If budget deficits caused inflation, there would be no budget deficits


By John Tamny for RealClearMarkets

At the risk of being called a “name dripper,” I mention the name Arthur Laffer. I am lucky enough to call him a friend, and when I see him I always remind him that he has greatly improved the conditions of the economic debate. Think about it.

Laffer’s calls for tax cuts in the 1970s were met with much economic criticism at the time. Also in politics. At the time, the view was that tax cuts would trigger an inflation breakout. One person who disagreed with such an abjectly foolish point of view was Ronald Reagan.

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In 1980, his economic platform included tax cuts, only for George HW Bush (in the GOP primary) and Jimmy Carter (in the general election) to argue that cuts in punishment at work would cause inflation.

On national TV, Carter was on, in one of their debates, Reagan wondered why it was inflationary for people to keep what they earn, but not inflationary for the government to take what people earn to spend it. to give. Reagan won by a landslide.

Better yet, the tax cuts Reagan and Laffer advocated were in no way inflationary. To say otherwise is a non sequitur. Inflation is currency devaluation. What the hell do tax cuts have to do with the latter?

Still, it’s worth pointing out that Reagan, Laffer, Steve TBEN, and a few others won the tax debate. How do we know this? We know because today no Republican with serious national ambitions speaks out without talking about big tax cuts. Undoubtedly more revealing, no Democrat with serious national ambitions ever talks about reducing tax rates to the 70% that prevailed in the 1970s, and before Reagan, Laffer et al. changed the discussion.

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And now when I see Laffer or TBEN (more namedropping), I always compliment them on the remarkably foolish thinking in others that they have overcome.

The sad thing about all this is that we seem to be rushing back to the folly that Laffer et al once endured. Without defending the horrendous tax that is government spending, it is not an inflation accelerator. What should make Laffer sad is that even conservatives are making the previous argument.

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They argue against all logic and reason that government spending fosters an ‘excess’, inflationary ‘demand’. No not at all. Demand follows production, and governments produce nothing. Governments can only spend to the extent that the productive have less to spend.

Where sadder gets sadder is that members of the left have been all too happy to draw the obvious, rather brain-dead corollary of the conservative argument prepared by nighttime hawks on the right who oh so coincidentally discovered that “inflation” comes from government spending in 2021-2022. Lefties note that if government spending is driving more ‘demand’, so should tax cuts.

Yes, inept Republicans have given even more confused Democrats the argument to abolish tax cuts.

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But the demand is a consequence of the supply. Tax cuts only mean that producers are allowed to love what they produce more than politicians. See Reagan. There is no new “demand” that is created so much as the “demand” remains in the hands of those who created it. Conservatives once understood this truth, but after inventing entirely new causes of inflation in 2021-22, they are now having a backlash. If demand is inflationary (it isn’t), then government spending AND tax cuts cause inflation.

You suspect Laffer is secretly disappointed? After working so hard to strengthen the economic discussion, both sides are twisting it. Most notably, conservatives tend to distort the discussion the most.

Which brings us to the budget deficits. On them, as any sane economic thinker would say, government spending is the real tax. Then focusing on deficits is making a distinction without a difference. The problem is the expenditure, not how the precious resources are extracted.

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Still, it’s really comical to see conservatives who never cared much about “deficits” under Reagan, Bush (HW and W.), and Trump, suddenly claiming they are wildly inflationary. An opinion piece in the Wall Street Journal by a GOP cheerleader carrying a card laughably claimed that the $1.9 trillion in coronavirus spending signed by Joe Biden drove the US into inflationary territory. You can’t make this up!

Suppose when Trump signed a $2.9 trillion law subsidizing horrendous lockdowns, GOP pundits were completely silent on “inflation.” In reality, deficits have nothing to do with inflation.

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To see why, ask yourself what you’re buying when you buy government debt, such as U.S. Treasury bonds. With the latter, you buy future income streams in dollars. Translated for those who need it, neo-inflationists on the right argue that deficits, apparently because they are deficits, are then reduced by devaluation.

Okay, but if it’s true, conservatives who are known to believe in markets pretty implicitly say that markets are remarkably stupid. Really, who would buy government debt if the dollars paid out through the debt securities gradually lose value due to inflation? Again, inflation is currency devaluation.

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The fact that inflation is a currency devaluation shows, of course, how flamboyantly foolish the deficit part of the economic debate has become. Indeed, if deficits cause inflation, then there would be no deficits. Do you understand? Increasingly, the experts are not doing that, which could lead to the undersigned changing the bouquets that stand in Laffer’s way. No doubt he endured a period of remarkable economic illiteracy, albeit one that can only rival today’s illiteracy.

Syndicated with permission from RealClearWire.

John Tamny is Editor of RealClearMarkets, Vice President at FreedomWorks, Senior Fellow at the Market Institute, and Senior Economic Advisor to Applied Finance Advisors (www.appliedfinance.com). His latest book, The Money Confusion: How Illiteracy About Currencies and Inflation Sets the Stage For the Crypto Revolution, is out today.

The opinions of employees and/or content partners are their own and do not necessarily reflect the opinions of TBEN.