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Nojoud Al Mallees, "High government spending means more inflation? It's complicated, economists say," CTV news, 06-23-2023, https://www.ctvnews.ca/business/high-government-spending-means-more-inflation-it-s-complicated-economists-say-1.6446446-- 嘉玮

OTTAWA - Conservative Leader Pierre Poilievre's attempt to block the federal government's budget bill from passing earlier this month is the latest example of government spending coming under scrutiny amid high inflation.

Q.Ai, "Does Government Spending Cause Inflation?," Forbes, 8-25-2022, https://www.forbes.com/sites/qai/2022/08/25/does-government-spending-cause-inflation/?sh=42f7edcb61e7-- 嘉玮

Not all government spending leads to inflation

There is the possibility of inflation, too. Many lower and middle-income people have necessities that they’re not able to pay for right now. With UBI, they would finally be able to pay for those necessities all at the same time, and all at once, which could drive up demand. If inflation was high enough, it would defeat the purpose of UBI. And if costs went up significantly, most people’s spending power might effectively end up being the same. Prices would have to be raised if demand is driven up too high and supply cannot be easily increased. Higher prices would again make those basics unaffordable to lower-income people, and in the long run, a guaranteed income would not raise their .

PESKY INFLATION If UBI were to be financed by increasing the federal deficit, it would most undoubtedly fuel inflation. As a reminder, by a more rapid increase in the quantity of money than the quantity of goods or services produced during the same time period. In other words, if the nation’s printing press produces money at a greater rate than its economy can produce, the result will be higher inflation levels. Printing an extra $3.8T yearly will surely cause inflation to roar. If our irresponsible fiscal spending habits during 2020 and 2021 taught us anything, it is that handing out money to anybody and everybody does not contribute to low inflation levels. CONCLUSION The idea behind Universal Basic Income comes from the heart. It is a human-centric policy that aims to help those who could use it. However, the policy does not make logical sense. As with anything related to finance, emotions should not rule the decision-making process. Data should be relied upon, and in this case, the data says that we should avoid UBI. While UBI helps people feel happier (who wouldn’t want free money?), it does not boost the job market, nor does it show that it would encourage those at the lower ranks of society to seek self-reliance (which is the populace UBI seeks to help out). The old adage, “if it seems too good to be true, it probably is” applies here. The laws of the universe apply no matter who or where you are. There is a price for everything. Society cannot receive something if nothing is given in return, no matter the intent behind it. If we really want to help out those at the lower ranks of society, training our young people to succeed in today’s world will be far more effective in the long run than simply throwing money at the problem. Yes, we need a social safety net, but paying every citizen $1,000+ per month is not a social safety net. It would cause extreme inflation and destroy our society’s very fabric. Best to move on from this idea.

A UBI would essentially transfer wealth away from higher earners toward low earners. This spurs higher consumption because those with lower incomes have a higher propensity to consume. On a macro basis, this may not necessarily create any inflation, as there is no new money entering the economy. However, it will create inflation on a micro basis. Rather than money going toward investment, it is going toward consumer goods. Instead of inflation occurring through a wide variety of areas, it is being concentrated.

In this paper we advance two arguments. The first is that basic income guarantees are unlikely to achieve the objectives of alleviating poverty, income inequality or poor standards of living, because the proposals have an inherent highly inflationary bias with disastrous consequences for the currency. An understanding of modern monetary systems elucidates why the provision of income without requiring that the recipient expends any effort in exchange drastically reduces the value of the currency. This onset of inflationary pressures, in fact, renders the basic income guarantee self-defeating. By implication then, the proposal cannot ensure the freedom and opportunity that BIG supporters claim it would. The poor bear much of the brunt of inflation and thus precisely those whom BIG aims to help suffer from that very same policy. We next argue that certain direct job creation programs, such as ELR, achieve most of the common goals that income and job guarantee supporters share, without introducing the crucial problem of inflation. We explain that such programs can be designed so that they are not coercive or demeaning. Neither should they be means tested. An ELR program is neither slavery, nor unemployment by another name. Using the Argentinean experience with job creation, we demonstrate how ELR can advance a sense of civic duty, citizenship, social cohesion, reciprocity, and community involvement while guaranteeing full employment-all without the harmful consequence of price instability. In addition the Argentinean experience demonstrates that an ELR program can contribute to the redefinition of the meaning of work, by commanding recognition that certain forms of labor, such as caring and community involvement, are socially useful. The Argentinean program Jefes de Hogar (Head of Household) has also promoted democracy by empowering individuals that had previously been marginalized. All of these consequences are considered highly desirable by basic income supporters.

