Spending

Inflation will go nowhere if government spending spree continues: study

Central banks, including the Federal Reserve, will fail to rein in inflation unless governments start taking responsibility for spending, according to a study presented to central bankers at a Jackson Hole conference in Jackson Hole, Wyoming.

The study’s authors, Francesco Bianchi of Johns Hopkins University and Leonardo Melosi of the Chicago Fed, warned that rising interest rates would eventually stall without adequate constraints on government spending.

“If monetary tightening is not supported by the expectation of appropriate fiscal adjustments, worsening fiscal imbalances lead to even stronger inflationary pressures. As a result, a vicious cycle of rising nominal interest rates, rising inflation, economic stagnation and rising debt would occur,” they wrote in the study (pdf).

If governments do not spend the money responsibly, inflation will be boosted by the private sector’s high inflation expectations, while at the same time economic output will be reduced by hawkish monetary policy, they said. Explain.

“The more hawkish monetary policy would have reduced inflation by just 1 percentage point at the cost of reducing output by about 3.4 percentage points,” the authors wrote. “That’s a pretty big sacrifice ratio.”

The spending craze is back

After a short pause following the wave of COVID-related stimulus spending, government spending is back in the United States.

On August 16, President Joe Biden signed the Democrat-backed “Cutting Inflation Act” which includes about $433 billion in new spending. Democrats claimed the bill would reduce the deficit by about $292 billion a year through tougher enforcement of the tax code.

President Joe Biden signs the Cut Inflation Act as Democratic lawmakers watch at the White House in Washington, Aug. 16, 2022. (Drew Angerer/Getty Images)

The president also announced a massive plan to cancel student loans on Wednesday.

Under the plan, individuals earning less than $125,000 a year or families earning less than $250,000 will be eligible for debt forgiveness of up to $10,000. Pell Grant recipients who meet these income standards will be eligible for relief of up to $20,000.

The White House has estimated this will cost $24 billion a year for the next 10 years. However, the Wharton School at the University of Pennsylvania said the cost would be much higher than announced by the Biden administration.

“We estimate that President Biden’s proposed student loan debt forgiveness alone will cost between $469 billion and $519 billion over the 10-year fiscal window,” the business school said.

Factors not controlled by the Federal Reserve

In recent months, the Federal Reserve has raised the federal funds rate by 225 basis points to 2.5%.

The data shows that inflation may have peaked.

According to a Commerce Department report on Friday, consumer prices rose 6.3% in July from a year earlier after posting a 6.8% annual increase in June.

However, economists and central bankers worry about factors other than money supply causing inflation.

One of the main factors is supply chain bottlenecks for certain products.

Federal Reserve Chairman Jerome Powell admitted at the Jackson Hole retreat that this was not covered by monetary policy.

“It is also true, in my view, that the current high inflation in the United States is the product of high demand and limited supply, and that the tools of the Fed operate mainly on aggregate demand,” said he said during his opening speech.

Epoch Times Photo
Federal Reserve Board Chairman Jerome Powell speaks during a press conference following a two-day meeting of the Federal Open Market Committee (FOMC) in the District of Washington on July 27, 2022. ( Elizabeth Frantz/Reuters)

Another worrisome factor is the tight labor market, which appears to be driving up costs in almost all sectors.

“The labor market is particularly strong, but it is clearly imbalanced, with the demand for workers far outstripping the supply of available workers,” Powell said.

Allen Zhong

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Allen Zhong is a longtime writer and reporter for The Epoch Times. He joined Epoch Media Group in 2012. He mainly focuses on American politics. Send him your story ideas: [email protected]