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To cure inflation, we must target the disease: Government spending

By Carmen Ashburn
web posted September 19, 2022

“In my day, my friends and I would ride our bikes to a local family business and buy delicious ice cream sundaes with mere quarters!” Does this phrase sound familiar? Such declarations are common in American living rooms as grandparents reminisce about the “golden days” when $5 could purchase meals for the entire family. In today’s world, however, we are lucky if $5 buys a single bottle of water at Six Flags. Indeed, similar occurrences are prominent across our economy: gas prices have hit all-time highs, lumber prices have skyrocketed, and housewives struggle to leave the grocery store without spending over $200. This phenomenon we are seeing in our everyday life is known as inflation: the rise in prices and decline in purchasing power of our dollar. Inflation refers to the devaluation of the Dollar - meaning that $1 is actually worth less than it did ten years ago. With the rate of inflation soaring to 9.1% in June of 2022 - the highest it has been in 40 years - we are in need of a solution. Milton Friedman - an American economist and statistician who received the 1976 Nobel Prize in Economic Sciences - believes he has the answer. In his documentary series “Free to Choose”, Friedman discusses the implications of inflation and argues that wage and price control is not the solution to inflation. Rather, we must curb government spending and the excessive printing of US currency.

Inflation is a key aspect of macroeconomics, for it affects our economy in its entirety. For this reason, it is often a hot topic during presidential debates and for government officials. These individuals often contribute inflation to the actions of labor unions, Putin’s “price hikes”, or corporations who are greedy for money. Friedman, however, dismisses these accusations instead stating that it is caused by the government’s monetary spending. As the government funds stimulus packages and creates large budgets for the many executive departments, more and more money is being printed by the federal reserve. Therefore, such an abundance of dollars creates an “artificial demand for the fixed amount of goods and services available”. In other words, there is more money in the system but the production of goods and services is staying the same. Hence, the cost of products must increase to keep up with the money supply.

To support the above claim, let’s look at numbers! Due to an abundance of government spending to fund federal COVID-19 relief efforts, the money supply (money printed) has increased by 40% since February 2020. In the beginning of 2021, the rate of inflation was only 1.4%. As of May 2022, that has risen to 8.6%. Interesting, isn’t it? This data demonstrates that inflation has a direct correlation to government spending and, therefore, the printing of money and the devaluation of the US Currency.

The solution to inflation is related to the cause. While many officials argue that we must institute wage and price controls, Milton Friedman argues that such controls only treat the symptoms (rising prices) and not the disease. Friedman used Japan to explain the cure for inflation. In the mid-70s, Japan sought to combat the rapidly increasing prices by slowing the printing of currency. With less money in circulation, this caused a temporary increase in unemployment and growth. However, this temporary pain eventually led to prosperity, for over a period of 5 years, inflation rates decreased dramatically and Japan’s economy boomed. Friedman states that, for our country to avoid an inflationary recession, we must employ a similar tactic. Indeed, our economy’s inflation crisis requires surgery, not a bandaid.

It is important to understand that Japan utilized this solution in the 1970s. Today, however, our country has accumulated a massive amount of debt - $30 trillion to be exact. Such debt was virtually nonexistent in the 70s compared to today. With that said, the printing of money is required in order to keep up with this debt. If spending were to suddenly cease, our country would experience serious consequences due to our debt that must be paid. Hence, Milton Friedman's solution, while pertinent and necessary, must be implemented slowly and methodically.

It is easy to blame labor unions and Putin’s “price hikes” for our $5 bottle of water, but the true cause is ultimately much closer to Washington D.C. In the end, we must sacrifice temporary economic stability for future prosperity by decreasing spending and the printing of money. Perhaps such endeavors will allow future generations to enjoy the simple satisfaction that comes with eating a $1 dollar ice cream sundae. ESR

This is Carmen Ashburn’s first contribution to Enter Stage Right. © 2022 Carmen Ashburn

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