Watching the screen on a gas pump while filling your vehicle’s tank is liable to induce a panic attack. Paying for a used car almost requires taking out a second mortgage. Speaking of mortgages, members of the middle class are being priced out of the housing market as home prices march relentlessly upward. Many price increases are out of control.
How did we get here? A little over a year ago, and in the years before the Covid-19 pandemic, most prices were relatively stable. But more recently, general price inflation is at a 40-year high.
The late economist Milton Friedman helped explain the inflation and stagflation of the 1970s. His explanation helped shape the strong economic recovery of the 1980s, built on the principles of limited government, with sound monetary policy that resulted in a steep decline in what had been rampant, double-digit inflation.
Inflation Is a Monetary Phenomenon
Friedman pointed out that “inflation is always and everywhere a monetary phenomenon.” The seemingly force majeure is actually a manmade problem, caused by the Federal Reserve (Fed) creating too much money. These principles of money and inflation aren’t new.
But those lessons are being disregarded by some in the economics profession. People like Stephanie Kelton have been promoting Modern Monetary Theory (MMT), which is virtually a complete reversal of what Friedman espoused and history demonstrated. This theory contends that the federal government’s current deficit spending isn’t an issue — it can, and should, be solved by the Fed creating money to fund it without concern about inflation as long as the U.S. dollar is the world’s reserve currency.
President Joe Biden has not openly endorsed MMT, but he’s no fan of Friedman either. Instead, he seems content to have many mostly younger congressional Democrats advocate for MMT, which provides convenient and seemingly academic reasoning for financing more federal spending without explicitly raising taxes. It has a similar political appeal that Keynesianism presented almost a century ago, and MMT is just as flawed.
But proponents of MMT do get one thing correct — the Fed can create money to service the debt and avoid a default. But in real terms, meaning adjusting for inflation, this assertion is false. Creating money to service the debt devalues the currency. Investors then receive a lower real return on their holdings of federal debt.
Furthermore, everyone is hurt by inflation, whether they own government bonds or not. Inflation is essentially a tax, as it robs people of their purchasing power at no fault of their own. Everyone who received a 7.5 percent raise over the last year probably thought they would be able to afford more stuff, but they were deceived. Inflation rose just as much — so there was no real raise.
False Claims That Taxes Are the Solution
But MMT proponents claim that the massive budget deficits are what allow people to save money. Were it not for those deficits, they contend, people would have no cash to save. At first glance, the pandemic seemed to support that. People received transfer payments from the government and saved much of them due to uncertainty. But more recently, people’s savings are being depleted as this dependency on government dries up and prices soar.
Now that inflation is running amok, MMT adherents believe tax increases are the primary (if not only) cure. They claim inflation is not caused by the Fed creating too much money, but by people having too much money to spend; taxation will remove that excess liquidity and stop inflation.
However, MMT doesn’t explain why it’s only inflationary when people spend money, but not when the government spends it. Somehow the Fed creating money by purchasing government debt miraculously doesn’t bid up prices for scarce resources. The theory sounds more like a belief than science — something that must be trusted rather than demonstrated.
Specifically, MMT ideology is built on mathematical relationships between economic variables like private and public savings and debt rather than a strong theoretical construct, and breaks down quickly when analyzed with sound economic theory. Moreover, these relationships seem to be used to derive a funding mechanism for their big-government policy goals, such as a federal jobs guarantee, universal healthcare, and other costly initiatives.
How Taxation Might Stop Inflation
But MMT is not entirely wrong on using taxation to stop inflation. If those taxes are used to pay for deficit spending — which really should be done by spending less — rather than the Fed financing it, then higher taxes can lower inflation. But that is far too nuanced of an explanation for MMT, which paints in much broader brushstrokes.
Regardless, MMT cannot dispel the hard truths of monetary policy, which is inflation comes from one place — the Fed. When the Fed creates money faster than the real economy grows, prices will rise; it’s that simple.
To alleviate the uncertainty and distortions across the economy of bad policies in Washington, there should be binding fiscal and monetary rules based on sound economics instead of ideology. This should include changing government spending by less than the growth in personal incomes and only changing the money supply to keep prices stable.
