Do budget deficits cause inflation? It's been years since I've done one of these, so take a gander:
Cases where the deficit increased and so did inflation: Once, around 1974-76.
Cases where it didn't: Six times. In 1951 the budget deficit went below zero but inflation spiked. 1957: Ditto. 1968-74: the budget deficit puttered along around ~2% but inflation rose steadily. 1982-86: Reagan spikes the deficit while inflation plunges. 1991-2008: The deficit goes up, down, up, then down again while inflation hovers around 2-3% the whole time. 2009: The budget deficit skyrockets while inflation drops below zero.
One (1) special case: In 2020, the deficit exploded like never before and the pandemic constrained supply. This did indeed produce a two-year inflationary surge. It also rescued the economy.
The real answer, of course, is that deficits don't usually cause inflation during recessions (1982, 2008). They just help put people back to work. But deficits can cause inflation if the economy is already running strong (1968) or people can't go back to work (2020).
"But deficits can cause inflation if the economy is already running strong (1968) or people can't go back to work (2020)."
yeah, Stephanie Kelton couldn't have said it better.
Welcome to MMT.
This is actually pretty standard Keynesian economics.
Yep, that's Keynes.
MMT is an interesting phenomenon. A lot of MMT believers favor it because it tends to promote higher government spending. (I do too, generally.) Eliminating concerns about the deficit will do that. In the event that inflation does pick up, MMT has a simple solution for that also: raise taxes. Which as Justin points out below, is not at all possible in today's political environment. So, a little out of touch with reality.
The right has their own econ orthodoxy, which typically doesn't match up with results in the real world either.
- Cutting taxes pays for itself
- Government spending causes inflation
- Raising the minimum wage puts people out of work
And other so-called economic truths that can't be questioned because that would go counter to the actual agenda of conservative politics, which is to cut taxes for the ultrarich and let everyone else fend for themselves.
"Which as Justin points out below, is not at all possible in today's political environment. S" Trump is massively raising taxes on the American people.
Not quite. Keynes believed in stimulus when necessary, but believed in running surpluses to balance over the business cycle. That's because he lived in a gold standard world. If he lived in a fiat world I believe he'd think different.
Too bad it is completely wrong for 2020.
Let's see if alienating everyone on the planet causes inflation. We're in the early stages of that non-double-blind experiment. If people start treating Greenbacks like Yuppies treat Teslas these days, get out your wheelbarrows, folks, because you'll need them for toting your D-Marks.
We can’t raise taxes because no one will allow it. Will republicans actually cut spending? Will trump follow through on his various schemes or will he just make a bunch of money? Too soon to tell.
There will be a tax cut, most of which will go to the wealthy and corporations. They'll cut spending to the bone, unless it's to places they like.
Keep in mind that Trump isn't really running this show. He's just a cypher with a pen.
Trump will raise taxes. That is what tariffs are — taxes on the goods we buy.
Too bad Kevin did point out that other countries didn’t spend big like the US did to recover from covid tanking the economy and they suffered inflation similar to ours. Now they are still struggling to recover.
Trump is massively raising taxes.
Shorter: Proof supporting the "federal spending is crowding out private" argument is weak.
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Even the 1974-6 case is weak. Inflation began to rise in 1973 before the deficit increase. Hello oil embargo. Gas prices skyrocketed to (I hope you're sitting down) 50 cents per gallon!
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Yes, but going with Kevin's penchant for inflation, that's something like $3.60 in today's dollars. Furthermore, median fuel economy was something like 2.5 times lower. And let's not forget that was still the days of choosing between leaded and unleaded gasoline!
I was just a wee child back then, but I remember the gas lines. Crazy times!
50 cents in 1973 is equal to $3.70 today, which is higher than the average price at the pump.
If you use Google, you will find that the majority of informed analysis (academic, think tank, and governmental agency) disagree with Kevin's perspective.
In large part, that's because Kevin is asking a slightly, but importantly, different question than that majority is. Kevin is analyzing whether inflation goes up when the budget deficit does. But that's not a terribly useful question, but it is easy to answer.
The economists you are talking about are asking whether or not inflation is higher than it would have been without the deficit. This is a far more important question, and also a lot more difficult to answer. Kevin edges up to it without quite getting there when he mentions that deficits don't increase inflation during a recession.
TheMelancholyDonkey - the title of Kevin's post is "Do budget deficits cause inflation?"
Respectfully, I believe that very concept is addressed by most of the academic articles (research papers etc) I mentioned/found on Google.
I did what you said - I googled Kevin's exact question. My results showed about a 60/40 split in favor of Kevin's answer to the question.
