Why inflation won't go away soon

MILTON FRIEDMAN published his classic paper on inflation in 1978.  He described 3 prior inflationary go-rounds that only led to higher inflation.  It goes like this.  Government initially inflates due to deficit spending (Vietnam and Great Society) followed by too much money chasing too few goods—inflation.  But the price increases cause consumers (70% of the economy) to cut back. This brings recession (1969,1973).  Politicians get cold feet at the sight of unemployment and overspend again.  This creates more inflation. It’s a cat-rat cycle.  You put a bunch of cats and rats in a cage.  Cats eat the rats and rats gang up on cats and eat the cats.  You get a lot of free skins.  In the case of inflation, govt and the bureaucracy gets the free skins of cheapened currency and lessened burden of debt.  But the people see their standard of living decline, jobs lost, and life savings shrunk.  Businesses see productivity declines, price controls, more regulation to try to curb prices, unions demanding big pay raises and govt demanding onerous taxes.  The whole country declines in malaise. But the bureaucrats find it easier to increase budgets (there is inflation!) and cheap currency means the real cost of national debt lessens.  Politicians say they can’t help further deficit spending because the Fed has raised interest rates and national debt must be serviced at higher interest costs much more. How much pain are the voters willing to take to tame inflation?  This likely drags on for years.

            Solution.  Fed creates tight money to reduce the “too much money” part. New blood in the politicians radically de-regulates business and lowers business taxes to increase the “too few goods”.  Productivity increases.  And it probably has to happen during a recession so that unions are scared to make high demands on wage increases. Meanwhile Reagan & Thatcher realized what many economists did not.  That if you cut taxes, govt actually gets increased revenue in a couple years. People and businesses stop fervently hiding their income from taxes, and actually pay more at the new lower rates. Plus the economy booms and they make more and pay more in taxes in subsequent years. (Laffer’s supply side economics). Caveat: This takes a number of years.

            We are just at the beginning of this long, hard road where Dem pols refuse to believe that deficit spending caused this and fantasize that more deficit spending will actually cure it. They’ve made enemies out of petroleum, gas, and coal, the 3 products necessary to make about 90% of all manufactured goods.  They are trying to remake social order by running off the police, border control, and military recruitment.  One of the great lessons in economics is that businesses die in a kleptocracy, central planning or an anarchy.  And it will take two more years to get Republicans into power.  But will they have the will to enact the solution?