Inflation Vs. Deflation: Bigger Government vs. Bigger Private Sector
Posted on July 30, 2010There are two big arguments going on that have huge implications for the future of the country.
There is the economic argument that centers around the value of our currency. And then there is the political argument that centers around the size of our government.
Are we entering a deflationary period or are we poised for a period of rapid inflation?
Economists can’t seem to agree. Some, like Paul Krugman, the New York Times columnist, think that we are getting dangerously close to going down a deflationary cycle that will not only kill jobs, but also kill property values, retirement accounts, and economic growth for the foreseeable future. The last time America went through a deflationary period was during the Great Depression. Deflation is bad because lower prices beget lower prices. People don’t buy today what they can buy cheaper tomorrow or better yet next week, which means consumption goes way down. Like an airplane that is a death spiral, it is awfully hard to pull an economy out of deflationary spiral. Economists are deathly afraid of deflation.
Other economists see the threat of inflation just over the horizon. They take one look at our huge deficits, they see the Federal Reserve injecting trillions of cheap dollars into the economy, they see the government spending continue to go through the roof and they conclude that the kind of inflation that afflicted this country in the 1970’s will hit us any day now.
This argument is important because the policy prescriptions to deal with them are so diametrically opposed. To avoid deflation, you inject more money into the system, through government spending programs or through massive tax cuts. To avoid inflation, you do the exact opposite, by balancing the budget and by limiting the supply of money.
The political argument, which is not disconnected from the economic argument, revolves around the size and scope of the government, especially in relation to the private sector. The Obama Administration is making the case that the government needs to be bigger so that it is better able to oversee the potential abuses of the private sector, and so that it can better help the poor. Republicans are making the case that the government is too big, too inefficient and too intrusive, and that the bigger the government becomes the more it limits the growth of the private sector.
Mr. Obama and his team haven’t quite made up their mind about the economic argument, and neither have the Republicans. But both have made up their minds about the political argument. As a result, you have oddly disjointed economic proposals from both parties.
On the one hand, Democrats say that the threat of deflation is so threatening, that the government has to spend trillions of dollars on bigger government (whether it is with the stimulus or the health care bill or unemployment insurance extension). And yet, they are also making the argument that because there is a threat of inflation that the tax cuts for the so-called rich must be retired so that we can make a dent in our budget deficit.
On the other hand, Republicans are saying that the President’s spending programs are irresponsible because they could cause devastating inflation. And yet, they are not willing to suspend the tax cuts in any way, and that lack of revenue could push the budget into even greater imbalance, causing the bond markets to freak out and also leading to inflation.
I am not an economist and I don’t really know if we are going to a deflationary period or an inflationary period. I do believe, though, that more government intervention in the marketplace, higher taxes on businesses, and fewer incentives for entrepreneurship will lead to less innovation and fewer jobs in the private sector.
I also know that an expanding government means less freedom for the citizens of this great country. The Washington Post just did an expose about the creation of whole communities in the Washington DC area of defense and homeland security contractors. These are well-paid private sector professionals who have a vested interest in keeping the taxpayers money flowing in their pockets. I am sure many of them do important work, but then again, I don’t know, because it is all classified.
Deflation is a greater danger than inflation, but a massive government that grows so big that it threatens innovation, economic growth and worse, the freedoms of the people is the biggest danger of all.