Under Bidenomics, inflation is the gift that keeps on taking

When government engages in deficit spending, an imbalance arises. The difference is the inflationary increase in the price level.

"History is largely a history of inflation," Nobel-winning economist Friedrich Von Hayek wrote in 1960, "usually inflations engineered by governments for the gain of governments.” 

Today, these words are truer than ever.  During the almost four years we’ve lived with “Bidenomics,” consumers have seen the cost of ordinary purchases increase by more than 15 percent due to inflation. That’s an additional expense of $9,000 per year for the average household.

Reflecting on the past can often be illuminating. During the four years of the Trump administration, the Consumer Price Index saw a meager 1 percent increase. Critics may argue that the deflationary impact of COVID skews this figure, but even excluding it, the overall price level would have only risen by about 2.5 percent. What's the key difference? The answer is one word — “government!”

Under the current administration, deficit spending by the government has surged by over 40 percent. The Treasury runs a deficit when the amount it spends exceeds the amount it collects in taxes. The difference is borrowed by selling bonds. But most big government do-gooders don’t understand the connection between increased government spending and inflation.

To oversimplify things, the macroeconomy is one giant circular flow. Your wages cost your employer some of her profits, but they become another’s profits when you buy something. Banks intervene in this flow by taking what you don’t spend on things and loaning it to others to buy things. It’s all pretty stable until the government steps in and starts spending money it doesn’t have. The result is inflation.

When you do your job — that is, when you produce something — you are paid by your employer for that production. Economists like to call this “revenue product.”  As long as the value of your revenue product is at least as much as what you are paid, everything keeps humming along fine. 

But when the government engages in deficit spending, an imbalance arises. More money is spent than the goods being produced. The difference is the inflationary increase in the price level.

In March 2021, Biden signed the American Rescue Plan Act — a $2 trillion boondoggle. Without getting mired in its mismanagement and outright fraud, it pumped all that money into the economy without producing anything.

According to our circular flow idea, that should cause inflation. And here are some “back-of-the-envelope” statistics that show it did.

In the twelve months following its signing, personal income increased by 3.7 percent while worker productivity (output per hour) decreased by 1.5 percent.  Adding those together we get a delta of 5.2 percent. During that same period, inflation increased by (you guessed it) 5.3 percent. It’s funny, but not funny.

But wait. We’re told that’s not the case, and that greedy corporations are causing inflation. Corporations may be greedy, but they shouldn’t take the fall for this one.

Yes, things at Walmart cost more today than they did four years ago. But that doesn’t tell us whether those price increases are a cause or an effect of inflation. The way we have to think about it is to question whether Walmart is making more money today than in the past, adjusting for inflation.

During the Trump years, Walmart returned a cumulative average of 18 percent per year on its investment. During the Biden years, it returned the exact same 18 percent. So no, it's not greedy corporations. It’s not wages rising more slowly than productivity. Rather, it’s the government causing inflation through deficit spending.

At the same time, we hear from the administration about its supposed “war on inflation.” You’d think if they were genuinely earnest about it, they would do something. And they did.

The Inflation Reduction Act was pushed through Congress just over a year ago. By its name, you’d think that, finally, something was being done. 

But to what end? This bill calls for almost another $1 trillion in government spending. Here we go again.

Kevin Cochrane is an economist, former senior banking executive, and visiting professor at the University of the West Indies in Barbados.