Almost two years after President Biden declared “Milton Friedman isn’t running the show anymore,” the late economist is clearly the one with the last laugh. Perhaps next time, the president will think twice before speaking ill of the dead.
The media is quick to explain away the runaway inflation that is squeezing American families and darkening the prospects of Democrats in the upcoming midterm elections.
“The U.S. economy has been hit with increased gas prices, inflation, and supply-chain issues due to the Ukraine crisis,” CBS News tweeted on Tuesday.
Its article went on to claim, “Although many Americans may prefer that the U.S. stay out of the conflict between Russia and Ukraine, the brewing violence and political fallout are already hurting their wallets.”
Americans know better—because each of these problems has been worsening ever since President Joe Biden took office in January 2021.
The West Texas Intermediate crude oil (WTI) price is up 98% since January 2021. Yet WTI is essentially flat since the White House warned that Russia would soon invade Ukraine on Feb. 11. On that day, WTI sold for $93 per barrel. On Tuesday, it closed at $92.
It just goes to show that the Biden administration (and its allies in the media) will try to blame anything except its own bad policies.
A New Approach to Reducing Poverty
We think about poverty all wrong. And because we think about poverty all wrong, much of our approach to alleviating it is wrong. Thus, poverty stubbornly persists and the trillions of dollars we spend barely nudges the needle to long-term poverty relief.
The problem is the disconnect between what poverty really is and what our public policies are trying to solve. A clear understanding of poverty is offered by Steve Corbett and Brian Fikkert in their book, When Helping Hurts. “While poor people mention having a lack of material things, they tend to describe their condition in far more psychological and social terms…” the authors explain.
“Poor people typically talk in terms of shame, inferiority, powerlessness, humiliation, fear, hopelessness, depression, social isolation and voicelessness. Low-income people daily face a struggle to survive that creates feelings of helplessness, anxiety, suffocation and separation that are simply unparalleled in the lives of the rest of humanity.”
Most Americans don’t define their self-worth based on material possessions (or lack thereof). But our public policies too often focus on stuff. American families below the poverty line have access to a plethora of programs, benefits, cash, and services that provide them with things, especially since the COVID-19 pandemic. But what they lack is a voice. Alleviating poverty means increasing opportunities to gain human dignity, purpose, and self-sufficiency.
Understanding that poverty encompasses more than just a dearth of disposable income is key to addressing the systemic issues at play. Those suffering from real poverty live a very different life and see their condition as something quite different from simply being “broke.” It’s more appropriate to say they lack the social capital—a buzz phrase, sure, but a useful one in this case—upon which to rely.
The poor lack many intangible things most of us take for granted, like having marketable skills and using them to contribute to our communities in a way society values. Absent a sense of their own dignity, purpose, and self-sufficiency, people are left with dependency to survive—a poison to the human soul. Any attempt to alleviate long-term poverty with little more than repeated handouts, without also connecting people with work, training, or education and building community connections, is not helping, it’s hurting.
If we truly intend to love our neighbor as God has commanded, we must recognize that the War on Poverty, fought LBJ-style with government programs, has been lost. A new approach must be charted—an approach that emphasizes keeping vulnerable Americans on track, developing valuable skills, individualizing plans that help people overcome their specific barriers to employment, and—most importantly—an exit strategy. With few exceptions, the goal should be to help people earn self-sufficiency through increased opportunity and work, not lock them into a lifetime of dependency and despair.
A good example of this approach is Bonton Farms, an inner-city Dallas urban farm that provides support for people to bridge the gap from poverty and prison and has helped hundreds of people gain a new sense of dignity and purpose. At Bonton Farms, it’s not about handouts. “This gives a lot of guys the opportunity to change,” one former inmate says.
“If they want to do better, they can. If they want to be more than just a street guy, a drug dealer, they can. If they want their kids to watch them be something more, it’s possible. That’s what we show them.”
Work is the key. Work means using one’s God-given talents and learned skills to provide a value to the community. Doing so confers on those suffering from poverty the very things they cry out for, such as hope, purpose, and a voice. They gain agency—the ability to make their own decisions—and learn skills necessary for them and their families to prosper. A job is the beginning of an exit strategy out of poverty.
