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Dornbusch and Edwards (1991) identify the following four phases of populism. Phase 1. Policies very similar to those espoused by MMT are first put in place. Government expenditures increase rapidly, and massive income transfers are implemented. Public‐​sector wages and minimum wages are raised, and large public‐​sector investment projects enacted. These policies are financed by a combination of easy money that flows from the central bank, and foreign resources that come from the country’s international reserves. During this early phase growth and wages increase, and the populist views appear to be vindicated. The populist leader repeatedly makes the point that orthodox economics and its supporters are wrong. Phase 2. The consequences of the overly expansive heterodox policies begin to show up, and bottlenecks and imbalances emerge. Foreign exchange becomes scarce and there is significant pressure for the currency to depreciate rapidly. Exchange controls are introduced — France under Mitterrand, in 1984, is a good example of this development from outside of Latin America. In some cases, traditional exports are taxed. In spite of these measures, prices continue to rise. The populist response is to decree generalized price controls. Unions ask for higher salaries, and indexation practices are adopted. The central bank continues to lend vast amounts to the public sector, helping maintain the experiment. The economy enters into an inflationary spiral. A black market for necessities, and a parallel market for foreign exchange, usually appears. Phase 3. There is a deepening of imbalances and inflation accelerates, generally moving to the three‐ or four‐​digit terrain. “Fiscal dominance” becomes more acute, as the central bank continues to finance the government. The frequency of price adjustments, through indexation, increases — first to quarterly and then to monthly intervals. Pervasive indexation tends to worsen the fiscal accounts through the so‐​called Olivera‐​Tanzi effect. Government expenditures increase according to the indexation formula, while tax revenues are collected based on lagged income figures. Consumers ditch domestic money, and foreign exchange becomes the medium of exchange. However, since the government requires that taxes be paid in domestic currency, the local monies (pesos, soles, escudos, bolívares, and córdobas) do not disappear completely. Demand for domestic money, however, falls very rapidly, with velocity of circulation increasing significantly. The disparity between inflation (very high) and exchange rates (depreciating more slowly) intensifies the extent of real exchange rate overvaluation.17 Phase 4. The populist regime is finally replaced. The new post‐​populism government faces a very fragile economy and frequently a mess. Inflation is usually (very) high, international reserves are non‐​existent, exports are at an all‐​time low, the government debt is in default, and the real economy is replete with distortions. When the new government comes into power, real incomes and wages are often below what they were at the beginning of the experiment.

Inflation. The data in these tables show that inflation was, eventually, extremely high in the four episodes. In Chile it surpassed 500 percent in 1973; in Peru, it reached hyperinflation levels — it exceeded 7,000 percent in 1990 — and in Venezuela it surpassed 130,000 percent in 2018. The IMF expects inflation in Venezuela to reach the 1,000,000 percent annual mark in 2019. As noted earlier, very high inflation feeds back into the fiscal deficit through the Tanzi‐​Olivera effect. When inflation is very high, indexation tends to become generalized, and wages are adjusted at increasingly shorter intervals. This means that the government wage bill — which in all of these countries was very substantial — increased rapidly, while taxes were assessed and paid based on lagged (and much lower) prices. In all of these cases a collapse in the demand for domestic money (or an increase in velocity) contributed significantly to the explosion of inflation. In Chile, for example, velocity in 1973, at the end of the Allende government, was 24 “times” per year, which was two times higher than the historical pre‐​Allende average of 12 times.23 Interestingly, during the last decade, velocity in Chile has been around 3 times. One of the most serious weaknesses of MMT is that it ignores the role played by the demand for money in macroeconomic outcomes. Economists have known for a long time that, as Patinkin (1965) masterfully emphasized, what matters is the excess supply (demand) in different markets. In his MMT Primer, Wray (2015: 254) declares that he is surprised by the notion that during a hyperinflation economic agents reduce their holdings of domestic money to a minimum. The absence of a prominent role for the demand for money (and changes in velocity) in the theoretical construct of MMT is, indeed, surprising. In Chapter 13 of the General Theory, Keynes explains that people hold money for three motives: transactions‐​motive, precautionary‐​motive, and speculative‐​motives (Keynes 1936: 168). He further argues that the demand for money (or liquidity preference) is a function of the rate of interest. He explicitly writes M = L(r). Economists have known, since at least Irving Fisher, that higher inflation results in higher r. Thus, a rapid increase in inflation will generate a greater excess supply for money, which will be mirrored by an excess demand for goods and bonds (here I am following Patinkin’s analysis); the excess demand for goods, in turn, will put pressure on prices. MMTers believe that because taxes have to be paid in domestic currency the demand for local money cannot decline precipitously. The experiences of the three countries discussed here show that this is not the case. Indeed, and as a large number of economists have pointed out throughout history, when the value of the local currency erodes quickly, holdings of it are reduced to a minimum and velocity increases rapidly.

