John H. Cochrane at Virtual Roundtable: Understanding Inflation and Causes
Inflation’s return marks a tipping point. Demand has hit the brick wall of supply. Our economies are now producing all that they can, John H. Cochrane legt uit.
Moreover, this inflation is clearly rooted in excessively expansive fiscal policies. While supply shocks can raise the price of one thing relative to others, they do not raise all prices and wages together.
A lot of wishful thinking will have to be abandoned, starting with the idea that governments can borrow or print as much money as they need to spray at every problem. Government spending must now come from current tax revenues or from credible future tax revenues, to support non-inflationary borrowing.
Stimulus spending for its own sake is over. Governments must start spending wisely. Spending to “create jobs” is nonsense when there is a widespread labor shortage.
Unfortunately, many governments are responding to inflation by borrowing or printing even more money to subsidize energy, housing, childcare, and other costs, or to hand out more money to cushion the blow from inflation – for example, by forgiving student loans. These policies will lead to even more inflation.
Expanded social programs and transfers must be funded from stable long-run tax revenues, from taxes that do not impose undue costs on the economy. These facts will make it much more difficult for policymakers to continue ignoring budgets and the disincentives that are embedded in many social programs.
The bailout bandwagon will end. The 2008 financial crisis was met with a torrent of borrowed and printed money to stimulate the economy and bail out banks and their creditors. The COVID-19 recession was met with a tidal wave. Once again, government money went to bail out creditors, prop up asset prices, and provide more stimulus.
Given these precedents, our financial system now firmly trusts that the government will borrow or print money in the event of any future crisis. But once fiscal space has run out and given way to inflation, the government’s ability to stop the next crisis may evaporate. When people no longer have confidence that the borrowed money will be repaid, or that the printed money will be soaked up again, they will not lend more. Today’s small (so far) inflation is a taste of this fundamental change.
Publicatie 14 april
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