This should be a bipartisan issue. Indeed, some of the greatest gains made in recent decades fighting poverty came via the Welfare Reform Act of 1996, passed by Republican majorities in the House and Senate and signed by Democrat President Bill Clinton. But even that was incomplete, and later presidents and governors dropped many of the work requirements that were its centerpiece.
These factors contributed to the recent launch of a multi-state poverty relief initiative called the Alliance for Opportunity. This includes three state-based think tanks, the Georgia Center for Opportunity, Pelican Institute in Louisiana, and Texas Public Policy Foundation. With a top-notch team and high-quality work that provides a toolkit for policymakers, we hope to help 1 million people out of poverty in these three states to show proof of what works for other states and for Congress to hopefully follow.
Our new efforts must begin with a full and fair assessment of how the current situation is helping keep vulnerable Americans on track. Existing programs, especially at the state levels, must be audited and made more transparent by improving data collection to evaluate desired outcomes. And we must partner with community groups closest to those in need—the real safety nets—while streamlining current programs with new ideas like empowerment accounts.
Additionally, we must remove barriers to ensure everyone has the right to earn a living. This includes removing obstacles like unreasonable occupational licensing, delay of a driver’s license for many who were formerly incarcerated, or simply instituting more apprenticeship programs to improve access to skills training.
And last, but certainly not least, we must address poverty through criminal justice reforms, which our new initiative aims to do. This includes restoration through diversion programs and specialty courts, life and work skills through rehabilitation and transition programs, and a productive path back into the community for the formerly incarcerated.
We must do more than send a check every month like the child tax credit payments sent by Congress in the second half of 2021. We must treat the poor like human beings, not just a number. We must meet them where they are and help them achieve their full potential.
If poverty was as simple as a lack of funds, then surely the money spent thus far would have made a bigger dent. But it’s not that simple. It never was. We’ve merely sought too long for easy answers. Now it’s time to roll up our sleeves and pursue a new path to eliminate dependency and restore the dignity of work so that more people can be financially self-sufficient.
There’s new evidence government-imposed shutdowns prompted by the COVID-19 pandemic have done more harm than good. Instead, a better choice is keeping the economy open so people stay connected to work and targeting resources to vulnerable populations.
A new meta-analysis from Johns Hopkins University underscores this finding, revealing that lockdowns in America and Europe during the first pandemic wave in spring 2020 only reduced the death rate by 0.2% on average. Researchers concluded that lockdowns “have had little to no public health effects” while imposing “enormous economic and social costs” and should be “rejected as a pandemic policy instrument.”
While businesses were shuttered, people were forced to stay home, and schools remained closed, the unintended social and economic consequences were clear: Rising unemployment, learning loss among students, spiking rates of domestic violence, and a pandemic-level rise in drug abuse and overdoses. All of that social and economic devastation yielded a minimal impact on health-related suffering due to COVID-19.
The new research from Johns Hopkins mirrors our own findings in a recent nationwide study, which found that overreaction by states to waves of the pandemic did substantial damage without much benefit in reducing the effects of the pandemic.
The research shows a statistical correlation between how severe state governmental actions were in shutting down their economies and negative impacts on employment more than a year after the pandemic began in America. This was the case even after controlling for a state’s dependence on tourism or agriculture, population density, and the prevalence of COVID-19 infections and hospitalizations.
Our research found no correlations between the severity of shutdowns imposed by state governments and the rate of reported COVID-19 hospitalizations or deaths. States like Hawaii, New York, California, and New Mexico that imposed harsher economic restrictions generally have greater job losses even today than those states that were less harsh, such as South Dakota, Iowa, Nebraska, Missouri, and Utah.
For example, New York was 10.2% below its trajectory in October 2021 while Nebraska was just 2.4% below.
The bottom line is that while policymakers were likely working in good faith to do their best in a challenging situation, it’s crucial we learn from these past mistakes so that we don’t repeat them. And make no mistake about it—those mistakes have driven untold amounts of human suffering during the past two years.
The worst part is that the government-imposed shutdowns created even more barriers for people who were already struggling. Every American was impacted, of course. These interventions created challenges and burdens for the middle and upper classes, but for our poorest communities they were outright damaging.