If MMT sounds too good to be true, that’s because it is. All progressives want to devote additional funding to a series of sectors, from health care and education, to economic security and the environment, so the theory carries an obvious appeal. But MMT is riddled with pitfalls.

1. It assumes politicians will easily raise taxes and cut spending.

In this section I analyze three of Latin America’s best known populist episodes: Chile during Salvador Allende’s socialist experiment from 1970 through 1973, Peru during the first Alan García administration (1985–90), and Venezuela during the Hugo Chávez and Nicolás Maduro governments (1998–present). Although each of these cases is unique, the three of them share the populist pattern discussed above, and followed policies similar to those espoused by MMT. Also, the three of them ended up in major crises. The case of Chile is possibly the most dramatic one, as the experiment with populist‐​socialist policies of President Salvador Allende ended up in a violent coup that was followed by a 17‐​year dictatorship. In Chile, inflation exceeded 500 percent in 1973. In both Peru and Venezuela, the central bank–financed fiscal expansions ended up in hyperinflation. In Peru the rate of inflation peaked at almost 8,000 percent, and the International Monetary Fund has forecasted that inflation in Venezuela will be almost 1 million percent by the end of 2019.18 The three countries studied in this section had a sovereign currency, and thus could (and did) follow the type of policies recommended by MMT economists. In addition, in all cases the exchange rate was not strictly fixed; the price of foreign currency was adjusted frequently (in some cases daily) through a crawling rate regime or a “dirty float” system.19 In every one of the episodes, exchange controls of one type or another were eventually put in place in an effort to slow down currency depreciation (Edwards 2010). I begin the discussion by presenting data on economic growth. I then discuss the expansion of public sector expenditures financed by central bank money creation, and the resulting inflation outbursts. The section ends with an analysis of the evolution of social conditions. I show that in the three cases, when the populist regime was replaced, real wages were lower than when the populist leader took over. Growth and Populism Phases In Figures 1–3, I present data on GDP growth for the three episodes. There are two dashed vertical lines in these graphs. The first one corresponds to the initial year of the populist episode; the second one refers to the first year of the post‐​populist regime. The similarities across cases are quite remarkable; the different phases of populist experiments are easy to detect in each one of these figures. • In the three episodes it is possible to see that the initial conditions are characterized by either very low or negative growth. As noted, these depressed circumstances give the populist leader the opportunity to present his/​her nationalistic, anti‐​globalization and anti‐​elite program, and to get to power. In Chile, growth in 1970 was 2 percent, which meant that per capita growth was slightly negative.20 In Peru, there was an IMF program at the time Alan García was inaugurated. Economic conditions were also negatively affected by the El Niño climatic phenomenon, which resulted in some of the worst flooding in the country’s history.21 In Venezuela, growth was negative the year Chávez won the elections. Depressed initial conditions in Venezuela were the result of a succession of failed adjustment programs — some supported by the IMF — and a decline in the price of oil. Memories of the repression and deaths during the Caracazo demonstrations and riots also contributed to the support of Hugo Chávez and his program (Edwards 2010). • As may be seen from these figures, Phase 1, with its booming growth, follows the launching of the populist programs. In Chile the economy grew at an impressive 9 percent during the first year of President Salvador Allende’s Unidad Popular government. Peru saw its GDP growth jump to 12 percent in 1986, one year after Alan García’s election. In Venezuela there was also important GDP recovery after the accession to power of the new leader. In Venezuela it is possible to detect the negative effect of the global financial crisis of 2008-09. However, there is a recovery, and the good times continued for a few additional years. In Venezuela, the positive‐​growth phase (Phase 1) was rather longer than usual. This was thanks to very positive terms of trade; the prices of oil and soybeans were very high during the early years of this episode (Edwards 2019). • Eventually, in every one of the three countries, the day of reckoning arrives, and Phase 3, with the collapse in growth, becomes a reality. As may be seen, in Chile there was negative growth in 1972, the second year of the Allende administration. In Peru growth was negative 9 percent in 1989, toward the end of the Alan García presidency. In Venezuela the economy collapsed in 2014. During Phase 4 the new postpopulist government had to put in place policies aimed at reducing inflation and reigniting growth. Monetary Policy, Fiscal Imbalances, and Inflation As noted, in all of these episodes there were massive fiscal expansions financed by money creation by the central bank. In Chile, the Unidad Popular government also nationalized the banking sector, as a way to facilitate the flow of credit to newly nationalized companies and major public infrastructure projects. In Peru, President Alan García tried to follow Allende’s footsteps and nationalize the banking and financial sectors. However, there was a massive popular opposition, and, after weeks of protests led by novelist and future Nobel Prize winner Mario Vargas Llosa, the government gave up on the attempt (Larraín and Meller 1991; Edwards and Edwards 1991). In Venezuela, the central bank came under significant political pressure, and in the early years of the Chávez administration its degree of independence was greatly reduced. During the populist experiment, the central bank’s main goal was to help the government achieve its political and social development goals (Carrière‐​Swallow et. al. 2016). In Tables 2 through 4, I present data on a number of key macroeconomic variables: public sector balance as percentage of GDP, rate of growth of the monetary base, annual inflation rate, current account balance over GDP, and real GDP growth. In addition to the boom and bust dynamics of growth already discussed, several results stand out from these tables. Fiscal Expansion. In all cases the fiscal deficit becomes very large during the episode. In two of the cases (Chile and Peru), a large imbalance develops immediately after