Suppose you lent someone $100 and when they paid you back they only handed you, say, $99 or $80. Would you consider the borrower to have kept his promise and contractual obligation? Or would you think that he had cheated you out of a part of the money you had lent him in good faith? Well, there are those who say that doing so is just fine, if it’s done through price inflation, so the borrower repays the lender in depreciated dollars. 

Binyamin Appelbaum, who makes this argument, is the lead writer for The New York Times on financial and economic affairs. He approaches economic and social policy issues from a consciously ‘progressive’ perspective on the regulatory role and redistributive responsibility of the US federal government. Indeed, he is so ‘progressive’ in his thinking that in a recent article on the opinion page of The New York Times, Mr Appelbaum made it clear that he considers FDR’s New Deal to be, well, almost socially ‘reactionary.’ 

The New Deal was enlightened government reform by men in government for men out of government and designed to make it easier for the ‘little woman’ to stay at home rather than enter the world of ‘man’s’ work. Equally ‘backwards’, Roosevelt’s policies did not mandate that the private sector had to provide paid family leave or paid sick leave. How ‘unprogressive’ for Roosevelt to presume to leave such questions and issues to the people themselves, based on marketplace voluntary association and agreement. 

Wanting government to do so much more and more

True political enlightenment is to use the threat of government regulatory force to make people do what ‘the enlightened’ know to be right and better for ‘the people’, than those people themselves. Some might consider such political paternalism to be examples of arrogance and hubris on the part of those in political authority (and by those who are advising them) to presume to dictate how people are to live and work and interact. But not Mr. Appelbaum.

He is absolutely delighted that Joe Biden has such big budgetary plans to rectify all the policy blinders and inadequacies that even past ‘progressive’ Democratic administrations have failed to advance and implement. Government will subsidise more of parents’ childcare costs, and the caregivers of such services will be boosted with more government-insisted upon wages and benefits. Plus, government will more widely subsidise the expense of people staying home from work to care for sick or elderly family members. 

In an earlier opinion piece, Mr. Appelbaum was equally delighted with the widened definition of ‘infrastructure’ to be found in Joe Biden’s spending agenda. He said, “When we define infrastructure, we are asserting a public responsibility to make certain things possible. Infrastructure is the stuff people don’t have to worry about.” Many people may think that infrastructure means things like roads, bridges, a dam or a dredged harbour, or maybe a lighthouse. But that would clearly show that any such person was not enlightened and ‘progressive’ enough in his thinking. (See my article, ‘Biden’s ‘Democratic’ Agenda of Paternalism and Planning’.)

What Joe Biden and Binyamin Appelbaum mean by infrastructure is to provide “the means to address the inequalities of wealth, health and opportunity plaguing our society”, which include educating the young, caring for the old, planning the physical environment in the face of ‘climate change’, and directing and subsidising the ability for ‘people to travel in electric vehicles’. Plus a wide variety of other welfare redistributive ‘good things’. One wonders if Mr Appelbaum has ever seen or imagined a human activity not requiring the paternalistic and intrusive hand of government or the political financing of it in some way. If he does, he does not talk about it much. 

Big spending requires big taxes and more borrowing

So, how will all of this be paid for? Like Joe Biden, Mr Appelbaum knows the answer: significantly raise taxes on ‘the rich’, along with on big businesses and large corporations. Make them pay their ‘fair share,’ assuming that that phrase means anything other than what people like Mr Appelbaum think is the right amount according to their own subjective and arbitrary sense of ‘social justice’. Or in more direct and unambiguous language: “I think you have too much and I’m going to use government to take it by force, since I know the right uses for it better than you, especially since I know you are a greedy, selfish person who does not care about others the way I do. Thank goodness there are people like me around!”

Joe Biden’s fiscal plan calls for increasing those taxes on ‘the rich’ and on corporate America to the tune of $3.6t over the coming years. But as an article in The Washington Post (28 May 2021) pointed out, even if all of Biden’s tax increase proposals were to successfully pass through Congress, their effect in raising federal government revenues would not be fully felt for years ahead. 

So, the Biden budget proposal assumes a deficit of $1.8t in fiscal year 2022, based on $6t of government spending (or almost one-third of total planned federal expenditures); and there will be budget deficits for many years after that of at least $1.3t per year. Given the current national debt of over $28.3t, if this were to be the pattern of government spending and borrowing over, say, the next 10 years then, in 2031, the accumulated national debt would reach more than $42t. 