Protecting the rights and opportunities of workers to earn a living is obvious. Equally important are the psychological benefits that come with the dignity of work. And there are socio-economic benefits from work that positively impact everyone, such as building social capital and gaining skills, which are especially important for those in marginalized communities who were most impacted by the shutdowns.
As the states look for a long-term strategy to deal with the pandemic, it is paramount that they consider the empirical evidence and not impose burdensome restrictions—such as business closures, stay-at-home orders, school closures, gathering restrictions, and capacity limits—on economic activity that have proven to do more harm than good.
Instead, the policies need to be crafted more carefully to expand opportunities for the poor and preserve jobs in an open economy in which entrepreneurs can solve problems while taking measures when necessary to protect vulnerable populations.
These are the policies that should have been done all along to avoid the severity of the shutdown recession and the effects on lives and livelihoods thereafter. Let’s not make another mistake when so many are already suffering.
Even though Sen. Joe Manchin says the Build Back Better Act is “dead,” we all know that spending plans in the D.C. swamp have a disturbing tendency to rise from the grave. There’s already speculation (on CNN and elsewhere) about what a new big-government spending bill will contain.
But with the national debt recently surpassing $30 trillion, we can’t allow even more irresponsible spending. The time for a Responsible American Budget is now.
Another big-government bill making its way down the pike is The America COMPETES Act of 2022, which the House passed last week. It contains up to $350 billion more in deficit spending, all in the name of making us more competitive with China.
This includes billions and billions of dollars in corporate giveaways, such as sending $50 billion in taxpayer money to the semiconductor industry, another $50 billion to the Energy Department as a slush fund for “science purposes” and $8 billion to the U.N. Green Climate Fund. That fiscal cost plus the bill’s regulatory cost will make the nation substantially less competitive.
The truth is, what Americans and Texans need is relief, not more debt and higher prices. The last two years have been increasingly difficult on our wallets. With inflation hitting a 40-year high, prices of everyday consumer goods continue to increase compared to years past, thereby reducing our purchasing power.
As the nation continues to recover economically, now is not the time to continue discussing increasing the burden of federal government spending and taxing on Americans. Should it pursue fiscal excesses like those included in the Build Back Better Act, each American would be saddled with an additional $24,000 of national debt, raising the total debt owed by each taxpayer to $111,000.
Over the past couple of years, we’ve seen major Texas metropolitan markets like in Dallas, Austin, and Houston become the new home to many companies in industries like technology and manufacturing. As quickly as Texas begins to see these new job opportunities, there is the potential for them to vanish should Congress raise taxes.
While the Tax Cuts and Jobs Act helped to increase the competitive advantage for businesses through cutting the corporate tax rate from 35% to 21%, there is movement to raise this rate and raise the global intangible low-taxed income (GILTI) rate on businesses. This would follow a disruptive trend of imposing a global minimum tax rate of 15% that was agreed to by more than 130 countries in October 2021, which would hit Texans hard.
Much like our business community, Texans could find themselves struggling to get by as they see things like their inflation-adjusted wages decline, making it difficult to afford things like childcare or increasing challenges in saving for retirement.
There should be a united voice in opposing additional hikes in spending and taxes and help refocus Congress toward supporting a stronger economy and more opportunities with fiscal restraint and deregulation that have been proven to work for all.
A good start is making the Trump tax cuts permanent. Of course, America doesn’t have a revenue problem, but a spending problem. So, the primary way to provide Texans and all Americans with relief is by passing a Responsible American Budget. This budget would freeze government spending per person so that there is less of a burden on taxpayers.
This budget approach has received high praise from members of Congress, top economists, state policymakers, and experts from across the country. Here are three of the many takes:
Art Laffer: “Government spending is taxation, and we cannot spend and tax our way into prosperity. The Responsible American Budget is a terrific way to rein in this government waste by imposing fiscal limitations on the profligate spenders in Washington.”
Steve Moore: “Spending in D.C. is simply out of control, and we have to act now to stop it. Fiscal restraints like the Responsible American Budget will go a long way to preserving our freedom and unleashing prosperity.”