Printing money one way in which the United States government finances its spending is through the use of the money printing press. The “print more money” argument, in general, , especially when applied to financing UBI. At the core of the coronavirus pandemic, the United States passed to “stimulate” the American economy. In 2020, the Fed actions which brought about the printing of more money, increasing the possibility of rampant inflation. This has seemingly been the case, as the latest CPI numbers an astounding 8.3%, near a four-decade high. Printing more dollars for the purposes of UBI will increase inflation further. Borrowing Throughout the past few decades, American spending projects have been financed by borrowing. A likely scenario is that UBI would be financed through borrowing, the same way American COVID relief bills . While unpopular, in recent years, American politicians have run up a budget deficit in the trillions, an astonishing $3.13 trillion in 2020. In 2021, the United States 5% of its total federal spending to paying the interest on its debts, for a total of $352.3 billion. As a reference point, the United States allocated $234.3 billion to pay for Veterans Benefits and Services. Is UBI important enough to accumulate more debt and interest, when 5% of the yearly federal budget is already used to pay interest accumulated on debt? Conclusion Undoubtedly, inflation is a significant issue facing the American public. For a nation that religiously relies on car travel and fossil fuel production, coronavirus spending and the energy price increase exacerbated by the Russia-Ukraine war has been disastrous for the economy. The cost of food and other essential goods , providing an additional cost on the average American. During this inflationary crisis, with of Americans living in poverty, inflation has caused significant suffering for the American people. While supporters argue that UBI will alleviate these pains, further spending will aid further inflation as American spending bills have done in recent years. As a result, Yang’s UBI plan does not make sense from an economic perspective, given its propensity for increasing inflation. 

UBI can be funded through money printing, deficit spending or by revenue from taxes. In the first case, the base money supply will increase. The risk with this case is raising inflation. As long as inflation is under control, money printing can help in many other issues (such as alleviating national debt or increasing comparative advantage of country in the trade) in a manner that is fair to everyone. The following sections will elaborate more on the benefits that money printing can provide.

The government will issue the notes to fund the UBI program in deficit spending. This case resembles transferring money from the wealthy (local or foreign) to the middle class and poor. However, the lower and middle class become endebted to the wealthy and their debt must be paid at a later time. Deficit spending may also cause inflation, as lower-income households tend to spend a higher percentage of household income. This method is not preferable, as raising money through debt issuing is not sustainable in the long run.

Of course, the UBI detractors would most likely chime in and respond that it is not the upward pressure on wages, per se, that is problematic, but rather the potential that increasing wages could overheat the economy by creating greater demand than supply, which is the principle driver of inflation. Paying higher wages to workers, combined with the infusion of unearned cash (and here the term “unearned” is solely meant to indicate that it is not tied to paid labor) in the form of a universal guaranteed basic income to all citizens regardless of their employment status, would, most likely, move more cash into the hands of those most likely to spend it, for both would disproportionately be allocated to those who find themselves on the lower rungs of the country’s income distribution continuum. And putting more cash in the hands of those most likely to spend it, that is not accompanied by an economy proportionately increasing the production of those goods and services a newly moneyed class is demanding, will most likely place an upward pressure on prices, which, of course, summons fears of inflation.

However, whether or not a UBI causes hyper-inflation to some extent will depend on the level at which it is set. Even the most ardent supporters might agree that giving everyone $100,000 annually will most likely jolt the economy into a tailspin of inflation or even stagflation as production grounds to a near-halt and the country turns to imports to satisfy its demand for goods and services. Hardly any proposals set the proposed UBI levels that high. At minimal levels (the lowest proposal I’ve seen is $2,000 annually), a UBI is unlikely to have much impact at all, other than providing emergency funds to the most destitute. And at a modest level—not too big, not too small—a “Goldilocks” UBI might have great benefits not just generally, but for workers specifically. Such a UBI is most likely to benefit individuals who currently feel trapped in jobs paying minimum wage or lower, or in jobs that are unsafe, or in jobs in which they are mistreated, in addition, of course, to those who are not employed and living on the brink. One additional group of workers who might benefit are the altruistic labor force—those workers who, but for the need to make an adequate wage, would prefer to work in those sectors of the labor market that contribute to the public good but offer minimal compensation, if any. How many more individuals would switch to coaching little league, cleaning public parks, staffing public libraries, feeding the homeless, or creating public art, if only they could afford to do so. Perhaps the more appropriate question to ask, then, is at what level could society reap the positive effects of a UBI without the economy entering into an inflationary tailspin; surely, there is such a level.

