Fighting inflation

The robust growth in the American economy has recently triggered some fears of inflation. Although the inflation rate is still tame–around two percent or so–strong aggregate demand in the booming market place could finally force Alan Greenspan’s hand. In order to cool a potentially overheating economy, the Chairman of the mighty Federal Reserve Board might feel compelled to hike interest rates and create a truly dampening effect.

Such a bold move, of course, would create enormous political shock waves that would reverberate throughout the entire globe. If US interest rates rise, American stocks should fall sharply. (US stocks, incidentally, represent the single best example of hyper-inflation today.) However, if interest rates are raised and US stock markets plummet, Mr. Greenspan will have spoiled the party and we’d all be pretty darn unhappy.

It might be a whole lot better, instead, to do what President Gerald Ford did during the inflation crisis of the late 1970s: create “Fight inflation” posters, bumper stickers, and campaign pins. That way, inflation will surely be licked.

But if that doesn’t work, legendary free market economist Milton Friedman might have an even better idea–a simple monetarist approach our economist Ed Stephens Jr. might adore: restrict government spending and gradually increase the overall money supply.

Personally, as a certified arm-chair economist, I prefer a more fiscal approach: dramatically cut taxes, impose a flat tax, limit government spending and radically curtail government regulations. This, to me, represents the soundest possible avenue of approach toward licking the threat of inflation for good.

We have to remember that inflation is a relatively new phenomenon. It is a 20th Century development brought about by massive government regulation of the macro economy. Prior to this century, we actually had instances of deflation–of prices actually decreasing. Constantly rising prices coincided very closely with the advent of big government incessantly intruding and intervening in the once free and open market place.

Cutting taxes and limiting government regulations, however, might strike some as an inherently inflationary prescription. If taxes are cut and regulations are reduced, some would argue, economic activity would likely be stimulated. This, in turn, would raise demand, which would–as per the laws of supply and demand–raise prices.

It is interesting to note that these very supply-side skeptics remain completely oblivious to their Keynesian demand side equivalent: namely, the notion that Keynesian pump-priming would in and of itself stimulate demand and hence artificially inflate prices.

The key concept to remember is the notion of unnatural artificiality that government intervention constantly creates–as opposed to the natural, water-like, free flow of market allocated capital in the macro economy.

Governments distort true prices with flawed policies. They create shortages and surpluses with price controls, price ceilings, regulations, and subsidies. This is nowhere more manifest than in the modern phenomenon of inflation.

The keys to subduing inflation lies in free trade (lower costs through comparative advantage), technological advances (faster, cheaper, better), and limited government spending and regulation. Nothing else will do.