress. It first began when inflation was resoundingly characterized as “transitory” in July of 2021, then Sen. Elizabeth Warren subsequently blamed greedy corporations. The most recent act of finger pointing was when Russia invaded Ukraine and domestic inflation was renamed by President Biden in his remarks to “Putin’s price hike”. This inconsistency leaves Americans with a basic question. What is the true primary cause of our inflation?
Fortunately, the economist Milton Friedman and his plethora of writing and research on the topic of inflation can provide some clarity. He was famous in proclaiming, “Inflation is always and everywhere a monetary phenomenon.” In his 1980 release of Free to Choose: A Personal Statement he delivers a dismissal of commonly blamed characters of inflation that are still eerily relevant today. “Government officials always find some excuse-greedy businessmen, grasping trade unions, spendthrift consumers, Arab sheikhs, bad weather, or anything else that seems remotely plausible.” The blame game by politicians is a long-standing tradition to dissuade the public from discovering the true culprit, government.
Friedman blames inflation on rapid monetary growth that exceeds output. Thus, the influx of more dollars creates artificial demand for the fixed amount of goods and services available. In addition, when more dollars are in circulation they lose value, which greatly impacts those in our middle and lower classes. The money supply since February of 2020 has grown by a whopping 40% to finance widespread federal relief efforts during the pandemic that has continued after the end of lockdowns and the re-opening of society.
Steep monetary growth has been a necessity for this current administration to finance large endeavors without raising taxes, such as the Build Back Better Plan, of which the official cost is $2.4 trillion dollars. Friedman asserts that monetary growth and fiscal recklessness work hand in hand.
“Financing government spending by increasing the quantity of money is often extremely attractive to both the President and members of Congress. It enables them to increase government spending, providing goodies for their constituents, without having to vote for taxes to pay for them, and without having to borrow from the public.”
The only cure to slowing inflation, in Friedman’s point of view, is to reduce the increase of monetary growth. Confidently writing that “a reduction in the rate of monetary growth is the one and only cure for inflation.” Fiscal policy, in and of itself, is not as much a contributor to inflation as monetary policy—but when fiscal policies are primarily financed through monetary means is when the two become interdependent.
Friedman writes, “Just as high government spending is one reason for excessive monetary growth, so lower government spending is one element that can contribute to reducing monetary growth.”
Unfortunately, with Joe Biden’s recent announcement of a new $5.8 trillion budget, it does not seem that this administration will adopt the needed fiscal restraints to accommodate such action.
With Federal Reserve chairman Jerome Powell repeatedly brushing off calls for reduction in the monetary growth in exchange for slight increases in interest rates, Americans can expect inflation to go unresolved for quite some time if such policies are continued.
The next time politicians or media pundits shift the blame of inflation to anything other than bad monetary policy, remember the words of Dr. Friedman, “It is tempting to believe that inflation is a temporary and mild matter produced by unusual and extraneous circumstances, and that it will go away of its own accord- something that never happens.”
This is when the long-forgotten practice of fiscal and monetary restraint is desperately needed.