A UBI system is still a theoretical approach, one that comes with good intentions and noble goals. Still, widespread financial equality and independence offer the potential to cause some serious economic issues.

One major issue with a universal basic income, raised by those who oppose such a practice, is inflation. It’s easy to see how the institution of a UBI may fuel inflation.

Social Security is widely believed to protect its recipients from a number of risks, including uncertainty regarding length of life and inflation, due to the inflation-indexed life annuity form of the benefit. The inflation protection comes from the fact that Social Security benefits are indexed to the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). The CPI-W is based on the spending patterns of a broad group of workers, representing approximately 32 percent of the U.S. population. However, the CPI-W may not accurately reflect the experience of retirees for two reasons. First, retirees generally have higher medical expenses than workers, and medical costs, in recent years, have tended to rise faster than the prices of other goods. Second, even if medical costs did not rise faster than the prices of other goods, individual retirees would still, on average, need to devote a larger share of income to medical spending as they age. This means that individual retirees would still see a decline in the real income they have available for non-medical spending. In this paper, we explore both of these factors, quantify the extent to which they undermine the inflation protection provided by the indexation of Social Security benefits, and explore the implications of alternative methods of indexing benefits.

Our analysis is related to the literature on cost-of-living indices for the elderly. Most recently, Burdick and Fisher (2007) and Stewart (2008) compare the CPI-W to the CPI-E, an experimental consumer price index based on the spending patterns of the elderly, produced but not published by the Bureau of Labor Statistics (BLS). Since the CPI-E is intended to reflect the experience of Americans aged 62 and older, the main difference between the CPI-E and the CPIW is in the weights for the various expenditure categories. The CPI-E has increased faster than the CPI-W over the past twenty years, due primarily to the relative rise in health care costs, and the fact that the elderly spend more on health care than the nonelderly, even after taking into account the availability of Medicare. Hobijn and Lagakos (2003) suggest that if Social Security benefits were indexed to the CPI-E instead of the CPI-W, the Trust Fund depletion date would be moved forward by about five years. This result demonstrates that there are important differences between the two indices, and that the choice between them is consequential. Other relevant research includes Boskin and Hurd (1982), who compute separate price indices for elderly and nonelderly households even before the CPI-E was constructed, and List (2005), who reviews the issues regarding cost-of-living indices for the elderly, but without as much of a focus on health care spending.

The Social Security benefits increase will pump even more money into the economy.

Retirees are looking forward to next year's cost-of-living adjustment (COLA) for Social Security, and it's easy to see why.

Though JGP spending automatically adjusts, a JGP is not an anti-inflation buffer stock mechanism, contrary to the claims of Mitchell and Mosler (2001). A JGP sets a wage floor which acts as a buffer stock mechanism guarding against deflation. It does so by drawing labor supply off the market as unemployment increases. However, it does not mitigate inflation by adding additional labor supply as unemployment decreases. The buffer against inflation is the supply of available labor and that is the same, with or without a JGP.29

In theory, the JGP proposal has significant macroeconomic benefits including generating a particular type of full employment, providing another automatic counter-cyclical stabilization mechanism, preserving the skills of unemployed workers by keeping them in jobs, and providing society with the benefits of the output produced by JGP workers.

