Even when gold was money, the quantity of money could fluctuate. Gold could be hoarded or used in jewelry. As Karl Marx explained, "By the side of a gross form of a hoard, we find also its [money's] aesthetic form in the possession of gold and silver articles" (Capital, Volume 1, trans. Samuel Moore & Edward Aveling, New York: International Publishers, 1967, 133). The Federal Reserve Act was passed in 1913 because supporters of the changes believed that the money supply needed to be "elastic". Even if money was never converted from ornamental use to monetary use, the supply of money could be increased when rulers clipped the edges off coins and used the clippings to make new coins. Some coins still have reeded edges today even though they are no longer needed to prevent coin clipping. Rulers, for ages, have wanted to increase the quantity of money. Ordinary people have also been in favor of more money being created. According to a seventeenth century economist, "Money being ... the common measure of buying and selling, everybody who hath anything to sell, and cannot procure chapman for it, is presently apt to think that want of money in the kingdom, or country, is the cause why his goods do not go off, and so, want of money is the common cry" (quoted in Marx, Capital, Volume 1, 122 fn). It's noteworthy that businessmen voiced such sentiments at the end of the seventeenth century, just prior to John Law's disastrous "experiment" in monetary expansion (See Charles Mackay, Extraordinary Popular Delusions and the Madness of Crowds, Volume 1, "The Mississippi Scheme").
I bring up monetary history briefly so that the reader will understand that monetary authorities are relatively unconstrained when it comes to money creation today. What Marx referred to as hoards may even be considered part of the money supply. If so, monetary authorities in the past would have more control of the quantity of money, but they would not be in control of how much money is circulating. Creating more money is one thing, but if it's not being circulated, merchants would still likely have to deal with a surplus of unsold goods. What then? Will they cry out for further additions to the money supply? Profligate governments liked creating new money because it allowed them to spend more without raising taxes. If the money creation helped businesses sell at accustomed prices, it was a side effect. Selling consumer products at stable prices, however, is not what is usually meant by inflation. Increased government spending need not even be financed by money creation. Yet, we've seen recently that worries about inflation are being used to oppose Biden's "government [spending] expansion" (Matthew Cantinetti quoted in The Week, 7 May 2001, 4). What are the underlying assumptions? I think the history of profligate rulers is suggestive. Raising taxes is not easy to do. For example, it was reported recently that "'corporate America is prepared to use every bit of leverage it has' to block the proposed tax hikes" (The Week, 7 May 2021, 4). Let's, for the sake of argument, assume that taxes and revenue can be raised by the necessary amounts.
The inflation that people care about is measured by the CPI (Consumer Price Index). We’ll often hear that inflation involves demand exceeding supply. Economists will use the term “aggregate demand.” Aggregate demand is composed of C (consumption) + I (investment) + G (government). We are concerned with increases in government spending that cause a rise in the CPI. Increases in G that are funded by taxes won’t necessarily increase aggregate demand. In order for inflation to rise in that situation, some or all of the increase in G would have to be spent on consumer goods. The classical economists made a distinction between productive and unproductive laborers. “Unproductive” laborers don’t create a “vendible commodity” (Adam Smith quoted in Joan Robinson, Economic Philosophy, 1962; Penguin, 1964, 43). They, however, still have income, and they can use the income to purchase commodities made by others. If we think for a moment, we can understand why the term “unproductive labor” isn’t still being used today. The term suggests that people are not being productive unless they directly contribute to the production of a consumer good. When it comes to investigating the inflation that we are concerned with, however, the concept of unproductive labor is not useless. If government employees and government beneficiaries have more money to spend, the increase in consumption spending is obvious. The contribution to production, however, may be indirect or even nonexistent. According to A. Gary Shilling, “When there is more purchasing power than available goods and services, prices go up” (Deflation, New York: McGraw-Hill, 1999, 3). Government budgets have to come at the expense of some other budget, so it’s not obvious yet how a government with a balanced budget can increase purchasing power.
We are far removed from a world where people talked about “unproductive labor” and “productive consumption”. When people talk about Consumption or C, they mean household spending on current goods and services (James D. Gwartney, Economics: Private and Public Choice, Academic Press, 1976, 134). It would be more accurate to refer to it as consumer spending. Because the consumption is from households and not businesses, the consumption is considered to be “unproductive”. (Here, we ignore the fact that people have to consume food in order to maintain “human capital”.) “Unproductive Consumption” is therefore a redundancy. Consumer spending, as used here and elsewhere, is an unambiguous term. It’s a helpful term because it helps us focus on the spending that pushes up the prices of consumer goods and services. The term inflation is not unambiguous, and I was probably guilty of equivocation myself in an earlier post. Milton Friedman defined inflation as a “steady and sustained rise in prices” (Dollars and Deficits, Englewood Cliffs, New Jersey: Prentice-Hall, 1968, 21). The public, however, probably defines inflation more narrowly. To them, inflation probably means a rise in the prices of goods that households buy.