the populist leader takes over. In Venezuela, it takes some time for the deficits to explode, but eventually it does happen. This delay is due to the extraordinarily high export prices during the early years of this experiment (Edwards 2019). In the case of Chile, I present two series for fiscal balance. The first one refers to the central government accounts, and shows that in 1973, the last year of the Allende administration, the deficit was almost 25 percent of GDP. The next column presents data for the “consolidated public sector” for 1970–73, and includes state‐​owned enterprises. As may be seen, in 1973 this measure of the deficit reached an astonishing 30 percent of GDP. In Peru, in 1983, two years before Alan García got to power, there was a huge deficit: 11.6 percent of GDP (Table 3). In 1984, President Fernando Belaúnde decided to call in the IMF, and an orthodox stabilization program was put in place. The data in Table 3 show that between 1983 and 1985 there was a draconian fiscal adjustment that amounted to 8 percent of GDP. This drastic fiscal correction generated a substantial jump in unemployment and a precipitous decline in real wages — 39 percent between 1982 and 1985 — and paved the way to Alan García’s electoral success in 1985. One of the first measures taken by García was to suspend the IMF program and to go back to very expansive fiscal policies. As may be seen in Table 3, in Peru the deficit exceeded 10 percent of GDP in 1987, 1988, and 1989. In 1990 it was slightly down to 8 percent of GDP. Throughout these years it was mostly financed by money creation by the central bank (Martinelli and Vega 2018). The picture for Venezuela, in Table 4, shows that during the early years of the Chávez administration the public sector ran a surplus. With the exceptions of 1998 and 2001, and thanks to a very high international price of oil, the early years of the Bolivarian Revolution were characterized by (relatively) balanced public‐​sector finances. However, the fiscal deficit surpassed the 3 percent of GDP mark in 2008, and from that point onward increased markedly every year, reaching a remarkable 31 percent of GDP in 2017. The initial fiscal imbalance in 2008-10 coincided with a sharp decline in oil prices in the global marketplace. However, when oil prices recovered in 2011, Venezuela made no attempt to adjust public finances. The decision was made to finance the deficit with money created by the central bank. In 2017 the deficit reached almost 32 percent of GDP, even higher than the consolidated fiscal deficits for Chile in the last year of the Allende administration. Money Supply Growth. The data in these tables show a clear connection between the eruption of very large fiscal deficits and a jump in the rate of growth of the money supply. This, of course, reflects the fact that in every one of these cases the central bank financed the expansion of public expenditures through the purchase of government debt. This was a deliberate component of these populist economic programs. This is illustrated by the following quote from García (1972: 102, 104), one of the economists behind President Salvador Allende’s economic program in Chile: “[The policy] was based on the simultaneous control of prices, wage increases, and increase in the public sector deficit… . [M]onetary and credit policy provided the financing for fiscal expansion and the deficit.“22 In Venezuela, the chairman of the Finance Committee of the National Assembly declared in 2010 that the central bank’s role was to finance the government. “It should support the development and social program approved [by the government]” (America Economía 2010). It is precisely this close relationship between fiscal deficits and money creation that makes these episodes particularly germane to the debate on the merits and prospects of MMT. Inflation. The data in these tables show that inflation was, eventually, extremely high in the four episodes. In Chile it surpassed 500 percent in 1973; in Peru, it reached hyperinflation levels — it exceeded 7,000 percent in 1990 — and in Venezuela it surpassed 130,000 percent in 2018. The IMF expects inflation in Venezuela to reach the 1,000,000 percent annual mark in 2019. As noted earlier, very high inflation feeds back into the fiscal deficit through the Tanzi‐​Olivera effect. When inflation is very high, indexation tends to become generalized, and wages are adjusted at increasingly shorter intervals. This means that the government wage bill — which in all of these countries was very substantial — increased rapidly, while taxes were assessed and paid based on lagged (and much lower) prices. In all of these cases a collapse in the demand for domestic money (or an increase in velocity) contributed significantly to the explosion of inflation. In Chile, for example, velocity in 1973, at the end of the Allende government, was 24 “times” per year, which was two times higher than the historical pre‐​Allende average of 12 times.23 Interestingly, during the last decade, velocity in Chile has been around 3 times. One of the most serious weaknesses of MMT is that it ignores the role played by the demand for money in macroeconomic outcomes. Economists have known for a long time that, as Patinkin (1965) masterfully emphasized, what matters is the excess supply (demand) in different markets. In his MMT Primer, Wray (2015: 254) declares that he is surprised by the notion that during a hyperinflation economic agents reduce their holdings of domestic money to a minimum. The absence of a prominent role for the demand for money (and changes in velocity) in the theoretical construct of MMT is, indeed, surprising. In Chapter 13 of the General Theory, Keynes explains that people hold money for three motives: transactions‐​motive, precautionary‐​motive, and speculative‐​motives (Keynes 1936: 168). He further argues that the demand for money (or liquidity preference) is a function of the rate of interest. He explicitly writes M = L(r). Economists have known, since at least Irving Fisher, that higher inflation results in higher r. Thus, a rapid increase in inflation will generate a greater excess supply for money, which will be mirrored by an excess demand for goods and bonds (here I am following Patinkin’s analysis); the excess demand for goods, in turn, will put pressure on prices. MMTers believe that because taxes have to be paid in domestic currency the demand for local money cannot decline precipitously. The experiences of the three countries discussed here show that this is not the case. Indeed, and as a large number of economists have pointed out throughout history, when the value of the local currency erodes quickly, holdings of it are reduced to a minimum and velocity increases rapidly.