While the MMT literature has not explicitly discussed the issue of time consistency, MMT economists have advocated for the use of automatic stabilizers as a means of overcoming general political economy concerns (Fullwiler, Grey, and Tankus 2019). Typically, their recommendations include procyclical tax policies and countercyclical spending, such as the JG (Wray 2019b, p. 17). The JG is intended to complement these programs rather than replace them entirely. Examples include traditional taxation policies, as well as "no longer indexing tax brackets or indexing them to an inflation target instead and introducing more tax brackets so that as incomes rise faster than the inflation target a higher percentage of income is progressively taxed" (Fullwiler, Grey, and Tankus 2019). For example, as incomes decline with decreased private sector demand, tax receipts fall. Note that tax bracket indexation may be counterproductive because changes in the price level may come from either a supply shock or a demand shock. Indeed, under this policy, the automatic stabilizer would be contractionary when an adverse supply shock occurs, which is precisely the opposite of the appropriate policy response. Additionally, rather than allowing a fiscal authority to attempt to change taxes in realtime, Fullwiler, Grey, and Tankus (2019) suggest that "varying tax rates and other inflation offsets should be included in the budgeting process from the outset." This may have some merit, but including "inflation offsets" at the beginning of the period does not categorically evade the problem of discretion if the rule is not independent of the fiscal decisionmaking process, which by design occurs at the beginning of the period. Moreover, the authors take the position that "we are not against one or more agencies being given additional tools to collectively manage demand on a discretionary basis" (Fullwiler, Grey, and Tankus 2019) yet we fail to see how this eliminates fiscal fine-tuning. While we have no objection to further progressivity on stabilization grounds and noting that tax policies are already procyclical, we do observe several problems with relying on procyclical tax policies as a primary stabilizer. First, there is a prime mover problem. Suppose there is a demand shock primarily due to loose fiscal policy. That is, automatic stabilizers are not designed sufficiently well such that inflation could be throttled at its source. Presumably, this is not impossible. Then we are back to our model: discretionary policy is necessary to reduce inflation any further than the automatic stabilizers have accomplished. Second and relatedly, it is improbable that, absent an enormous change in the structure of taxation, automatic tax policy would be sufficient to reduce the BER significantly absent discretionary intervention. Historically, discretionary policy has made up 50% of the policy response to demand shocks (Sheiner and Ng 2019). Indeed, Auer23 bach and Feenberg (2000) and Cohen and Follette (2000) find that the impact of automatic stabilizers, while apparent, is overall relatively modest, indicating that MMT may have a more substantial overhaul of the tax system in mind. Otherwise, the policies advocated would be insufficient. Moreover, the automatic stabilizers would have to be designed to automatically move the BER to the NAIBER, something which would require current knowledge of the NAIBER but perfect foresight of the structure of the economy. The reasoning is simple: the structure of the economy necessarily changes over time, which implies that automatic stabilizers cannot be designed ex ante such that inflation is perfectly addressed in each case. Hence some form of discretion is required. This does not necessarily mean tax policy, but it does mean that at some point the fiscal authority has to make a choice.12 At some point, there must be discretion. Third, and perhaps most importantly, it is impossible for these automatic stabilizers to discriminate between supply shocks and demand shocks (Blanchard 2000). In an ideal world, stabilization policies would minimize deviations from potential output but not react to changes in potential output. This is not the case with automatic stabilizers (like tax policy) intended to react to changes in output, but which cannot adequately discriminate between changes in potential output and deviations from potential output. Moreover, as noted by Blanchard and Summers (2020), output shocks tend to be more persistent than unemployment shocks and hence may be permanent changes to potential output rather than deviations from potential output. Consequently, automatic stabilizers triggered by output changes—like tax policy—are not recommended. Fourth, Blanchard and Summers (2020) advocate for semi-automatic stabilizers triggered by unemployment rather than output. Semi-automatic stabilizers are fiscal rules— 12. Moreover, the design of automatic stabilizers would not be immune from the Lucas Critique (Lucas 1976). generally, tax or spending measures—"triggered by the crossing of some statistical threshold, be it a low output growth rate or a high unemployment rate" (Blanchard and Summers 2020, p. 125). An existing example is the extension of unemployment benefits during a recession. In a JG world, this is not possible. Changes in the BER follow changes in the stance of fiscal policy rather than vice versa, so that the structure of JG employment could not serve as a useful trigger for an automatic stabilizer. Thus, absent a major innovation in stabilization policy, MMT policymakers would conduct automatic stabilizers (or semi-automatic stabilizers) based on output triggers, a suboptimal policy. Even taking into account automatic stabilizers like a progressive income tax structure, the fiscal authority would still, on net, prefer fewer taxes than are required to move the BER to the NAIBER. Moreover, the only way to avoid this outcome, which would be to eliminate discretion, would require perfectly designing a system of automatic stabilizers. Then, the future path of booms and busts is exactly offset, and the BER equals the NAIBER consistently, something which we have already argued is impossible. Finally, if the fiscal authority does tie its own hands and leaves demand management completely to an imperfect system of automatic stabilizers, there would inevitably be accelerating or decelerating inflation. The reason is simple: if fiscal policy is necessary to move the BER to the NAIBER, but is incapable of doing so, then the BER will be at a level such that inflation is accelerating or decelerating.

Aiming to fortify broad labor market gains among U.S. minority groups over the previous decade, Federal Reserve Chair Jerome Powell in 2020 engineered a historic promise to try to maintain that progress by giving "broad-based and inclusive" employment a status equal if not superior to the central bank's pledge of low inflation.

Amid a still-raging escalation in prices, however, that commitment has taken a blow. Officials at the Fed's Dec. 13-14 policy meeting acknowledged an economic slowdown needed to thwart inflation also meant "the unemployment rate for some demographic groups - particularly African Americans and Hispanics - would likely increase by more than the national average."

