Inflation in the United States – Part 4
By: John Steele Gordon
In 1974, Congress passed the Budget and Impoundment Control Act – as misnamed an act of Congress as it is possible for an act to be. It effectively removed the president as a player in the budget game, by ending his power to impound appropriated funds. With Congress in full control of spending, spending went out of control. In the six years preceding the Act, with the Vietnam War raging, annual deficits had averaged 11.3 billion. In the first six years after the Act, with the war over, they averaged $54 billion.
By 1980, the inflation rate hit 13.5 percent, the highest peacetime rate in history. Although the national debt increased by two-and-a-half times in the 1970s, so great was the inflation in that decade that the debt actually declined as a percentage of GDP.
Only when Paul Volcker became chairman of the Federal Reserve in 1979, and Ronald Reagan became president in 1981, did inflation end. The Federal Reserve sharply increased interest rates, pushing the economy into a deep recession. Unemployment hit 10.8 percent at its peak, the highest since the 1930s. But it worked. Inflation, which had been 13.5 percent in 1980, was down to 4.1 percent in 1984 and would stay low for the next few decades.
When the economy went into a deep recession with the bursting of the housing bubble in 2008, however, the government began running unprecedented budget deficits. The national debt, over $10 trillion in 2010, would double by 2017. With the onset of the COVID pandemic in 2020, deficits soared further as the government sought to mitigate the effects of shutting down much of the economy. The national debt now stands at $29 Trillion – about where it was in 1945, relative to GDP.
But this breathtaking increase in the money supply did not, at least immediately, set off inflation. For while inflation is a monetary phenomenon, it is also a psychological one: when the expectations of inflation becomes widespread, it becomes a self-fulfilling prophecy.
That prophecy was fulfilled in 2021. With the Biden administration continuing pandemic relief, which discouraged may from seeking work, and restricting oil and gas production, inflation set in. Supply chain disruptions also contributed.
By December 2021, consumer prices were up seven percent on an annual basis, the highest in 40 years, while producer prices were up 9.6 percent, the highest since that statistic has been compiled.
And the expectation of further inflation is now deeply embedded in the economy.
Regardless of this, the Biden administration is still pushing hard for its “Build Back Better” plan, which would add at least another $5 trillion to the national debt over the next decade. And President Biden has airily said that “Milton Friedman is no longer in charge.”
But unfortunately for the Biden presidency – and for the U.S. economy and the American people – Milton Friedman was right. Create to much money and you get inflation. We are witnessing the proof of that right now.
The following is adapted from a lecture delivered on January 6, 2022, at Hillsdale College’s Allan P. Kirby, Jr. Center for Constitutional Studies and Citizenship in Washington, D.C., as part of the AWC Family Foundation Lecture Series.
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