The difficulty of confronting MMT about those failings is compounded by its practice of walking back its positions and adopting those of its critics without acknowledgment. Examples include replacing the full employment threshold model of inflation (Wray, 1998) with the Keynesian Phillips curve model, and also recognizing that capital controls may be needed to contain international economic forces that can potentially disrupt fiscal policy. Recently, Kelton (2019) has slipped in another long-standing Keynesian argument that stability of the debt-GDP ratio requires that the nominal interest rate be less than the nominal rate of growth (i < g). In doing so, she tacitly admits another financial constraint on government and continues the walking back process. On one hand, the walking back process is reasonable: on the other hand, it undermines MMT’s claims regarding government being financially unconstrained. The second column in Figure 2 concerns the political economy failings of MMT. These political economy failings fundamentally challenge the viability of Lerner’s (1947, 1951) functional finance approach and suggest an MMT policy regime could even create economic instability. As noted above, money financed budget deficits drive the economy to full employment by increasing wealth and AD. That makes it critical there be institutional arrangements for closing the deficit once full employment is reached to avoid inflationary excess. However, MMT relies on a highly simplified and implausible political economy in its attempt to address that problem. Thus, it assumes taxes can be abruptly and precisely raised at full employment to contain excess demand, when the reality is taxes are politically contested and difficult to raise. Long ago, Friedman (1961) argued that fiscal policy was impractical for “fine-tuning” stabilization policy owing to inside (decision) and outside (implementation) lags. Those lags mean policy implementation is likely to be poorly timed, so much so that it could amplify the business cycle rather than dampen it. The Friedman critique of fiscal policy concerns “timing” of policy actions. It can be augmented to include a “public choice” critique based on politicians aversion to raising taxes and cutting spending. 10 That aversion stands to reinforce the problem of fiscal policy timing. Additionally, it stands to impart an inflationary bias and gradually ratchet up government spending as a share of GDP. That is relevant because MMT recommends increased spending to stimulate the economy below full employment, and higher taxes once full employment is reached. Over successive cycles MMT’s policy frame is likely to be destabilizing.11 Absent budget discipline, spending and deficits would tend to ratchet upward owing to the political attraction of money financed deficit spending and the political aversion to higher taxes. Yet, MMT reduces budget discipline by arguing the central bank should be under the direct control of the fiscal authority which is encouraged to use money financed deficits.12 Another political economy critique (Lavoie, 2014) is that central banks and fiscal authorities are institutionally separated in most economies, but MMT ignores this and treats them as a unified decision maker. The separation is usually justified on public choice grounds that politicians have an inclination to inflationary monetary populism, and separation of fiscal and monetary powers helps prevent that. MMT ignores the separation, invoking an “as if” argument. Two implications follow. First, as Lavoie (2014) notes, the current system does not support MMT’s policy claims as the system is not structured as needed. Second, if the system were changed and structured as required by MMT, financial markets would likely shift to expecting an increased likelihood of inflationary monetary populism owing to MMT’s policy frame. That would cause asset prices to fall and interest rates to rise. The latter critique links to MMT’s comprehensive failure to take account of the impact of expectations of policy on economic behaviors and financial markets (about which more below). Expectations about the future impact current private sector decision making, which implies the inflationary bias in MMT’s fiscal policy assignment will impact present conditions long before inflation accelerates or full employment is reached. Given that, it is easy to envisage how an MMT regime could even generate economic instability. An untimely money financed fiscal stimulus could raise concerns about financial instability or inflation expectations, thereby raising current market interest rates and prompting need for further fiscal stimulus. That we do not see such patterns today may be because policy is not constructed according to MMT’s institutional and policy recommendations.13

