Hendrickson’s View

Mark W. Hendrickson

Mark Hendrickson is an economist who recently retired from the faculty of Grove City College, where he remains a Fellow for Economic & Social Policy for the college’s Institute for Faith and Freedom. These articles are from The Epoch Times and The Institute for Faith and Freedom, an online publication of Grove City College, in Grove City, Pennsylvania.

Specious Theories Concocted to Justify Inflation

From an economic point of view, some of the ideas being proposed by current policymakers in Washington, particularly the president’s Council of Economic Advisers and top officials at the Federal Reserve, cause this economist to scratch his head in wonderment.

Take the Fed, for example. The central bank hatches policies wielding major economic impact, and yet the explanations and rationale for its policies can seem bizarre, self-serving, or just plain glib. With inflation having become an issue this year, the powers-that-be are devising some bogus “economic theories” that portray today’s higher inflation as a supposedly good thing.

The Wall Street Journal’s Greg Ip recently reported on some of these theories. For example: “Economic theory says modestly higher, stable inflation should mean fewer and less severe recessions.”

Oh, really? In the first place, the Fed hasn’t hit its inflation target for many years, so it doesn’t have any demonstrated ability to guarantee “stable inflation” at any level. Second, both high and low inflation periods have been followed by recessions. Thus, to suggest that there is a magical inflation figure that is a recession tonic is specious. In fact, inflation destabilizes the economy by increasing the uncertainties about the prices that both consumers and producers face. Inflation-induced price dislocations complicate economic decision-making and discombobulate production and employment, and so are one of the causes of inflation.

Mr. Ip also reported that “if inflation ends up closer to 3 percent than 2 percent next year, raising the [Fed’s inflation] target would relieve the Fed of jacking up interest rates to get inflation down, destroying jobs in the process.”

In this fairy-tale view, the experts are saying to simply let inflation rise — that is, let the purchasing power of our currency erode at a faster pace — and we will avoid economic pain.

Question: If avoiding painful economic adjustments, such as shifts in employment, were simply a matter of boosting prices, why didn’t earlier generations of central bankers adopt permanently expansive monetary policies to create constant inflation and uninterrupted economic bliss for the people?

This is the silly superstition (popular today under the rubric of Modern Monetary Theory) that the way to raise standards of living is to print more money. Again, if wealth creation were that simple, the process would have been mastered centuries ago and nobody would be poor. Instead, money printing can lead to hyperinflation — the destruction of money — which it already has in over 50 countries, always resulting in extreme societal impoverishment and disruption.

Ip further writes, “In bad times though, inflation allows an employer to cut labor expenses by freezing pay so inflation gradually reduces real wages. That isn’t possible with zero inflation: The employer would have to cut jobs or pay.”

Sorry, but workers have seen through that illusion for many decades with numerous union contracts including COLAs — cost of living adjustments — that protect workers against inflation’s not-so-stealthy real pay cuts. Also, American economic history includes periods when wages fell, but standards of living rose. To say that pay cuts are “impossible” is to ignore history.

Ip cites two former “senior staffers at the Fed” who assert that if the Fed were to engineer inflation of 3 percent instead of 2 percent, then “unemployment would be 0.75 percentage points lower than otherwise.”

This is another iteration of the discredited Phillips curve theory, which states that when inflation rises, unemployment falls. Remember the 1970s? Both inflation and unemployment rose at the same time then in a grim scenario known as “stagflation.” Monetary authorities may be able to print money, but they can’t print jobs.

In delicious understatement, Ip writes, “It is unclear if 3 percent inflation meets the Federal Reserve Act’s mandate for stable prices.” Of course, it’s clear. By definition, prices aren’t stable, whether they are rising at 3 percent or 2 percent per year.

Ip also reports that several of President Biden’s economic advisers expect inflation to be 3 percent a year from now, so the Fed should raise its inflation target to 3 percent rather than try to lower inflation.

What would that actually accomplish? By moving the goal posts of the Fed’s target to fit the actual economic reality of 3 percent inflation, I suppose the Fed would proclaim, “See how successful we’ve been?” But other than massaging the Fed’s reputation, Americans would take it on the chin. At 3 percent inflation, the dollar would lose half its value in only 23 years, instead of the 34 years that it would take at 2 percent inflation. Also, savers, who currently are earning about 0.1 percent in their bank accounts, would continue to have their wealth bled away by real interest rates being even more negative than they have been for the past decade-plus.

Pardon the cynicism, but perhaps we need to consider the possibility that the elites in the Washington establishment are more interested in burnishing their own reputations than in pursuing sound economic policies.

