Inflation hurts our spending capacity, diminishes our quality of life, dashes our hopes of upward mobility, and damages our trust in the cornerstone institutions of banks, dollars, and government.
Yet inflation is all around us. After purchasing my usual burrito bowl at Chipotle recently, I had to review my receipt to ensure I had been appropriately charged! No more guacamole add-ons for me … who has money for that?
Gas prices have noticeably increased in the last several months. Grocery bills persist in rising. And I pity anyone who wants to purchase a home right now. Yet for all the obvious challenges brought on by inflation, the federal government continues to enact policies that cause it. Namely: spending bill after spending bill.
The Federal Reserve is a tool created by the government to (supposedly) protect our financial supply and stabilize the economic environment. Generally speaking, I applaud how the Fed has sought to create a so-called “soft landing” in the aftermath of a global pandemic and the myriad supply chain problems that occurred as a result.
Learn more about the Fed:
The problem is, despite being a government agency, the Fed now finds itself working in direct opposition to the Federal Government. This is classic bureaucratic dysfunction.
Here’s how it works: the Fed raises interest rates to cool the economy, primarily to combat inflation. Raising interest rates is a common-sense way to accomplish this. This approach is based on the principle that higher borrowing costs discourage both consumer and business spending, which can help stabilize prices. In theory, it leads to an economy with less new money floating around.
The challenge is that even as the Federal Reserve raises interest rates, the federal government continues to pass myriad spending bills that do precisely the opposite: They cause enormous amounts of new money to float around.
When lots of new money is available in the system, people are eager to spend it. That’s an increase on the demand side of the economic curve. Meanwhile, we can assume the supply side remains constant since there have been no substantive changes there.
The result of increased demand with steady supply?
You guessed it: higher prices.
Sellers are motivated by profit. When their customers have more money available, they’re willing to pay more for the same products. And when the entire economic environment has more money in the system, this creates inflation.
See also: Fiscal Policy Myths DEBUNKED (You’re definitely gonna want to watch #4)
And right now, the excesses of government stimulus and spending bills are supplying inflation-causing new dollars at a frightening rate.
The New York Times recently ran an article along these lines, noting:
“The I.M.F. said that U.S. fiscal policies were adding about a half a percentage point to the national inflation rate and raising ‘short-term risks to the disinflation process’ — essentially saying that the government was working at cross-purposes with the Fed.”
Nailed it. The next line in the article will not surprise you either:
“Biden administration economists, and some analysts on Wall Street, reject that view.”
Of course they reject it! Accepting it would mean accepting fault for passing absurd spending bills that ultimately hurt Americans and the global economy far more than they help.
As classical liberals who believe the market functions best with minimal government interference, this is a classic case study that supports our economic principles. So now, let’s consider a couple of practical examples that illustrate how government spending leads to inflation.
Free Lunch
Unsurprisingly, the government disagrees with the principle that “there is no free lunch.” Instead, since the pandemic, the government has consistently broadened the guidelines determining which students and school districts do benefit from free lunch (and breakfast) programs. The result is that many children whose parents make six figures now get free school meals.
Consider the impact on local grocery stores when, suddenly, millions of federal dollars flow into their communities to purchase food for school lunches. Again: Demand goes up, supply remains steady, so prices increase. No wonder grocery stores nationwide are raising prices.
Student Loans
While it’s certainly a laudable goal to provide low-income individuals with the opportunity to attend college, broad student loan availability creates a glut of money available to universities and colleges. If the majority of students simply paid for college out of their own pockets or through bank-provided loans with reasonable interest rates, universities would be limited to that supply of students and dollars. But when students from even wealthy families can easily obtain a loan for college, the supply of dollars in that market skyrockets.
WATCH: QUICK THOUGHTS ON STUDENT DEBT CANCELLATION
Meanwhile, you guessed it again: Demand remains steady, and up the inflation elevator we go. The result: an inflation-adjusted tuition increase of 180% over the last thirty years.
In response to these examples of inflation and the obvious role of government spending behind them, we can affirm that the best thing the government could do would be to stop spending.
If it doesn’t, the sad and potentially disastrous outcome of a Federal Reserve versus federal government showdown is a never-ending inflationary cycle that makes many entrepreneurs feel defeated and many consumers feel depressed. The result is less wealth, fewer jobs, more people in poverty, and little to no opportunity for upward mobility.
If we care about people, the jobs they do, and the reliability of the dollars in their bank accounts, let’s demand that our federal government cease its absurd spending and debt accumulation.
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