Even a temporary monetised fiscal stimulus could trigger expectations, especially from the government, that a one-time use could easily become permanent. In turn, a permanent recourse to monetary issuance would lead to a flight from currency and to hyperinflation.

MMT’s claim that government spending is only constrained by the “inflationary” ceiling, which binds when all productive resources are fully employed (Mitchell, 2020), is incomplete. MMT does not address the opportunity costs and distributional consequences of the monetisation of deficits by the central bank, e.g. its impact on asset prices, that may affect both the demand and the supply side of the economy and therefore the inflation constraint, even before full employment is reached.

“Where MMT departs from this literature is to explicitly integrate bank reserves into the analysis in a way that no previous Post Keynesian author has attempted. The MMT framework shows that far from placing upward pressure on interest rates, fiscal deficits in fact, set in place dynamics that place pressure on interest rates in the opposite direction. You will not find that result in the extant Post Keynesian or mainstream literature… Even the Post Keynesian economists consider crowding out to be overcome by the government’s capacity to print money” (Lavoie, 2014). It is nice of Mitchell to make a reference in his blog to my 2014 book on post-Keynesian economics. However credit must be given where credit is due. While MMT advocates Warren Mosler and Randall Wray (1998) were the first to claim that, all else equal, a government deficit would put downward pressure on the overnight rate, this analysis was quickly picked up by myself (Lavoie 2003) and other fellow post-Keynesians. In contrast to what Mitchell asserts, my 2014 book explains in detail why the government deficit leads to downward pressures on the overnight rate. In addition, in the introductory macro textbook that Mario Seccareccia and I adapted to the Canadian market, the same analysis is provided in very explicit terms (Baumol et al., 2009). This thus came ten years before MWW. Furthermore, the story being told by Mitchell is incomplete. While it is true that government deficits put downward pressures on the overnight interest rate, things are more complicated when it comes to other rates, for instance longer-term rates. With the help of a relatively simple stock-flow consistent model that incorporates several endogenous interest rates, Lavoie and Reissl (2018) show that a government deficit may or may not lead to an increase in these other rates, depending on the value of various parameters as well as those tied to portfolio decisions. Of course this result depend on the chosen model and its assumptions, but I believe that a wide variety of models would come to the same conclusion. Thus, as argued earlier, MMT needs to go beyond the institutional analysis of the payment system which is its forte, and incorporate the findings and tools of post-Keynesian economics if it wishes to provide a fully consistent macroeconomic theory. The example being provided here is directly related to monetary economics, but a lot also needs to be said about other aspects of macroeconomics such as growth theory or technical progress, not forgetting microeconomics and pricing theory.

