Inflation and the role of the government.
Nathan Jeeves | September 22nd, 2022
Introduction
During the tumultuous years of the pandemic, with political and economic uncertainty, many politicians and world leaders seemingly felt great pressure, whether internally or externally, from their political party platform or voter base, to immediately act with national lockdowns on economic and social activity. During this outbreak period as countries attempted to enact damage control, locking down entire populations and freezing the economic workings of a normal functioning free market economy, people were compensated for staying in their homes based on protecting others in the forms of furlough schemes and other such compensation to partially similar ends such as stimulus checks. However, many warned about the potential warped attention being paid to imminent health concerns of the pandemic compared to the plausibly equal if not more severe, though less publicly visible, future financial and economic effects of putting a pause on critical economic activity. Those same prophecies of a bleak economic landscape because of lockdowns of the populous today proclaim that the rising cost of living, wage rate slump, and a plethora of other financial and economic realities of the present day under the umbrella of inflation are the results of policies enacted during the pandemic period materializing.
But is this claim correct and is this worldwide inflation something that can be explained? Maybe such a topic that has such a broad impact as the cost of living is something we should spend time exploring.
Inflation, what is it?
To begin to even start to theorizing and debating solutions to the problem of inflation it is best that we are clear on the issue at hand; inflation to be simply put is the rise in prices, which can be translated as the decline of purchasing power over time: it is what everybody across income levels and will soon enough notice through some medium or another, whether you are in a supermarket purchasing daily essential seeing the receipt for your eggs, bread and milk at the check-out or a real estate developer’s purchasing at bulk orders of timber from a supplier, everyone will notice things increasing in price in times of high inflation as they are today.
With the prices hitting everybody hard in their pocket, it is normal to wonder how this inflation came about. After all, what has changed from times past when prices of everything were seemingly more affordable? Is it that businesses overall are upscaling their products or services on mass to accommodate an increase of higher market clientele? Is it the greed of businesses and producers is going unchecked? Or is it something simpler?
In the science of economics, scholars such as Milton Freidman have held the unwavering position that ‘inflation occurs on the whole from one source and one source alone’, and that is those in control of the scarcity of the circulating money supply- those in power with control of the printing press of cold cash. When governments find it politically viable to promise widely desired public functions such as furlough schemes during pandemic lockdowns without wanting to enact taxes likely to collect such capital to pay for the furlough schemes and other public wants more generally, what occurs in such scenarios is leaders in the dominion of cash printing press choose to finance such a difference in tax collected and money spent by printing more of it, essentially degrading scarcity of money people have. This process may, in fact, help people in transitory financially tough circumstances but not without the gradual devaluing of people’s earnings: in a way, politicians in this sense can avoid a direct tax increase whilst employing a secret tax in the form of the general erosion of purchasing power. Though despite such negative outcomes of money printing carelessly such practices may be politically successful as the voting populous may see no correlation between policies enacted years before and the economic and financial struggle, they see years later: which might go some part in explaining why inflation is such a prevalent phenomenon.
Inflation attitudes and proposed solutions
Today we are faced with the consequences of past actions, whether correct or unwise we have to deal with them, and ironically much like in the landscape of the 2020 pandemic era which may have caused those with economic policy influence a few years ago to act in ways which led us to the economic challenges faced today, today world leaders scramble to find solutions to the current issue, this time inflation and feel the pressures of a call to action and to legislate solutions to such a widely impacting problem. More recently solutions proposed have been in the form of the recent ‘inflation reduction act’ in the U.S which Penn faculty affiliated with the Kleinman Centre recently gave their analysis on, theorizing the recently passed Act will potentially reduce inflation in the short term and increase inflation in the long term, in essence zeroing out any real lasting and noticeable reduction in inflation. With opinions such as these it is hard to stay optimistic about solutions to inflation, after all, if government spending got many nations into this problem, would it make sense to adopt a similar strategy to get them out of it? Only time will tell if inflation is able to be prevented and controlled as varying countries deploy different tactics to tackle the problem and assess the resulting effects, until then some seem to feel that the damage has already been done to world economies and there is little to be done to significantly minimize the effects, instead maybe the best thing to do is realize mistakes made and look to the future remembering prevention is the best cure
is it inflation inevitable?
If we are to believe that inflation is truly never really able to be entirely mitigated after the proliferation of new cash into circulation, a good question to ask is ’is it inevitable?’
Can we look to the future and learn from our mistakes to not repeat them?
The answer to this is that only the people in those countries of democracies and in control of who has representative power must in aggregate have the wisdom of the past, remembering with fidelity the consequences of wanting public services and schemes advertised by politicians without looking at the means used to attain them.
Without widespread awareness of the consequences of excessive government spending, people of the world may continue this harsh cycle of inflation for generations to come.