If Budget Deficits Caused Inflation, There Would Be No Budget Deficits

By John Tamny for RealClearMarkets

At risk of being called a “name dropper,” I’ll name drop Arthur Laffer. I’m lucky enough to call him a friend, and whenever I see him I always remind him that he’s vastly improved the terms of the economic debate. Think about it.

Laffer’s calls for tax cuts in the 1970s were met at the time with lots of critiques in the economics field. In politics too. The view then was that tax cuts would cause an inflationary breakout. One person who didn’t agree with such an abjectly foolish viewpoint was Ronald Reagan.

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In 1980 his economic platform included tax cuts, only for George H.W. Bush (in the GOP primary) and Jimmy Carter (in the general election) to claim that reductions in the penalty placed on work would cause inflation.

On national TV in front of Carter, Reagan wondered in one of their debates why it was inflationary for people to keep what they earn, but not inflationary for government to take what people earn only to spend it. Reagan won by a landslide.

Better yet, the tax cuts that Reagan and Laffer championed were in no way inflationary. To say otherwise is a non sequitur. Inflation is currency devaluation. What on earth do tax cuts have to do with the latter?

Still, it’s useful to point out now that Reagan, Laffer, Steve Forbes, and a few others won the tax debate. How do we know this? We know because nowadays no Republican with serious national ambitions expresses those without talking major tax cuts. Arguably more revealing, no Democrat with serious national ambitions ever talks about returning tax rates to the 70% that prevailed in the 1970s, and before Reagan, Laffer et al changed the discussion.

And when I see Laffer or Forbes now (more namedropping), I always compliment them on the remarkably foolish thinking within others that they overcame.

What’s sad about all this is that it appears we’re rushing back to the foolishness that Laffer et al once endured. Without defending the hideous tax that is government spending, it’s not an inflation accelerant. What must make Laffer sad is that even conservatives are making the previous argument.

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They claim against all logic and reason that government spending fosters “excess,” inflationary “demand.” No, not at all. Demand follows production, and governments produce nothing. Governments can only spend insofar the productive have less to spend.  

Where sad gets sadder is that members of the Left have been only too glad to draw the obvious, rather brain-dead corollary to the conservative argument crafted by overnight spending hawks on the Right who oh-so-coincidentally discovered that “inflation” springs from government spending in 2021-2022. Lefties note that if government spending drives more “demand,” so must tax cuts.

Yes, inept Republicans have handed even more confused Democrats the argument to shoot down tax cuts.

Except that demand is once again a consequence of supply. Tax cuts merely mean that the producers will get to keep more of what they produce over politicians. See Reagan. No new “demand” created as much as “demand” stays in the hands of those who created it. Conservatives once understood this truth, but having invented all-new causes of inflation in 2021-22, they’re now suffering blowback. If demand is inflationary (it’s not), then government spending AND tax cuts cause inflation.

One guesses Laffer is secretly disappointed? After working so hard to enhance the economic discussion, both sides are perverting it. Most glaring about this is that conservatives are perverting the discussion the most.

Which brings us to budget deficits. About them, as any sane economic thinker would point out, government spending is the true tax. To then focus on deficits is to make a distinction without a difference. The problem is the spending, not how the precious resources are extracted.

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Still, it’s truly comical seeing conservatives who never cared much at all about “deficits” under Reagan, Bush (H.W. and W.), and Trump, suddenly claim they’re wildly inflationary. One opinion piece in the Wall Street Journal by a card-carrying GOP cheerleader laughably claimed that the $1.9 trillion coronavirus spending bill signed by Joe Biden was what pushed the U.S. into inflationary territory. You can’t make this up!

Figure that when Trump signed into law a $2.9 trillion subsidization of hideous lockdowns, GOP pundits were wholly silent about “inflation.” In reality, deficits have nothing to do with inflation.

To see why, ask yourself what you’re buying when you purchase government debt like, for instance, U.S. Treasuries. With the latter, you’re buying future income streams denominated in dollars. Translated for those who need it, neo-inflationists on the Right claim that deficits, apparently because they’re deficits, are subsequently shrunken via devaluation.

Ok, but if true, conservatives known to believe in markets are fairly implicitly saying that markets are remarkably stupid. Really, who would buy government debt if the dollars paid out via the debt securities are progressively losing value through inflation? Again, inflation is currency devaluation.

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Of course, the fact that inflation is currency devaluation exposes just how flamboyantly foolish the deficit portion of the economics debate has become. Indeed, if deficits caused inflation then then there would be no deficits. Get it? Increasingly the pundits do not, which may cause yours truly to amend the bouquets thrown Laffer’s way. No doubt he had to endure a period of remarkable economic illiteracy, albeit illiteracy only rivaled by that of today.  

Syndicated with permission from RealClearWire.

John Tamny is editor of RealClearMarkets, Vice President at FreedomWorks, a senior fellow at the Market Institute, and a senior economic adviser to Applied Finance Advisors (www.appliedfinance.com). His latest book, The Money Confusion: How Illiteracy About Currencies and Inflation Sets the Stage For the Crypto Revolution, releases today. 

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