Kellen McGovern Jones, "How the Modern Monetary Theory Experiment Lost (Badly) to Basic Economics," Foundation for Economic Education, 9-8-2022, https://fee.org/articles/how-modern-monetary-theory-experiment-lost-badly-to-basic-economics/-- 嘉玮

Modern Monetary Theory (MMT) was the “Mumble Rap” of politics and economics in the late 2010s. The theory was incoherent, unsubstantial, and––before the pandemic, you could not avoid it if you wanted to.

Section 2.3 criticized MMT from a targets and instruments perspective, arguing that the recommendation to park the policy nominal interest rate discarded an important policy instrument. Worse yet, parking the nominal interest rate actively creates macroeconomic problems. Introducing a Phillips curve introduces inflation, and inflation affects the real interest rate. Consequently, MMT’s nominal interest rate parking policy implies real rates would fall as the economy moves up the Phillips curve, potentially creating an unstable situation in which higher inflation drives lower real interest rates which in turn drives higher inflation. The converse problem would hold if the economy moved down the Phillips curve and real interest rates would rise with unemployment, potentially causing even higher unemployment. Recognizing that interest rates matter introduces the familiar fiscal policy – monetary policy mix problem which was a central concern of Old Keynesians, and which is another concern that is entirely neglected by MMT. The greater the emphasis on fiscal looseness, the more the need to raise real interest rates to avoid excessive AD. However, higher interest rates negatively impact investment and growth. Consequently, a government that is concerned about growth and future living standards will be concerned about budget deficits and their implications for interest rates, which in turn means it is financially constrained and concerned about bond market sentiments. The problematic of the policy mix also connects with another neo-Keynesian concern regarding portfolio crowding out (Tobin and Haliassos, 1990, p.893-894), which is different from monetarist crowding out. The latter concerns the impact of deficit financed fiscal policy on AD and output. The former concerns the impact of deficit financed fiscal policy on wealth composition. In particular, if the demand for wealth is finite and government financial obligations are net wealth, government deficits can crowd-out private capital accumulation by increasing the supply of government wealth that must be 17 held in private portfolios. Restoring activist interest rate policy does not save MMT. Indeed, the opposite is true. If policy makers are concerned about interest rates, they need to be concerned about the state of the interest rate spectrum, which the policy rate is part of. That means they need to be concerned about financial market conditions, which implies government is not financially unconstrained. Furthermore, maintaining an interest rate target requires issuing government financial obligations, and government needs to be concerned about the impact of that issuance on AD and financial markets. Again, government is not unconstrained.

Prices today are rising at their fastest pace in decades and American concern about inflation is growing. While some amount of inflation can be the result of a healthy and growing economy, rapid, sustained inflation harms American families by wiping out their wage gains and eroding savings. Inflation can also rock consumer confidence, which hurts U.S. businesses endeavoring to rebuild after the pandemic recession.

Considerable debate exists over whether recent inflation is transitory or if it is a more concerning type of systemic inflation. On one hand, inflation might be a temporary phenomenon caused by the reopening of the global economy. The United States is ahead of many other nations in its recovery and supply chains are taking time to recover from over a year of sustained disruptions. On the other hand, rising inflation may be the direct result of government stimulus, which significantly increased household income and demand at a time when labor markets and other business functions remain below their pre-pandemic strengths.

The international monetary system remains dollar-based despite decades of warnings that the central role of the dollar was coming to an end. Some critics pointed to fundamental flaws in what economist José Antonio Ocampo has called a (non) system. It provides no automatic adjustment for persistent current account imbalances. It allows for significant, often damaging, policy spillovers from large countries (especially the United States) to smaller ones. There is no nominal anchor for global inflation, and, finally, there is no assured lender of last resort. Implicitly, these critics assumed that a system with such flaws could not long endure. Until now, they have been proven dead wrong.

