Does deficit spending cause inflation and unemployment?

The Republican Party has assumed three tasks:

  1. Oppose the Democrats wherever possible on any subject at any time.
  2. Oppose anything that benefits the lower half of the income/wealth/power population.
  3. Support the rich

This unofficial, but very real, platform is referenced in the following article from the May 23rd, 2021 Chicago Tribune”

Biden betting big on wage growth
GOP: President’s policies are already spurring inflation
By Josh Boak Associated Press
WASHINGTON — The Biden administration recently gave a bit of simple advice to businesses that are unable to find workers: Offer them more money.

Businesses are coping with spiking prices for goods such as steel, plywood, plastics and asphalt.

Yet workers, after enduring a year of job losses, business closures and social distancing, are no longer interested in accepting low wages.

Administration officials say the White House is not trying to target a specific wage level for workers. But officials say higher wages are a goal of President Joe Biden and a byproduct of his $1.9 trillion relief package and at least $3.5 trillion in additional spending being proposed for infrastructure and education.

Boosting wages gets at the central promise of the Biden presidency to improve the lives of everyday Americans and restore the country’s competitive edge in the world.

Republicans say that Biden’s policies have already let loose a torrent of inflation that will hurt the economy.

Several economic factors are pushing toward inflation, but wages probably are the least of them.

Changes in average wages (blue line) do not correspond with changes in inflation (red line).

For companies that have become more automated, wages have been assuming less and less importance.

Industries vary markedly by expenses as a percentage of revenue. See: HERE. Low margin, low automation business obviously would be affected most by salary increases.

Most businesses should shoot for salaries in the 30 percent to 38 percent range, according to Second Wind Consultants.

Taking a mid-point of 35%, your business grossing $100, would pay $35 in salaries. Giving every employee, say, a 25% raise, would cost you $8.75 per employee.

So, you either would have to cut your profits, raise prices by 8.75%, or find some means to lower costs (via efficiencies, automation, etc.)

But wait. Most of your employees pay the government 15% for FICA, (your business technically pays half, but that cost is passed on to employees as salary costs) so if the federal government merely stopped collecting FICA, that immediately would give each worker a 15% raise paid for by the federal government. 

Further, because FICA takes dollars from the private sector (aka “the economy), the elimination of FICA would stimulate economic growth by leaving more dollars in the pockets of consumers. 

You would benefit; your employees would benefit; the entire economy would benefit — all at no cost to anyone. 

But wait again.

The total cost of health care, including premiums and out-of-pocket costs for employees and dependents, was estimated to average $14,800 per employee in 2019.

And again, because employers consider healthcare costs to be “pass-through” (considered as part of the cost of compensation), that’s another $14,800 each employee does not receive.

And that problem could be eliminated by a federally funded, Medicare for All program.

White House economic adviser Jared Bernstein said the goal is “to pull forward a robust, inclusive recovery that provides good employment opportunities to people who are in the bottom half, who went to work, often in unsafe conditions, or had to stay home to take care of their families and deal with school closures and childcare constraints.”

The New York Federal Reserve reported a 26% increase over the past year in wage expectations by noncollege graduates. The lowest average salary they expect for a new job is $61,483, up more than $12,700 from a year ago.

The wage pressures feeds into some anxiety about inflation.

The Biden team sees the 0.8% month-over-month jump in consumer prices in April as temporary, a sign of consumer demand and the bottlenecks that naturally occur when an economy restarts.

But newly released minutes from the Fed’s April meeting suggest the U.S. central bank could raise interest rates earlier than previously indicated to stamp down inflation and potentially limit economic growth.

We have three primary controls over inflation.

First, there is the month-to-month incremental control: Interest rates. Raising rates makes money more valuable to own, which instantly dials down inflation in small, targeted steps.

Second, for large-scale inflation, which is caused by shortages of key assets like oil and food, we have the federal government’s ability to purchase these assets abroad or to fund their creation domestically, and to distribute them to the populace.