Grover Norquist: “There has been success in reducing federal tax rates in recent years, which President Biden and congressional Democrats are now trying to undo. Where we’ve yet to make sufficient progress is reining in federal spending. With the Responsible American Budget, the Texas Public Policy Foundation has laid out plan to get federal spending under control.”
If we can have less spending, taxing, and regulating, we can compete and return to the real prosperity earned in 2019 rather than the increased dependency on government today. Otherwise, America can’t compete.
Latest on Texas budget.
Government spending is at the heart of sound public policy. But out-of-control spending for decades has created substantial economic destruction and ongoing threats that must be remedied before things get worse. Fortunately, we have examples of how fiscal rules can solve this problem. We must put these rules into place before our economy gets any worse.
Excessive federal government spending has created mounting budget deficits that have driven the national debt to $30 trillion. This debt has given the Federal Reserve ammunition to use to excessively print money, resulting in the highest inflation in 40 years. And inflation destroys our purchasing power as it is a hidden tax that erodes our livelihood.
Controlling spending takes discipline, and applying fiscal rules can help.
Policymakers should follow the examples a century ago of Presidents Warren G. Harding and Calvin Coolidge, who demonstrated that controlling spending and cutting the debt is possible.
President Harding assumed office in 1921 when nation was suffering an overlooked severe economic depression. Hampering growth were high income tax rates and a large national debt after WWI. Congress passed the Budget and Accounting Act of 1921 to reform the budget process, which also created the Bureau of the Budget (BOB) at the U.S. Treasury Department (which was changed in 1970 to the Office of Management and Budget in the Executive Office of the President). President Harding’s chief economic policy was to rein in spending, reduce tax rates, and pay down debt. Harding, and later Coolidge, understood that any meaningful cuts in taxes and debt couldn’t happen without reducing spending.
Charles G. Dawes was selected by Harding to serve as the first BOB Director. Dawes shared the Harding and Coolidge view of “economy in government.” In fulfilling Harding’s goal of reducing expenditures, Dawes understood the difficulty in cutting government spending as he described the task as similar to “having a toothpick with which to tunnel Pike’s Peak.”
To meet the objectives of spending relief, the Harding administration held a series of meetings under the Business Organization of the Government (BOG) to make its objectives known.
“The present administration is committed to a period of economy in government…There is not a menace in the world today like that of growing public indebtedness and mounting public expenditures…We want to reverse things,” explained Harding.
Not only was Harding successful in this first endeavor to reduce government expenditures, his efforts resulted in “over $1.5 billion less than actual expenditures for the year 1921.” Dawes stated: “One cannot successfully preach economy without practicing it. Of the appropriation of $225,000, we spent only $120,313.54 in the year’s work. We took our own medicine.”
Overall Harding achieved a significant reduction in spending. “Federal spending was cut from $6.3 billion in 1920 to $5 billion in 1921 and $3.2 billion in 1922,” noted Jim Powell, a Senior Fellow at CATO Institute. Harding and the Republican Party viewed a balanced budget as not only good for the economy, but also as a moral virtue.
Dawes’s successor was Herbert M. Lord, and just as with the Harding Administration, the BOG meetings were still held on a regular basis. President Coolidge and Director Lord met regularly to ensure their goal of cutting spending was achieved.
Coolidge emphasized the need to continue reducing expenditures and tax rates. He regarded “a good budget as among the most noblest monuments of virtue.” Coolidge noted that a purpose of government was “securing greater efficiency in government by the application of the principles of the constructive economy, in order that there may be a reduction of the burden of taxation now borne by the American people. The object sought is not merely a cutting down of public expenditures. That is only the means. Tax reduction is the end.”
“Government extravagance is not only contrary to the whole teaching of our Constitution, but violates the fundamental conceptions and the very genius of American institutions,” stated Coolidge.
When Coolidge assumed office after the death of Harding in August 1923, the federal budget was $3.14 billion and by 1928 when he left, the budget was $2.96 billion.
Altogether, spending and taxes were cut in about half during the 1920s, leading to budget surpluses throughout the decade that helped cut the national debt.