Other critics pointed to developments that might have been expected, gradually but continuously, to lower confidence in the U.S. dollar as a store of value and as a medium of exchange. As the U.S. share of global GDP has continued to shrink, its capacity to service an ever-growing stock of international debt (the Triffin dilemma) has become increasingly questionable; surely “vendor financing” cannot continue forever? Moreover, concerns have been raised at various times about relatively high inflation in the United States as well as the relative commitment of the U.S. Federal Reserve to resist inflation. Massive increases in the U.S. government deficit and debt have recently raised fears that an excessively bipartisan Congress would lose control. This has led in turn to growing worries about “fiscal dominance” and eventually much higher inflation. Finally, resentment over the repeated use of the U.S. dollar as a geopolitical “weapon” was rising well before the imposition of sanctions on Russia.

David Gorton, "How Does Money Supply Affect Inflation?," Investopedia, 5-30-2023, https://www.investopedia.com/ask/answers/042015/how-does-money-supply-affect-inflation.asp-- 嘉玮

Does Printing Money Cause Inflation?

Cleveland Federal Reserve, "Measures Expected Inflation," Federal Reserve, xx-xx-2023, https://www.clevelandfed.org/center-for-inflation-research/measures-expected-inflation-- 嘉玮

Individuals make choices based not only on past events and current developments, but also by looking forward and thinking about the future. Moreover, when individuals act on their beliefs, there is the possibility that expectations can lead to self-fulfilling outcomes. That is, if individuals expect a certain event to occur and others share the same view, then their collective behavior can cause the expected event to take place when it otherwise may not have. Consequently, expectations can affect economic outcomes.

Taylor Orth and Carl Bialik, "What Americans know — or think they know — about inflation," No Publication, 11-4-2022, https://today.yougov.com/topics/economy/articles-reports/2022/11/04/what-americans-know-about-inflation-yougov-poll--嘉玮

Placing blame

Hans F. Sennholz, "The Causes of Inflation," Foundation for Economic Education, 5-1-1972, https://fee.org/articles/the-causes-of-inflation/-- 嘉玮

Welfarism and Inflation

The government, along with the cost of economic stabilization, incurs distribution and allocation costs. However, increase in government spending in form of intervention, going by the neo-Classical economists could result to high inflation outcomes given the full employment assumption (Olayungbo, 2013: 238). In general, fiscal policy in many countries is faced with many problems which includes, Tax collection difficulties, institutional inadequacy, problems related to access to foreign capital, Money issuing to finance public expenditures which in turn causes inflation. Therefore, government expenditures in addition to the impact on production can have an impact on inflation (Georgantopoulos & Tsamis, 2010).

Inflation has been issue of Iran's economy during the past three decades. Statistics indicate that inflation in Iran has always been high, since inflation has significant effect on the life of individuals and other economic variables. In this context, understanding the roots of inflation can assist authorities in designing proper policies. On the other hand, government needs to spend in order to ensure stability of the economy, stimulate or enhance productivity or investment through direct public spending and investment according to the Keynesian view. Government also spends in order to redistribute income between the rich and the poor. Several theories have been advanced to explain this problem in different countries. Using a variety of instruments such as government spending, although in both theoretical and practical experiences of countries have been proven that increases in government spending causes inflation, it’s one of the significant issues in the possibility of achieving economic growth.

As Milton Friedman once said, “Inflation is always and everywhere a monetary phenomenon.” That is, when the government prints more money, the value of money decreases, and prices rise. That’s exactly what we’ve seen. Federal debt has severely accelerated since 2020, and now approaches $30 trillion. Congress’ numerous COVID relief measures will have a $5.14 trillion impact on our debt. How did the government pay for this spending binge? By printing money. The U.S. money supply has increased by approximately 40 percent since March 2020. Multiple studies find that the dramatic increase in federal “stimulus” payments, which gave individuals more spending cash and paid them to not work, exacerbated inflationary pressures. Washington politicians pretend they don’t know what’s behind runaway inflation, but voters know. To paraphrase James Carville, “It’s the spending, stupid.” What can policymakers do? While it’s impossible to put the toothpaste back in the tube, there are measures to decrease inflationary pressures. That starts with fiscal restraint. Lawmakers at the federal, state, and local levels need to control the runaway growth of government spending. They must resist the urge to overspend now and give out “free money” in an election year, and should work to enact guardrails on government spending, like the Taxpayer Protection Act, which controls the growth of state government spending. Lawmakers should enact tax reform that eases burdens on working families and enables small businesses to hire workers and raise wages. They should seek permanent reform that increases economic competitiveness and reject short-term gimmicks. Lastly, comprehensive regulatory reform would help manufacturing and producers control costs and unleash energy production to lower electricity and fuel costs. While we have the natural resources to be energy independent—and help power the world—regulatory burdens prevent getting these resources to market. Inflation is not going away soon. Lawmakers need to first recognize inflation’s root causes—in particular, government spending—to bring about sound solutions that help working families.

