Controlling Inflation; D. Lee

Dwight R. Lee Controlling Inflation ~PbY~¥ Controlling Government INFLATIONhas become such a chronic: problem that many people now be·· lieve no one knows what causes it or how to eliminate it. In fact, the cause of inflation has been known for cen·· turies, and it is very simple to elim·· inate. Inflation is a persistent in·· crease in the prices of the products we buy and is always the result of the money supply increasing more rapidly than the output of. these products. With a rapid increase in the money supply, inflation is inev·· itable. Without a rapid increase in the money supply, inflation is im·· possible. The federal government can eliminate inflation simply by bring·· ing monetary growth under control. But if this is true, why has not the government eliminated inflation long Dwight Lee is Associate Professor of Economics" Center for StUdy of Public Choice, Virginia Polytech ..

nic Institute and State University. ago? Politicians have consistently told us that inflation is our major economic problem and have un veiled a series of plans for solving this problem. These plans all have one thing in common. They have not worked. Inflation has gotten worse, not better. We are left with the sus picion that the government has not been serious in its fight against in flation. Additional support for this suspi cion comes from the fact that creat ing more money, and therefore caus ing inflation, is a convenient way for the government to obtain more of the wealth that you and I produce. The way this wealth transfer occurs is in all important respects identical to the wayan individual in a posi tion to personally increase the money supply could increase his wealth at the expense of others. 357 358 THE FREEMAN June An Easy Way to Make Money Consider the situation in which you have the legal right to print money and put it into circulation by spending it. Every evening you can start up your printing press and run offstacks of20s, 50s, 100s, and 1,000s for the next day's purchases. The de sire to maintain productive employ ment will vanish as your job pro vides only a pittance of what you can, in a few moments, make at home. Also, you will find that the demanding task of spending your money is a full-time job. Overnight you will have become enormously wealthy . But notice that the total wealth produced in the economy is not any larger than it was before. In fact it is slightly less since, having quit your job, you are producing less than before. So your increased wealth means a reduction in the wealth of others. The additional goods and services you are buying are not available for others to buy.

But even though you are making others worse off by creating money and spending it, you need not worry about being blamed for this. To the contrary, you will surely be sought after and held in high esteem as one who is contributing to the wealth of the community. -Your large expen ditures will be a very visible source ofincome for those selling you yachts, resort homes, jet planes, and lavish vacations. Those who are on the re ceiving end of your purchases will be encouraging you to increase, not reduce, the amount of money you print and spend. And with these people now having additional money, they will be able to spend more, thus providing more income for others. Because of you, everyone will have more money. But it is because of this additional money that others are being made worse off. With the additional money being spent, but with no more products to spend it on, prices will increase. Even with more money the inflation will reduce the amount others can buy. Since you are buy ing more, others have to be buying less. But even though you are caU$ ing the inflation you can be confi dent that your victims will place the blame elsewhere. People will blame higher prices on those who are sell ing the higher priced products. It is ironic that it is those who are help ing to hold down increasing prices by continuing to make products available who are 'most likely to be blamed for inflation.

Adding to the irony is that many of those you are impoverishing with inflation will urge you to increase your purchases; particularly your purchases from them. Your ability to increase the money in circulation will be seen as the way to compen sate for higher prices. And you will probably be sympathetic with this ((solution," having noticed how much less a couple of billion dollars buys 1981 CONTROLLING INFLATION BY CONTROLLING GOVERNMENT 359 now in comparison with how much it would buy when you first started printing money. What could be more appropriate than increasing the amount of money you print each evening? Can the Temptationbe Resisted? How many of us, finding ourself with the ability to legally increasc~ the money supply, would be able to restrain our desire for more? The op portunity to make ourself and our family wealthy, while being hon ored as a great benefactor of thc~ community, would be a difficult one for most of ':Is to resist. And if you or I could not resist such a temptation, can we expect more restraint fronl those in government? The answer is surely no. The only difference be·· tween you and me as individuals, and government, is that the federal government really is in a position to acquire wealth by expanding the money supply. It is clear that this is an opportunity the government has not been able to resist. Those who benefit from a growing government sector have pushed consistently and effectively for public policies that generate inflation and reduce OUlr wealth. The problem is not that the government does not know how to eliminate inflation. The problem is that the government has not wanted to eliminate inflation.

We are currently witnessing an attempt to control the inflationary policies that have become the hall mark of Washington over the last several decades. This heroic effort deserves and needs our unflagging support. It is an effort which will be stoutly resisted by one politically in fluential interest group after an other, each hoping to benefit from more inflationary government spending. They will argue that in flation requires that the federal gov ernment increase their price sup port program, increase their agency's budget, increase aid to their city, in crease welfare payments, etc. Each group will argue that the govern ment spending they favor will pro vide benefits for all. In fact each ex pansion in government spending will add to inflationary pressure, trans fer wealth to a few, and reduce the' economy's capacity to generate more wealth for us all. But the natural tendency of gov ernment is to give in to the special interest groups. In fact the special interests are hard to distinguish from government interest. Those in gov ernment have found that the safest way to expand and perpetuate their power, control, and wealth is to pro vide concentrated benefits to politi cally organized groups while spreading most of the cost over us all with inflation. The only way to stop this destructive process is to re strain government.

The hope has been to vote for pol iticians who are sympathetic to the 360 THE FREEMAN need for controlling government. In other words, vote for a government that will restrain itself. But as im portant as it is to elect responsible representatives at all levels of gov ernment, we cannot depend on this alone to do the job. Our elected rep resentatives answer to the voters only periodically, but they are under constant pres~ure from entrenched special interests pushing for more government spending. When ap pealing for votes almost all politi cians argue for limited government, but how many remain true to their campaign promises once the election is over? And we have almost no con trol over those in the bureaucracy, and the special interest groups with which the bureaucrats indentify. Restraining Government The time has long since arrived for us to re-establish effective con stitutional limits on the scope of government activity. Our founding fathers knew that government could not be trusted to limit itself, and our Constitution is testimony to their profound insight. Unfortunately, the limits the Constitution imposed on government for over 100 years have, in recent decades, been severely eroded by judicial interpretations guided by the false notion that wideranging governmental discretion is a force for social good. Few are naive enough to believe that an individ ual, given the ability to confiscate the wealth of others, would be blind to personal advantage and trustwor thy to use this ability to promote only the public interest. Yet the ((so phisticated" view of many of our in tellectual elite is that the collection of individuals who comprise govern ment can be trusted with enormous, and unrestrained, power to promote the public interest.

Despite the wishful thinking that often passes as scholarship, there is a desperate need for the enforce ment of clear constitutional limits on the federal government's ability to create and spend money. Without such limits we can be sure that an undisciplined federal government will continue inflating the currency and expanding its wealth at the fur ther expense of the productive sector of the economy. We may want to de bate the form the restraint should take; a return to the gold standard, a balanced budget amendment, a limit on government spending, or some combination of these and other restraints. But only the most naive would argue that we can continue to trust the government to restrain it self , William R. Hawkins REINDUSTRIALIZATION: The Capital Question REINDUSTRIALIZATION. The term is imposing. It conjures up the image of a devastated economy and of a re building effort of massive propor tions. Indeed, the effort has been likened to that of the Marshall Plan which helped rebuild Europe after World War II. It is also a term which is viewed with suspicion in some cir cles because of the ease with which politicians learned to use the term in an election year. Yet, the· sudden popularity of the reindustrialization concept should be welcomed, for it indicates a new consensus as to the seriousness of the problems con fronting the American economy-a consensus that cuts across ideologi cal and party lines.