Inflation ghosts, Republicans, and depression

Many economists, who should know better, have predicted rising, if not runaway, inflation since the Great Recession. They sounded the alarms with Obama’s stimulus package, the Feds keeping rates near zero, and the expansion of the money supply. Yet, despite their fear-mongering, the consumer price index has barely budged from year to year.

Given the steady drumbeat by inflationistas the Federal Reserve finally capitulated late last year, raising interest rates. The Fed did so because its committee members believed that unemployment had sufficiently decreased while economic output continued to rise, albeit modestly. Several prominent economists disagreed with the Fed’s action, including Paul Krugman, Brad DeLong, and Larry Summers. They believe that low inflation, depressed wages, declining labor force participation rates, and a sluggish GDP argue against raising interest rates.

Let’s look at two metrics: annual change in CPI and the civilian labor force participation rate.

cpi and labor force participation

Labor force participation rates rose steadily from the mid-60s to the end of Bill Clinton’s presidential terms. Inflation also rose, until peaking in 1980. The rate then fell sharply, and has remained far below five percent from 1990 onwards, even landing in negative territory during the Great Recession.

Republican orthodoxy views inflation as Enemy Number One. Conservative ideology equates the federal budget with those of individual households. Debt is therefore bad, regardless of circumstances; governments should never spend more than they receive. This stubbornness prevents a Keynesian solution, which is to stimulate consumer demand via government expenditures.

Way back in the 1930s Keynes argued that in a depressed economy only the central government could be effective. Private industry will not invest if consumers lack the means to buy goods and services. For Keynes, the more depressed the economy the greater the stimulus warranted. As it happened following the Great Depression, it took a world war and its associated massive federal spending to finally spur the economy.

Some economists hold that the central government should have acted more robustly in response to the Great Recession. While almost all economists agree that the stimulus package prevented worse damage, it was hardly sufficient to restore economic vitality. That so many people are still out of work, underemployed, or trying to live on stagnant wages attests to fundamental problems with the economy, which continues to sputter.

real gdp since 1980

As for government spending, there has been no better time than over the last decade to invest in public goods, those things that the private sector can’t or won’t provide. Among these are transportation and common schools. The tragedy of such neglect is that those investments would have enabled the economy to grow faster and sustainably for decades to come.

transportation spending

We note the effect of the stimulus package, that blip in 2012. But then spending contracted. The added shame is that during this time from 2008 money has been very cheap, given the near-zero interest rates. Also, for every dollar the government spends, there is a great-than-one return on the investment (Keynesian multiplier).

I’ve said previously that the Republican Party is injurious to all of us. It stands in the way of progress, its defining characteristic. And that progress would be improved lives for all and not just the top one percent.

This vision of a better world is not simply pie-in-the-sky thinking. We know that other countries have ventured much closer to realizing more equitable and just societies than America’s.