Americans should be wary of inflation hawks and their tales about the dangers of inflation, tales that have been recycled many times in American history. Their often-repeated story is that government spending, rising wages, and easy access to money drive prices up. Their solution is to cut government spending, raise interest rates, and relax the labor market to make it harder for workers to get higher wages. However, the three “reasons” for the price hikes that hawks have paid are not the drivers of inflation today. Rather, energy prices – oil, natural gas, and related fuels – have been and remain unresolved bottlenecks related to the COVID-19 turmoil and the war in Ukraine.
Two years ago, in April and May 2020, gasoline was $1.95 a gallon. At $4.12, it’s more than double that now. It was a lot cheaper in early 2020 because 21 million Americans, truck drivers, teachers and others were out of work, sick or in quarantine, and tens of millions were skipping restaurants, movies, and vacations. These disturbances mean People were driving less cars, so petrol prices were lower than they have been for years.
Political leaders of both parties, as Covid came, had to choose between the pain of a severe recession and the risk of some inflation. Gas and other energy prices could have been kept low if President Trump, President Biden, and Congress had refused to spend money to prevent such a recession. Instead, they used the government in 2020 and 2021 to replace the income that was draining COVID-19. Money from the government in people’s pockets has allowed the United States to weather the economic storm associated with COVID, and gradually resume normal activities. The worst was avoided.
COVID-related The number of job losses decreased from 21 million in the second quarter of 2020 to 8 million by early 2021. People were driving again, so gasoline prices rose 30 percent to $2.95 a gallon by April 2021. That was the start of inflation today, but it’s also an important sign of economic recovery . There is still COVID-related inflation because higher energy prices are passed on through prices for agricultural products, transportation, and more. There are also still supply chain bottlenecks and chips, and Russia’s attack on Ukraine added an extra $1.25 a gallon to the problem. So far, however, a severe recession has been avoided due to government measures. Hawks and commentators are not now telling their hands about inflation, nor are they telling their audience how they would be hurt if the government didn’t put money in their pockets.
Inflation hawks want Americans to think they would be fine if the Trump administration, backed by Democrats, did not pass the CARES Act in March 2020, pumping $2.2 trillion into the economy just as unemployment from the coronavirus neared its peak. They want Americans to think they’d be fine if the 2021 Consolidated Appropriations Act was passed after the November elections in December 2020, and didn’t add another $900 billion in COVID-related money to the pot. They want voters to believe that things would have been okay if US rescue package worth 1.9 trillion dollars and the $1 trillion infrastructure bill Pushed by the Biden administration was not passed in 2021. The talk on television, which focuses on the story of the inflation hawk, probably does not understand, and certainly does not explain to television viewers what the political options are: a severe recession or some inflation risk.
American history contains many examples of what happens when inflation hawks get their way. Dozens of American economists in 1930, 1931, and 1932 repeatedly petitioned President Hoover and Congress to spend money on more generous relief and public works so that the millions who had lost their jobs at the onset of the Great Depression could resume spending. However, Hoover believed that government spending would be counterproductive and inflationary. As unemployment and deflation worsened from 1929 to 1933, rounds of spending and wage cuts drove prices down 7 percent annually. Instead of inflation, unemployment has risen to 25%, a disastrous trade-off.
The 1930s wasn’t the first time American politicians opted for stagnation and unemployment when high prices were seen as a risk. President Andrew Jackson in the 1830s was a staunch supporter of gold and wanted to reduce the use of paper money. Ordinary farmers and merchants, usually borrowers, love plentiful paper money. It was randomly issued during that period by small local banks which like the financial sector today, definitely need stricter supervision. However, Jackson killed the Second Bank of the United States, an institution that may have supervised the banks, and compounded his mistake by Requirement to pay for land purchases in gold. This caused a decade of low prices that hurt ordinary farmers and the “mechanics” who used paper money to buy land and improve themselves.
The massive government expenditures of the Civil War were financed by taxes, borrowing, and paper money printed by the federal government called Greenbacks. But in 1873, the Gold Guardians, hard money advocates and inflation hawks of the era, won their campaign to take American currency out of circulation. An annual contraction of 1 or 2 percent over the next 30 years again deprived farmers and other debtors who had to repay the loans with money that was worth more than when they borrowed them. William Jennings Bryan, the 1896 Democratic presidential candidate, was still denouncing the impact of the downturn on farmers and labor when he famously said so Americans were crucified on a “cross of gold”.
Today’s concerns about inflation echo from the past. During the Jackson era of the 1830s, during the 30 years after 1873, and during the Great Depression of the 1930s, ordinary Americans suffered far more from falling prices and unemployment engineered by inflation hawks than they did from inflation. The very meager government spending over the past 200 years has caused far more pain than inflation. This is worrying because inflation hawks are once again turning Americans in their direction.
Paul A. London, Ph.D., was Senior Policy Adviser and Deputy Under Secretary of Commerce for Economics and Statistics in the 1990s, Associate Deputy Director in the Federal Energy and Energy Administration, and Visiting Fellow at the American Enterprise Institute. A legislative aide to Senator Walter Mondale (D-Minnesota) in the 1970s, he was a diplomatic staffer in Paris and Vietnam and the author of two books, including Solving Competition: The Bipartisan Secret Behind American Prosperity (2005).