If legislators continue pushing government spending to new heights, they should be aware of the costs. These costs go beyond the simple sticker price of new spending. For instance, government investment has well-demonstrated opportunity costs and in many cases replaces relatively more productive private investment to the point that the private sector shrinks. Furthermore, large government spending packages are usually accompanied by tax increases which reduce economic growth by depressing employment and investment. One study finds that, if the $3.5 trillion budget resolution boosts productivity in line with historical norms, the effect of the corresponding proposed tax increases eliminate any benefits of the government investment, decreasing economic growth only five years after its enactment. Lawmakers should also be aware of the additional risks that swelling government spending poses to American families. The most pressing risk today is rising inflation. While monetary tightening serves as the traditional tool to prevent inflation, future monetary tightening may not be effective if extraordinary spending patterns continue. Inflation is Rising By two common price metrics, inflation is rising at the fastest paces since the early 1990s. In August, the Core Consumer Price Index—which tracks the prices of commonly-purchased goods excluding volatile items in the food and energy sectors—increased 4 percent year-over-year. Likewise, the most recent Core Personal Consumption Expenditures Price Index—which tracks actual spending by households on items excluding food and energy—rose 3.6 percent. Although inflation has stopped accelerating in recent months, it remains significantly above the Federal Reserve’s 2 percent target. Furthermore, the recent cooling is largely driven by consumer anxiety about the Delta variant which has reduced consumer demand for transportation and travel. Increasing anxiety is neither a laudable nor sustainable approach to reducing inflation. If high inflation persists, it will harm American families by decreasing their purchasing powe. In the first quarter of 2021, the rise in consumer prices effectively erased all nominal wage gains causing real earnings to fall. Recent measures of consumer sentiment have also dropped significantly, with surveys showing that Americans are increasingly concerned about inflation. What Causes Inflation? To better understand whether this rising inflation is simply a temporary phenomenon or the direct result of government intervention, it is important to first understand two different types of inflation. The first is cost-push inflation, which happens when the cost of production rises. Cost-push inflation can occur if businesses are faced with sudden rising prices for raw materials, intermediate goods, or labor, and pass those higher costs on to consumers. This type of inflation may be sustained if it is the result of a lasting policy change, such as new taxes on foreign-made inputs, but it can also be a temporary response to an exogenous shock, such as supply chains adjusting to the re-opening of the global economy. The second is demand-pull inflation, caused by increases in consumer demand. Demand-pull inflation can be a sign of growth if it is the result of a strong economy in which more individuals are employed, income rises, and demand rises with it. But it can also be harmful if it is triggered by new government policies that provide consumers with so much money (subsidies and transfer payments, or easy access to credit via a low cost of borrowing) that demand grows too fast for production to keep up. The price increases facing American families today are likely the result of both types of inflationary pressures, and these pressures are interacting with each other to exacerbate prices even further. Rising consumer demand for goods is increasing consumer prices, and it is also putting pressure on businesses to increase production while they are constrained by supply chain disruptions and labor shortages. When this occurs, American families are simultaneously faced with higher prices and shortages, lowering their quality of life.

These proposals are rooted in a misunderstanding of the true cause of inflation: namely, government-induced demand. More spending, therefore, will only fuel the inflation fires.

Over the course of the pandemic, the Treasury Department issued roughly $6 trillion, $2.7 trillion of which was monetized by the Federal Reserve. Americans were sent $5.1 trillion through various programs, including individual checks and unemployment bonuses. Overall federal debt has since risen by about $6 trillion.

Stephen Miran, "Filling the Punch Bowl," City Journal, 5-8-2023, https://www.city-journal.org/article/high-government-spending-undermines-feds-inflation-measures-- 嘉玮

In response to persistently high inflation, the Fed’s hiking cycle, bringing rates to roughly 5 percent, is the fastest and most aggressive in 40 years. Yet we’ve seen very limited evidence of a slowdown in economic growth sufficient to bring inflation back down to the 2 percent target.