How will the federal government ever succeed in paying off this debt? Or even covering the interest payments on the accumulated debt? According to the Congressional Budget Office, in An Overview of the 2021 Long-Term Budget Outlook (May 20, 2021), by 2031, almost half of all money borrowed by the government in that fiscal year will be used just to pay the interest owed on the national debt at that time. So, over the next decade the government will be borrowing huge sums of money merely to stay current with the interest payments due on all the years of past deficit spending. 

This, now, finally, gets us to the question raised in the opening paragraph about how you might feel if a borrower failed to repay all that you had lent him, and whether you would consider this to be a breaking of a promise and a breach of a loan agreement. This is also why I have taken the time to share Binyamin Appelbaum’s views on government spending and taxing and what, clearly, will be needed borrowing to cover all the expenditures that he sees Joe Biden trying to implement and with which he wholeheartedly agrees. 

Inflation to do ‘good things’ and reduce the real value of the debt

In a series of tweets on May 25, 2021, Mr. Appelbaum, said that, “I find the fixation on 1970s inflation puzzling for several reasons. Inflation really wasn’t that high, certainly not by the standards of ‘historically memorable inflations’. Also, high inflation was good for a lot of people. Student loans disappeared! Home ownership spiked!…”

“Describing inflation as the ‘primary risk’ to the US economy strikes me as overstating the risk of inflation and overstating the consequences. The primary risk to the economy is that half the population isn’t vaccinated. Second place is the need for jobs…”

“PS You know how we dealt with the massive federal debt incurred during World War II? I-N-F-L-A-T-I-O-N.”

It is easy enough for him to say that the “fixation on 1970s inflation” seems “puzzling,” since Mr Appelbaum was only born in the late 1970s and would only have any earliest personal memory, no doubt, from when he was a small child in the early 1980s, when Paul Volcker, then Federal Reserve Chairman, put the brakes on monetary expansion and brought price inflation way down. While price inflation as measured by the Consumer Price Index (CPI) followed a rollercoaster path during the decade of the 1970s it, nonetheless, saw the highest price inflation experienced in the United States since about hundred years earlier during the American Civil War. 

The harmful effects from 1970s inflation

In 1975, the CPI rose for a period of time at a 12% annualised rate and then in 1979-1980, it again spiked, reaching an annualised rate of about 15%. Mr Appelbaum may shrug that off, but it means that something that cost, say, $100 at the beginning of the year cost $115 at the end of the year at that annualised rate. Unless someone’s income had risen over that period by a comparable 15%, that person would have experienced a noticeable decline in their real income. Labour unions at the time pushed for increases in nominal wages for members in an attempt to maintain their average real income with the CPI as a benchmark.

But it needs to be recalled that price inflations never bring about rises in all prices at the same rate and at the same time. Monetary expansions are non-neutral in their impact affect due to the temporal-sequence of how new money is injected into the economy and how that money is spent and then received as higher revenues due to the patterns of the resulting increasing demands for different goods and services in different amounts at different times and different places in the economy in the process. (See my articles, ‘Monetary Inflation’s Game of Hide-and-Seek’ and ‘Macro Aggregates Hide the Real Market Processes at Work’.)

Thus, some selling prices may have been running ahead of increases in particular wages in an industry negotiated based on the CPI estimate of a change in the cost of living, while in other instances, money wages negotiated up in a sector of the economy at a higher rate based on that CPI estimate of changes in price inflation may have been more than the particular prices for the specific goods those workers were employed in manufacturing. 

For instance, if selling prices for a set of particular goods were increasing at, say, 7%, while revised money wages in that part of the economy were only rising at a CPI-based negotiated rate of 5%, then employers would have experienced a decline in their real labour costs; however, if in some other sectors or industries CPI-based money wage adjustments were increasing at that 5% annual rate, while the selling prices of the goods in those sectors or industries were only rising at a 3% annual rate, those employers would have experienced a rise in the real wage in employing labour, thus making it more costly and less profitable to increase or maintain all those at work in that part of the economy. 

This is because the ‘real wage’ as estimated on the basis of the employee’s general cost of living as calculated by a consumer price index for finished goods as a whole, is not the same as the ‘real wage’ from an employer’s perspective who is comparing the money selling price for his own particular good (which may or may not be rising at the same average increase as prices in general), and the money wage that may be insisted upon by employees or negotiated by labour unions based on the CPI. 

The era of stagflation – rising prices and increasing unemployment

This is part of the reason behind the period of the 1970s known as the era of ‘stagflation’, that is, generally rising prices combined with increasing unemployment. This was exacerbated by the downward rigidity of a wide variety of money wages at the time, such that if the rate of price inflation declined, the money wage demands of, especially, unionised workers did not moderate, which further increased the real cost of employing labour from the employers’ perspective.  