The decade had started in depression and by 1923 the national economy was booming with low unemployment. If this conservative budgeting approach—which was tied with sound monetary policy for most of the period—had been continued, the Great Depression wouldn’t have happened.
Officials at every level of government today should learn from this extraordinary lesson that fiscal restraint supports more economic activity as more money stays in the productive private sector.
With spending out of control at the federal level and in many states and local governments, the time is now for spending restraint and strong fiscal rules to set the stage for more economic prosperity today and for generations to come.
Approve a Sustainable Michigan Budget: Spending limits on government can boost economic growth and opportunities
While Michigan employs 205,200 fewer people than in February 2020, a 4.6% decrease, the state government’s budget continues to grow.
To keep the government from spending more and further crowding out the productive private sector, the Mackinac Center has created the Sustainable Michigan Budget. This plan would set a maximum limit on what lawmakers can spend, based on changes in population and inflation. The next state budget would be allowed to grow by 3.15% under this formula, limiting spending of revenue from state taxes and fees to $39.1 billion.
Spending restraints should make it easier for lawmakers to lower tax rates. If state revenues exceed what needs to be spent, lawmakers should let individuals keep more of their hard-earned income. This would encourage job growth, provide more opportunities for Michigan residents and make the state more competitive economically.
Over the past two years, 14 states have cut their tax rates — including Ohio, which now taxes income at lower rates than Michigan. Lawmakers in Indiana are also looking to cut income taxes and business taxes as well as eliminating two state utility taxes. Limiting spending can help the state compete with its neighbors while providing a better economic environment for residents.
When lawmakers limit spending, they can use the extra revenue raised by the state to improve Michigan’s financial prospects by paying down long-term debt. Lawmakers accidentally made school employees the state’s largest creditors by severely underfunding the school pension system. This is a disservice to teachers and expensive to taxpayers. Paying down this debt would save billions of dollars in interest costs over time.
Spending limits also encourage lawmakers to prioritize effective government programs. They must balance devoting state resources to their highest priorities while keeping government affordable to taxpayers. This increased prioritization can help ensure that residents receive more effective services from government each year, not just more expensive services.
Michigan’s initially approved FY 2021-22 budget included $37.9 billion in spending. U.S. CPI inflation was 3.32% in FY 2020-21, while Michigan’s resident population declined 0.17%. That comes to 3.15% in population growth plus inflation. Based on the Sustainable Michigan Budget, the FY 2022-23 budget should be no more than $39.1 billion.
The Sustainable Michigan Budget does not apply to the large amount of federal funds recently sent by Congress to Michigan, as these should be only one-time appropriations. This is because fiscal transfers to the state budget are made primarily by federal lawmakers for restricted purposes. The funds cannot be used to lower state taxes or pay down state debts, for instance.
It’s an appropriate time to limit state spending. Michigan suffered through a one-state recession in the 2000s and these losses affected the state budget. Since then, however, state revenue has steadily increased. Spending grew faster than the rate of population growth plus inflation for eight out of the past 10 years.
The Sustainable Michigan Budget would provide further protections than exist in the state’s current spending limit, which was put in place in 1978 by the Headlee Amendment. The current limit, based on personal income growth since 1977, would allow lawmakers to ratchet up spending by 35% before meeting this threshold. As such, it provides no real constraint on the size of the state budget.
Legislators find themselves with more taxpayer dollars at their disposal than ever before. They have been in the habit of spending every one of those dollars. As anyone who manages a household budget should know, that’s not a long-term, fiscally responsible practice. A Sustainable Michigan Budget would change this tendency. It would help ensure state funds are devoted to highest priorities, bolster the state economy, and, more importantly, ensure that residents have more opportunities to flourish in the productive private sector.
James M. Hohman is the director of fiscal policy at the Mackinac Center for Public Policy, a research and educational institute based in Midland, MI.
Vance Ginn, Ph.D., is chief economist at the Texas Public Policy Foundation, and served as the associate director for economic policy of the White House’s Office of Management and Budget during the Trump administration, 2019-20.
Mission: To enact public policy solutions that promote the human dignity, fruitful purpose, and self sufficiency of every American.
Vance Ginn, Ph.D.