Yes, and I will repeat: Kevin means something different by that question than those academics do. For the economists, "Do budget deficits cause inflation?" is asking whether they lead to inflation being higher than it otherwise would be.
If you want to refute me, you should actually, you know, refute me.
And the more important question still is whether or not any extra inflation is more important than lost economic growth without the deficit spending.
Krugman and other Keynsians are firmly on the side of there being asymmetric risks. You can tolerate missing on higher inflation more easily than missing on long term economic growth.
Solarpup - you raise an interesting, related, but totally separate question than this article.
My point, Kevin's point of view is counter to the majority of the 'expert' opinion on the topic.
Except it's not.
What exactly is the 'informed' majority opinion on this question? This will be fascinating.
jbuds - I suggest you Google the title of the current article, "Do budget deficits cause inflation?"
You will see left and right aligned think tanks, academic articles and US (and non US)government agencies. Many, but not all, the authors are PhD Economists.
Clearly, you may decide if you think these folks are 'informed'.
This was you claim, not mine. I will pass on your demand that I research your claim.
So should we label your response as:
1) 'I don't know',
2) 'I refuse to say', or
3) 'I made a claim that I wish I hadn't made!' ?
Probably all 3 huh?
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And I strongly suggest that you pay attention to exactly what question those economists are trying to answer, rather than assuming that people using the English language necessarily mean exactly the same thing when they use exactly the same words. Maybe there's a language in which that's true, but it sure as hell isn't English.
The Milton Friedman school of economies insists that Kevin is correct,
I appreciate Kevin citing 1968 as an example of a stimuilus that caused trouble. Nixon screwed up the economy, mostly by stretching out the Vietnam War as long as anyone could, squelched it with wage-price controls, and basically dumped it on Carter, who had the bad luck of OPEC's action on top of that.
So it goes back a while now: the Democrats (back to the New Deal) rescue people from GOP massive mistakes and take the blame for them. Biden was a model leader and the formula held anyway. No wonder we're doomed.
Unfortunately, that is the case...
The infrastructure bill that Donny squashed included funding to improve air traffic control. It should have been done many years ago.
Why on earth WOULD a deficit increase inflation? This is a con that the right has been pushing since I was in my 20s, and it keeps on working. I am not an economist but I understand arithmetic. Inflation means suppliers of goods and services raise their prices excessively. This happens when their costs (labor or interest rates or capital) go up, or if they otherwise need to offset earlier losses from a recession or whatever. The cons CLAIM that government "spending" crowds out private investment and thus is perfectly awful. I suppose there is some convoluted argument about how that could fuel inflation (by the government "printing money") but it doesn't appear to happen in the real world.
Demand in excess of supply causes inflation. Doesn't matter if the excess demand originates in the public sector or the private sector. The price of eggs would be rising even if the government was running a surplus. Saying that a deficit is the cause is misunderstanding the situation.
Long and variable lags. How much should the inflation rate be offset from the deficit to get the best fit? If deficits cause inflation, you would expect the inflation rate to peak a year or so after the deficit peaks.
The whole concept of isolating two specific variables and seeing if one "causes" the other, especially when dealing with dynamic and emergent systems like the economy, is an anachronism.
Identifying associations generally adds value to overall analysis and prescriptives, but it's long since time to put to bed the notion that significant causation is involved, unless there is very significant association, without other significant or very significant association (and even here maybe just not found or looked for yet), and a proposed feasible mechanism).
And I'm not even going to get into that a budget deficit is not an actor, but a measurement, and so is inflation, so measurements causing measurements doesn't make a whole lot of sense, so again we are left only with associations of varying strengths...
I think you confuse "measurement" with "phenomenon". Budget deficits and inflation are both phenomena. They can be measured, but they're not measurements.
Fair enough.
"But deficits can cause inflation if ... people can't go back to work (2020)." This garbage. Pandemics cause both deficits and inflation. When A and B are stronly correlated, one of three thins can be true A cause B. B cause A. Or C causes both A and B. 2020 was an example of the last.
"But deficits can cause inflation if ... people can't go back to work (2020)." This garbage. Pandemics cause both deficits and inflation. When A and B are stronly correlated, one of three thins can be true A cause B. B cause A. Or C causes both A and B.
Good points. Kevin's 'conclusions' can't be taken seriously as he made no actual attempt to analyze or even try to make an argument. He just drew lines on a graph and made something up. Or more likely, he made something up, then decided he needed lines on a graph before he could post about his made up conclusion.
The lack of correlation between deficits and inflation across various countries during the pandemic really shoots a hole in his guesstimate.