The third control is federal fiat. The government merely says something on the order of, “From now on, the dollar will be worth [a specified exchange rate]. The fiat approach was used on several occasions with regard to the gold exchange rate, but nothing says it couldn’t be used with regard to any basket of foreign currencies.

The popular myth is that raising interest rates “limits economic growth,” and that myth is why the stock market temporarily reacts negatively to interest rate increases. 

However, raising rates requires the federal government to pump more interest dollars (i.e. stimulus dollars) into the economy.

So, as is all-too-frequent in economics, this myth is directly in opposition to reality.

Changes in interest rates (blue line) very closely correspond to changes in GDP (red line). When interest rates go UP, GDP goes UP.


The Senate’s Republican leader, Mitch McConnell of Kentucky, has told voters that Biden’s decision to provide an additional $300 a week in unemployment benefits and the spending in his relief package are hurting the economy.

He said Thursday on Fox Business that the package “Democrats jammed through on a party-line vote” is “producing both people not wanting to work and raging inflation.”

“People not wanting to work” is the right-wing meme that actually means, “Poor people are lazy. They don’t want to work in the grueling jobs and for the slave wages our wealthy supporters want to pay.”

It is the GOP version of “Starve ’em until they are so desperate they will take any awful job and accept any awful wage.” 

Slave wages and slave conditions are why growing cotton was so profitable in the old South.

And as for “raging inflation,” that is a typical, Trump/GOP misstatement unless one considers a 10 year interest rate average below 2% to be “raging.”

To no one’s surprise, rates shot up in the past month, as COVID vaccinations finally freed people to mingle and shop.

But if rates don’t drop, the government still has the unlimited ability to control inflation.

The GOP approach is to give tax reductions to the rich, while starving the rest of the population to whip them to work.

Part of the dispute between Biden and Republicans is on how economies grow. The administration has embraced a philosophy of investing in workers and providing them with benefits to make it easier for them to juggle life responsibilities and jobs.

Republicans believe the key is to minimize taxes and other barriers for employers so that lower operating costs lead them to invest and hire.

In other words, if you give people no benefits, and the only available jobs are sweat labor at starvation wages, people will have to take those jobs, and the corporate executives will grow richer.

Republicans see the $300-a-week federal unemployment payment as discouraging people from working because they can earn more money by staying unemployed. Their view is that this limits how many jobs can be created and how high wages will rise.

There are 23 states — all with Republican governors and GOP-controlled legislatures — that plan to block the enhanced federal benefits in June, under the belief that the loss of income will cause people to take jobs.

Yes, that does work. Loss of income forces people to take bad jobs.

Aaron Sojourner, a labor economist at the University of Minnesota, warned that scrapping the benefits could reduce families’ incomes and possibly encourage employers to pay less such that workers’ incomes might be depressed.
“Lower wages is exactly the premise of the Republican position,” Sojourner said.

Sadly, the Democrats have not had the courage to tell what they surely must know: 

  1. Taxpayers do not fund federal spending.
  2. The federal government has the unlimited ability to pay for benefits
  3. The economy, and the people living in it, are much healthier during periods of federal deficit spending.
  4. The GOP and their wealthy backers want to starve the populace so that the rich will grow richer.

Rodger Malcolm Mitchell Monetary Sovereignty Twitter: @rodgermitchell Search #monetarysovereignty Facebook: Rodger Malcolm Mitchell …………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………..

THE SOLE PURPOSE OF GOVERNMENT IS TO IMPROVE AND PROTECT THE LIVES OF THE PEOPLE.

The most important problems in economics involve:

  1. Monetary Sovereignty describes money creation and destruction.
  2. Gap Psychology describes the common desire to distance oneself from those “below” in any socio-economic ranking, and to come nearer those “above.” The socio-economic distance is referred to as “The Gap.”