Current Tax Proposals: Critiquing Two Promises

I have written about “Washington’s Bi-Partisan Fiscal Folly” for years, caused by chronic overspending. Regardless of which party holds the upper hand in Washington, the federal budget deficit persists. In the first two full fiscal years of the Trump presidency (when there was a GOP majority in Congress), the annual federal deficit rose from $584 billion to $668 billion in 2017 and then to $779 billion in 2018. Then, with a split Congress, it rose again to $983 billion in 2019 before exploding to a COVID-turbo-charged deficit in excess of $3 trillion in 2020.

Currently, with a Democratic president and Congress, we may ask what is the current outlook for the federal deficit. Fiscal year 2021’s federal deficit is also expected to be a COVID-inflated $3 trillion. Most experts assume (or hope) that the last two years will prove anomalous, and that with COVID relief in the rearview mirror, a baseline budget deficit of “only” around $1 trillion will remain. Against that backdrop, President Biden and congressional progressives propose to increase federal spending by several trillion dollars for infrastructure and for a variety of social and environmental programs. In addition, Democratic leaders have proposed various tax increases to fund that spending.

I will remain silent here about the relative merits of the various spending and tax proposals. I will comment only on the two major promises that the proponents of these spending and tax increases make: that the new taxes will fully cover the costs of the additional spending, and that the tax reforms will make the rich “pay their fair share.” President Biden has stated in regard to the new spending, “It is zero price tag on the debt. We are going to pay for everything we spend.”

There are two proposed spending bills. The $1.2 trillion infrastructure bill includes $550 billion for new spending. That total is spread over five years, so we’re looking at $110 billion per year in new spending. The $3.5 trillion spending plan is all new. It is spread over 10 years, and thus adds $350 billion of new spending per year. Thus, adding $110 billion and $350 billion, the spending bills would add $460 billion to the annual baseline budget deficit of $1 trillion.

Now, the revenue side of the budget: To pay for an additional $460 billion per year of new spending, Democrats have proposed several dozen changes to the tax code, both on corporate and personal income. The best summary I have read of projected revenue increases is that, “Overall, the House Democrats’ tax plan is estimated to raise $2.2 trillion over a decade, with $1 trillion coming from tax hikes on high-income individuals, $900 billion from corporate and international tax reform, and additional revenue from increased tax compliance.”

So: $2.2 trillion divided by 10 years means that Democrats expect to raise $220 billion per year with which to fund $460 billion per year of new spending. That would add another $240 billion to the annual deficit.

The actual figure would likely be far higher. On the spending side, the nonpartisan Committee for a Responsible Federal Budget has calculated that the true cost of the allegedly $3.5 trillion bill would actually be $5 to 5.5 trillion. This opinion is shared by The Wall Street Journal, which has dropped its customary decorum and branded the $3.5 trillion proposal “one of the greatest fiscal cons in history,” and accused the proponents of this spending package of “blatant fiscal dishonesty.” And on the spending side, Democrats are proposing multiple tax-break subsidies to higher-income taxpayers (“the rich”), including paid family leave, rich child-care allowances, giving households earning up to $800,000 per year, $8,000 to buy electric vehicles, and repealing the cap on the federal SALT (state and local tax) deduction. Fifty-seven percent of that last tax break would go to the top 1 percent of filers, according to the Tax Policy Center, giving them an average tax cut exceeding $35,000. Indeed, according to the Joint Committee on Taxation, “restoring the full SALT deduction would cost the U.S. Treasury $88.7 billion in lost revenue for 2021 alone.”

It should be clear from those figures that the proposed tax reforms will not come close to paying for the proposed spending increases. Furthermore, it is plain that all the talk about making the rich pay their fair share is hollow rhetoric, cynically designed to win support from advocates of social justice while doing nothing to meaningfully reduce inequality.

There is an old saying that if something sounds too good to be true, it probably is. Indeed, the Joint Committee on Taxation determined that the proposed tax reforms, in addition to their generous handouts for the rich, would not exempt taxpayers earning less than $400,000, as President Biden originally promised, but instead would raise taxes on families earning as little as $50,000 per year.  Most of you won’t be surprised to know that political rhetoric often doesn’t conform to economic reality. The current spending and tax increase proposals are a vivid case in point.

Learning to Defuse Anger Through Respectful Dialogue

We all know how politically polarized American society has become. There are intensely held, differing opinions about what government should or shouldn’t do. One particularly regrettable aspect of this polarization is that families have been fractured and friendships ruptured. How sad — and perhaps unnecessary.

With millions of Americans making plans to gather this week to celebrate Thanksgiving, some tips on how to defuse potentially explosive disagreements are timely.