This dilemma was summarised at the time by Austrian-born economist Gottfried Haberler, in an essay on ‘Stagflation: An Analysis of Its Causes and Cures’ (American Enterprise Institute, March 1977): “It is well known that every prolonged inflation tends to become cumulative and to accelerate. This does, of course, not mean that every creeping inflation must inexorably become a trotting and a galloping one. What it does mean is that to provide the same stimulus inflation must accelerate. The reason is that prolonged inflation generates inflationary expectations: nominal interest rates rise because borrowers and lenders expect higher prices; unions press for higher wages to protect their members from the expected price rise; businessmen place orders ahead of time and accumulate inventories, etc. 

“Expectations of price rises may even run ahead of reality which is essentially an unstable situation. No wonder that sooner or later a stage is reached where a slowdown of the rate of inflation, or perhaps a mere reduction in the rate of acceleration, leads to unemployment and recession. If most people expect prices to rise at 15% and the actual price rise then turns out to be only 7 or 8%, the consequence for the economy will be the same as a complete stop of inflation would have had at an earlier stage. This is stagflation.”

Inflation may benefit some, but at others’ expense

Mr Appelbaum seems quite happy that some student loans during the 1970s were being paid back in depreciated dollars, which reduced the real burden of the debt. But does he forget that for every borrower there is a lender who, as a consequence, will have received less in real buying terms when the loan was repaid? He, no doubt, thinks of the lenders as greedy ‘bankers’ sitting in their offices, feet up on their desks, wearing a top hat with a cigar in their mouth, like a caricature from the Monopoly game.  

But, to use Frederic Bastiat’s term, ‘what is unseen’ are all the bank depositors behind that more visible bank officer, whose individual savings have been pooled to extend loans, including to those attending college. Those savers often are families attempting to build up enough themselves to make a down payment on a house or a car, or to be accumulating a fund so when their own son or daughter goes off to college they would not have to possibly go as much into debt to pay for their higher education; or household members may be saving for their retirement at some point in their future. 

The real value of their savings – and the personal and family financial hopes and dreams behind it – were and are damaged in terms of the real purchasing power that is lost with every percentage rise in the cost of living as time goes by, along with the reduced real interest income to the extent that nominal rates of interest do not rise sufficiently to fully compensate for the general increase in prices. Inflationary premiums added on to nominal interest rates to adjust for expected rises in prices rarely can be formed precisely, particularly due to that non-neutral ‘ragged’ manner that monetary expansions generate rising prices in those different ways and at different times.  

Home ownership rose in the 1970s, but this was partly due to the housing market becoming a casino, in which people bought and sold – ‘flipped’ – property and houses in speculative attempts to make quick profits on a house that could be bought at price ‘x’ one day and resold not long after at, possibly, price ‘x+2’. The housing market saw a noticeable retreat once the price inflation came to an end in the early 1980s. And, no doubt, some who bought housing property for real or speculative purposes in the late 1970s suffered losses a few years later when the inflation expectations frenzy subsided. But this, too, does not seem to enter Mr Appelbaum’s story. 

Irrelevant talk about vaccinations and a lack of jobs

He says that the concerns right now should not be about ‘inflation’, but people not getting vaccinated and ‘the need for jobs’. Big government spending and expanded welfare programmes under the camouflage of ‘infrastructure’ do not get people to get their Covid-19 vaccinations. For most people the vaccine is already either covered by insurance policies or are heavily subsidised. There has been so much confusing and contradictory talk about the efficacy and the possible side effects from the injections that some people just don’t believe what they hear in favour of vaccination anymore, or consider that if they are not elderly and do not have a serious ‘precondition’, there is little need to worry that much if they just wait it all out. 

Does Mr Appelbaum think people should be forced to be vaccinated against the virus? If so, he can consider himself comfortably in the company of the government authorities in the Russian region of Yakutia in Siberia, where mandatory vaccination has been made the local law. Given that he clearly has little problem with government taking one group of people’s monies and deciding how others will be made or influenced to live through how those taxed away or borrowed dollars are politically spent, maybe he might apply for US-Yakutian dual citizenship. 