Wide Gaps negatively affect poverty, health and longevity, education, housing, law and crime, war, leadership, ownership, bigotry, supply and demand, taxation, GDP, international relations, scientific advancement, the environment, human motivation and well-being, and virtually every other issue in economics. Implementation of Monetary Sovereignty and The Ten Steps To Prosperity can grow the economy and narrow the Gaps: Ten Steps To Prosperity:

  1. Eliminate FICA
  2. Federally funded Medicare — parts A, B & D, plus long-term care — for everyone
  3. Social Security for all
  4. Free education (including post-grad) for everyone
  5. Salary for attending school
  6. Eliminate federal taxes on business
  7. Increase the standard income tax deduction, annually. 
  8. Tax the very rich (the “.1%”) more, with higher progressive tax rates on all forms of income.
  9. Federal ownership of all banks
  10. Increase federal spending on the myriad initiatives that benefit America’s 99.9% 

The Ten Steps will grow the economy and narrow the income/wealth/power Gap between the rich and the rest. MONETARY SOVEREIGNTY

 

 

2 thoughts on “Does deficit spending cause inflation and unemployment?

  1. Rodger,
    You say:
    “However, raising rates requires the federal government to pump more interest dollars (i.e. stimulus dollars) into the economy”.

    Can you explain this a bit more. Why does it require more $ to be pumped into economy? Isn’t that just countering the interest rate rise? I can’t wrap my head around this. If the theory says increasing the rate “cools” inflation, it works by “removing” money from the private sector, right?. (ie increased savings=money more valuable to own), So then how is adding money back supposed to help? Aren’t we back at square one?

    Like

    1. Excellent question, Anthony.

      The situation is indeed complex because there are several countervailing effects.

      1. Increasing interest rates increases the value of dollar-denominated securities, which would increase the value of the dollar (counter-inflationary.)

      2. But, increasing interest rates requires the federal government to pay more interest dollars on T-bills, T-notes, and T-bonds, which pumps more economic production dollars into the economy (Counter-inflationary) along with more demand dollars (inflationary).

      3. For ordinary commodities, adding to the supply would decrease the price, so long as demand also did not increase (inflationary).

      4. But dollars are not like other commodities. Adding to the domestic supply of dollars also increases the domestic investment in the production of goods and services (counter-inflationary).

      5. Because the value of dollars not only is determined domestically but on foreign exchange, and increasing interest rates increases the value of dollars internationally (counter-inflationary).

      6. Raising interest rates decreases the price of existing bonds (counter-inflationary), and moves dollars from stocks to new bonds. This is the so-called “cooling” effect, which provides the illusion of counter-inflation.

      7. Raising interest rates reduces investment in research, development, and production of goods and services (inflationary).

      8. There also is a difference between the LEVEL of interest rates and CHANGES in interest rates. Changes have SHORT-TERM effects. As the economy adjusts to the higher interest rates, these higher rates and the increased money supply will provide more growth stimulus.

      9. There is a different effect in changes at different levels. For example an increase of 1% from a 2% level will have a different effect from an increase of 1% from a 4% level.

      The effects of interest-rate adjustment are mixed in the short term, and are different from the long-term effects.

      The cause of inflation is shortages of key goods and services, primarily food and energy. Thus, the primary control over inflation and economic growth is NOT the Fed, but rather, Congress and the President. It is they who control scarcity and growth investment.

      And now for the TRUTH. Everything I have written is hypothetical and varies according to specific circumstances at specific times. Many variables have countervailing effects. So the bottom line is to ask, what really happened?

      One would think there would be a parallel between low interest rates and high inflation (https://fred.stlouisfed.org/graph/fredgraph.png?g=EME7)

      Or between interest rates and inflation changes (https://fred.stlouisfed.org/graph/fredgraph.png?g=EMDK).

      Or between interest rate changes and inflation changes (https://fred.stlouisfed.org/graph/fredgraph.png?g=EMEf).

      Yet, we do not see those effects in the real world. What we do see lately is low interests rates + low inflation + high deficits — exactly the opposite of what the economists tell you should be happening.

      Like

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