The ability to agree to disagree is venerable wisdom. For generations, sales managers have cautioned their sales agents never to discuss politics or religion with their prospects. Why risk provoking people by saying something that might offend their most deeply held beliefs?

From the beginning, the United States has been a pluralistic society composed of individuals holding a multiplicity of political and religious beliefs. Over the last few generations, such pluralism has affected countless families. Many Americans abandon the political and religious beliefs of their parents. Sometimes each sibling has a different set of beliefs. This can be disorienting, frightening, depressing, or threatening to other family members.

Here, let me share a bit of wisdom I picked up in my criminal law course at the University of Michigan School of Law long ago. This one gem was worth the price of admission. Professor Yale Kamisar (in his 90s today, God bless him) contrasted a clever person — one who focuses on how he’s different from other people — with a wise person — one who focuses on how he’s like others. A lot of Americans today could benefit from heeding that adage.

The reason why so many conversations, whether with total strangers, casual associates, coworkers, friends, or relatives, become explosive and divisive is that the parties to the dialogue have arrived at different conclusions on an issue. The unfortunate tendency is a feeling that we have to “prove” and convince the other of the rightness of our position. The problem with this is that the more energetically one side strives to prove his correctness, the more he causes the other to become defensive and push back. Showing another person that you intend to prove him wrong is bad psychology. It undermines comity and mutual respect. Rather than try to defeat the other, try practicing the Golden Rule. You wouldn’t want someone telling you that you’re absolutely, horribly wrong about an issue, so why would you try to convince your interlocutor that he or she is ridiculously wrong? What do you hope to accomplish by such an aggressive approach? You’re more likely to render further dialogue difficult, if not impossible, and perhaps end any possibility for a truce and peaceful coexistence.

While you may have come to opposite conclusions, you might be surprised by how much you have in common with your interlocutor, if you look for it. Think about this: Do you really think that your relatives or friends have gone over to the dark side and become evil people just because they favor a different politician or policy than you do? Try asking them what the overriding goal is of the position they’re taking. What motivated them to take the position they now hold? Most issues seem less black and white when one takes that approach. It’s not that one side wants to hurt their fellow beings and one wants to help them. Most people want to do what’s right and good. Where they differ is in their perceptions and in their understanding (or misunderstanding) of the facts or errors to which they have been exposed.

Take global warming, for example. Many Americans desperately want to phase out fossil fuels very quickly despite the hardship this will impose on many people, particularly the poor. The average person (at least, those who aren’t hardcore environmentalists) who takes this position doesn’t do so out of unkind motives, but because (like poor Greta Thunberg, Alexandria Ocasio-Cortez, and millions of others) he or she believes the steady diet of climate catastrophe hysteria that the schools and media have force-fed people. Millions of others, by contrast, believe that the appropriate human response to Earth’s ever-changing climate is continued economic development so that human beings can better cope with Mother Nature’s changing conditions and periodic ferocity. Both sides want what’s best for people — that much we have in common — and that should cause us to respect the good intentions of our opponents even though we disagree with their preferred political agenda.

Another example: The socialistic desire to have the federal government mandate and fund various forms of support for various groups of citizens is popular among some, anathema to others. The socialists will say how much they want to help those in need and how unfair our free-market system is because it leads to economic inequality. Here, a gentle explanation of the difference between justice and “social justice” might be helpful. So might sharing some of the long historical evidence that socialism has never worked and an economic explanation of why it can’t work, and why inequality is better than equality for the economic well-being of a population. Again, though, you can easily discern when the other is willing to exchange ideas and when his only interest is in proving you wrong, in which case it’s best to move on to less controversial topics.

After having the humility to try to understand the motives and goals of others, perhaps the most important rule of thumb in keeping political discussions from degenerating into anger and condemnation is to reject the temptation to believe that you have to convert the other. Have enough confidence in yourself so that you don’t feel that you have to convince others of the correctness of your position. If they’re willing to engage in give-and-take about how they arrived at their conclusions, you can have a respectful discussion. If, on the other hand, either of you wishes only to harangue, criticize, and condemn the other, it’s time to politely withdraw from the conversation or to steer it in another direction. In short, find common ground. Respect the person, even if you despise his or her opinions (another version of “hate the sin; love the sinner”).

As you gather for Thanksgiving this year, may your gathering be radiant with gratitude for the gift of life and for the privilege of living in a country where citizens have been freer than most of the human race ever has been — a blessed country that has made immense progress already and has the potential to achieve so much more. Love the good motives in your friends and loved ones, and don’t give up on them because you differ on complex issues of public policy. There’s so much more to life than politics! Happy Thanksgiving, everyone.     *