Mr. Appelbaum also insists that a far more important issue is the ‘need for jobs’. But there is no such abstract or amorphous thing called ‘jobs’. Production and employment are means to ends, the better and fuller satisfaction of the demands of consumers in society for useful and desired specific goods and services. As long as there are unfulfilled ends and wants, there is work to be done. So, willing hands can always find employment. But this will not happen if either governments command people not to work and, therefore, not to earn, as was done in 2020, due to the government lockdowns and shutdowns; or if you subsidise some people not to work, by sending supplementary government checques that sufficiently add to already received unemployment benefits that it is more financially attractive for some to stay at home than to accept gainful employment at a more market-based wage.  

Applying the inflation swindle to eliminate the debt burden

Finally, what is to be done with the huge and growing national debt? As far as Mr Appelbaum is concerned, the answer is simple: just inflate it away through debasement of the currency so the nominal dollars paid back to creditors in depreciated units of money makes its real burden just go away. This type of swindle is certainly not a new one. We can turn to Adam Smith in The Wealth of Nations (1776, Book V, Chapter III: ‘Of Public Debts’): 

“When national debts have once been accumulated to a certain degree, there is scarce, I believe, a single instance of its having been fairly and completely paid. The liberation of the public revenue, if it has ever been brought about at all, has always been brought about by a bankruptcy; sometimes by an avowed [an admitted] one, but always by a real one, though frequently by a pretended payment. 

“The raising of the denomination of the coin [debasement of the currency through inflation] has been the usual expedient by which a real public bankruptcy has been disguised under the appearance of a pretended payment.” 

It has long been understood that price inflation is a form of tax, under which portions of the citizenry’s income and wealth is taken from them through reducing the real buying power of the nominal sums of money held by all those in the private sector and the general public. But, as has also been pointed out many times, while actual taxation is targeted in various ways at defined groups in society, price inflation is indiscriminate in negatively affecting the real incomes earned by various segments of the overall population. It is far more arbitrary and deleterious in its effects on people.  

Considering that Mr Appelbaum is a lead writer for The New York Times on financial and economic policy issues, perhaps it would be useful to quote at some length on this issue from one of his predecessors in that staff position at the Times. Henry Hazlitt (1894-1993) was, also, from 1934 to 1946, the editorial writer for The New York Times on financial and economic issues. Toward the end of his stint in that position, in 1946, he wrote and published his most famous book, Economics in One Lesson. He discusses the very inflation that Mr Appelbaum argues for. Said Henry Hazlitt in a chapter on ‘The Mirage of Inflation’:

“If no honest attempt is made to pay off the accumulated [government] debt, and resort is had to outright inflation instead, then the results follow that we have already described. For the country as a whole cannot get anything without paying for it. Inflation is a form of taxation. It is perhaps the worst possible form, which usually bears hardest on those least able to pay. 

“On the assumption that inflation affected everyone and everything evenly (which we have seen is not true), it would be tantamount to a flat sales tax of the same percentage on all commodities, with the rate as high on bread and milk as on diamonds and furs. Or it might be thought of as an equivalent to a flat tax of the same percentage, without exemptions, on everyone’s income. It is a tax not only on every individual’s expenditures, but on his savings account and life insurance. It is, in fact, a flat capital levy, without exemptions, in which the poor man pays as high a percentage as the rich man.

“But the situation is even worse than this, because, as we have seen, inflation does not and cannot affect everyone evenly. Some suffer more than others. The poor may be more heavily taxed by inflation, in percentage terms, than the rich. For inflation is a kind of tax that is out of the control of the tax authorities. It strikes wantonly in all directions. The rate of tax imposed by inflation is not a fixed one; it cannot be determined in advance. We know what it is today; we do not know what it will be tomorrow; and tomorrow we shall not know what it will be on the day after. 

“Like every other tax, inflation acts to determine the individual and business policies we are forced to follow. It discourages all prudence and thrift. It encourages squandering, gambling, reckless waste of all kinds. It often makes it more profitable to speculate than to produce. It tears apart the whole fabric of stable economic relationships. Its inexcusable injustices drive men toward desperate remedies. It plants seeds of fascism and communism. It leads men to demand totalitarian controls. It ends invariably in bitter disillusion and collapse.”

The United States is in dangerous waters if it becomes ‘general wisdom’ and ‘popular opinion’ among public policy analysts and politicians that governments can spend all they want, in any amount, by just running huge annual budget deficits and expanding the national debt because it can all be made to go away through a magician’s trick of monetary expansion and currency debasement. It needs to be remembered that the political magician’s conjuring does not change reality; he merely succeeds in diverting our attention from what is really going on through a temporary illusion. It does not go away with the longer-term harmful consequences that cannot be made to disappear.

This article was originally published in the American Institute for Economic Research and reprinted here with permission.