Milton Friedman always pointed out that inflation, at its heart, is a monetary problem. It is not caused by gas stations jacking up their prices out of greed or by Home Depot gouging lumber customers — it is caused by too much money chasing an insufficient amount of produced goods and services.
In other words, when people have pockets full of money but the economy is not producing things for them to buy, you get inflation.
This was a classic and endemic problem in the Soviet Union. That late and unlamented socialist country had an extremely unproductive economy, but its government loved to give people pay raises in order to mollify them. As a result, people had full bank accounts (or, more likely, mattresses filled with cash), but there was nothing to buy with the money, hence all the jokes about standing in lines and visiting stores with empty shelves — kind of like the United States today, except worse.
America is suffering its worst inflation since the Carter era because its leaders didn’t know when to stop with stimulus payments. When COVID hit, some amount of government aid seemed to make sense. After all, people were being forced by the government to stay home and not work or run their businesses. But then, in a space of about two years, governments shoveled about $10 trillion into an economy that was producing fewer goods and services than it had been before. Also, 30-year mortgage interest rates plummeted to as low as 2.5%. Money was easy to come by, and goods and services (including houses) were few and far between. Reality finally caught up.
President Joe Biden’s contribution to the problem, his $1.7 trillion stimulus bill in early 2021, is widely believed by economists of every political stripe to have been the tipping point, leading to the current disastrous levels of inflation.
But some state and local governments are underterred and seem determined to make the problem worse.
California has famously begun sending out $600 to $1,100 stimulus checks to its citizens, depending on their family situation. Governments in Maine, New Mexico, South Carolina, and a dozen other states are implementing similar stimulus policies. A county in New York is now sending $200 checks to its senior citizens. Mind you, this is not means-based welfare — it is just free money. It is supposed to help people cope with inflation, but it is actually helping cause inflation.
Not to compare California or Onondaga County with the Soviet Union, but economics works the same way in both. In similar fashion, when California lawmakers proposed to give first-time homebuyers grants equal to 17% of their new home purchase price, they were threatening to make the price of housing in California go up even faster.
There is a reason a handful of Senate Democrats resisted Biden’s plea to pass yet another multitrillion-dollar spending bill. There is a reason the Federal Reserve is now tightening the monetary supply and raising interest rates. These are needed correctives at a time of 8% inflation.
The federal government has the biggest effect on inflation because it controls the currency. But that doesn’t mean it is the only government that can affect inflation, especially at a time of slow or negative economic growth like the one the nation is experiencing now. State governments may think they are improving the situation by handing out cash to “make up for” inflation.
Here’s a better idea: If you have all that money lying around, try paying down your state’s unfunded pension liabilities. Budget surpluses don’t materialize every year. Don’t just go around handing out cash and making a bad problem worse.
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