Government spending is part of aggregate demand, but the components of government spending are sometimes murky. I think that people can agree that refundable tax credits are essentially just government spending. Tax rebates and especially retroactive tax rebates might be called “tax cuts,” but no one is really fooled anymore. I suspect that some of what are labelled “tax breaks” by opponents truly are tax cuts. The fact that opponents want to conflate a tax policy with a tax decrease suggests that some tax decreases are just government spending, and it’s more politically viable to oppose government spending than it is to oppose tax cuts. Long before the monthly child tax credit was enacted in 2020, Bruce Bartlett wrote that “there is growing pressure to make the child credit refundable as well. This has encouraged liberals to simply convert their own welfare proposals into refundable tax credits and label them as ‘tax cuts’” (Imposter, New York: Doubleday, 2006, 57). Being refundable, the child tax credit was a thinly-disguised spending program. More importantly, it was “social spending” that was immediately spent on consumer goods and services.
The supporters of the latest proposed increase in government spending have argued that the increased spending will be “paid for”. Opponents have said that the spending will not be funded entirely by taxes because the programs will not end. They will only be paid for in the first few years. It’s much easier to get the public to oppose spending if the spending will increase the budget deficit. The public apparently assumes that the Treasury will sell its securities to the Federal Reserve and that the Federal Reserve will create the money out of thin air. In other words the Fed will “monetize” the debt (Harry E. Figgie, Jr. & Gerald J. Swanson, Bankruptcy 1995, Boston: Little, Brown & Co., 1992, 76 & 83). As mentioned, we are going to assume that the spending will be funded entirely by taxes. If “tax-and-spend” is also inflationary, then opponents of government spending will have an easy task at a time like now. People have already been “taxed” by inflation. We can expect them to oppose more inflation just as we expect “corporate America” to oppose higher tax rates.
Ironically, a Keynesian economist, Hyman Minsky, admitted that “Big Government” could exacerbate inflation even if it was “paid for”. His book Stabilizing an Unstable Economy was reprinted after the 2008 recession because mainstream economists started to embrace his financial instability hypothesis. There are also a lot of ideas in the book about inflation. During the twentieth century, intellectuals on the Left had no qualms about connecting war and militarism to inflation (See Robert Heilbroner & Peter L. Bernstein, A Primer on Government Spending, New York: Vintage, 1983, 69). It’s rare to see them say that the “War on Poverty” was inflationary, if they ever said such a thing. It is therefore surprising to see passages such as:
If one receives income as the result of a contribution, however meager, to the production of something “useful,” then, roughly speaking, he is putting something into the output pot even as the income constitutes a right to take something out…. A transfer payment as part of disposable income finances taking out without requiring any offsetting contribution to the pot…. Today, a good part of the rights to taking out are based on legislated, moral, or customary usages, not on explicit current or past contributions…. The military payroll as well as the income derived from defense contracts are income receipts that make no contribution to current useful output, and are at least as inflationary as transfer payments. (Hyman P. Minsky, Stabilizing and Unstable Economy, New Haven: Yale UP, 1986, 20)
Minsky understood that spending by governments (G) often was or would almost immediately morph into spending on consumer goods: “Government wages, purchases, and transfer payments generate demand for consumption goods, even as they do not augment directly their supply” (Stabilizing an Unstable Economy, 260). “Big Government” can be inflationary because inflation “is, first of all, the result of financing too many claims on the supply of consumer goods at the inherited set of prices. Any restriction on the supply of consumer goods—such as occurs in wartime or as the result of a drought—or any expansion of incomes that will be available to finance the demand for consumer goods, without any concomitant increase in supply, will lead to rising prices” (Ibid, 261). With one sentence, Minsky explained why merely paying for spending with increased taxes might not be enough if the public is very adverse to inflation: “It is not just the government deficit that generates inflation; if government expenditures are rising relative to the output of consumer goods, even a balanced government budget will result in rising prices” (Ibid, 264).
The public may intuitively grasp what Minsky taught, and, ultimately, they may not care if the increased spending is paid for. In the case of recently proposed “social spending,” the parameters of debate, for the most part, weren’t wide enough to include an in-depth analysis of inflation. Republicans kept saying that the spending bill would increase the deficit, and the talking point was effective enough. The notion that a lot of government spending is de facto consumer spending is simple enough. The argument that deficits cause money creation, and money creation causes inflation isn’t any less complicated. There are rumors that the social spending bill is still going to be brought up for a vote. If so, we’ll see if the party line changes. Perhaps, no political party wants to publicly oppose consumer spending. If they are serious about stopping inflation, they may have to.
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