A federal job guarantee would be monumentally expensive, return only limited value from the participants’ work, entail administrative challenges nearly impossible to solve, and be potentially disastrous for economic growth and the private labor market.

Relying on rigorous but basic economics and data analysis, we find the following:

But a job guarantee has bigger problems — macroeconomic, operational, political and the existence of a more effective alternative — that make it a poor choice. The macroeconomic problem is that a job guarantee can’t guarantee a job for everyone. Unemployment has a “natural rate,” estimated at between 4 and 5 per cent in pre-Covid Australia. If unemployment falls below this rate, inflation increases and interest rates rise, hurting investment and consumption and bringing unemployment back up to this natural rate. Arguments that we can defy that kind of economic gravity are unconvincing, with big trade-offs. They usually rely, among other things, on having the government set or heavily influence wages, which would kill more jobs than it creates. The better approach is to get the natural rate of unemployment lower (which can only be done through productivity-enhancing reform) while stimulating demand. Governments could do both, but don’t. A job guarantee faces more daunting operational challenges. The Australian Bureau of Statistics shows that the long-term unemployed often face complex and self-reinforcing challenges, ranging from insufficient skills and training to poor physical and mental health, limited social capital and higher rates of drug and alcohol abuse. The long-term unemployed need more than just a job.

Since the JG has been studied more carefully, a number of mostly skeptical evaluations have been done by Aspromourgos (2000), Kadmos and O'Hara (2000), King (2001), Sawyer (2003), and Seccareccia (2004). In relation to the New Deal work programs, Jensen ( 1989) and Margo ( 1991 ) made similar critiques that broadly range from the limited capacity to deal with structural unemployment and labor market distortions, to high cost and inflationary tendencies. Probably the most common critique is that JG is not able to deal with structural unemployment. Solving structural unemployment requires retraining, whereas JG does not provide training and there are only limited learning opportunities on the job because most JG occupations involve low or common skills. Worse, JG may weaken skills by assigning individuals to tasks that do not fit their skills. In terms of market distortions, a JG would likely compete with existing public and private sector activities unless it is involved in a very narrow set of activities with limited relevance. In addition, JG may decrease the supply of work to the private sector because JG workers may have fewer incentives to look for private jobs if the JG provides better working conditions. Finally, according to critics, like the New Deal work programs, the JG is likely to have a bad reputation and so send a negative signal to potential employers. JG critics are skeptical of the cost estimates provided by JG proponents and argue that the benefits produced would not match the cost. The administrative cost of a JG would be substantial and would require a massive reorganization of the current government administration in charge of helping the unemployed. Not only would the cost of a JG be higher than estimated, but also the benefits would be limit because of the limited usefulness of the JG activities. The private or public sect already cover most of the useful activities. Finally, JG critics think that the claims about the stabilizing effects of a JG are overstated or not accurate. Some authors argue that a JG would create addition demand while putting the economy at full employment, thereby leading to t same demand-pull inflation as in the typical Keynesian fiscal policy. Others have doubted the capacity of the buffer program to stabilize wages significantly because contrary to agricultural commodities or bank reserves, labor is not a homogenous commodity. In addition, the level at which the JG wage is set is important to determine the cost, benefits, and potential inflationary dynamics, and JG proponent have not spent enough time looking at this issue carefully.

In terms of market distortions, a JG would likely compete with existing public and private sector activities unless it is involved in a very narrow set of activities with limited relevance. In addition, JG may decrease the supply of work to the private sector because JG workers may have fewer incentives to look for private jobs if the JG provides better working conditions. Finally, according to critics, like the New Deal work programs, the JG is likely to have a bad reputation and so send a negative signal to potential employers.

JG critics are skeptical of the cost estimates provided by JG proponents and argue that the benefits produced would not match the cost. The administrative cost of a JG would be substantial and would require a massive reorganization of the current government administration in charge of helping the unemployed. Not only would the cost of a JG be higher than estimated, but also the benefits would be limited because of the limited usefulness of the JG activities. The private or public sect already cover most of the useful activities.

#4: Inflation would rise. A sudden increase in the cost of labor for businesses will lead to inflation throughout the economy because of higher business costs that will need to be passed on to consumers. In addition, when only those at the bottom of the income distribution get a defacto raise to $15, there are upstream consequences. Workers who were making $15 an hour may demand $20 an hour now. Workers making $20 an hour might want $25 an hour and so on. This may seem like a benefit, but “this is a story of serious wage-price spiral, unless we introduce other measures,” warns progressive economist Dean Baker.5 We have been very fortunate that inflation has been well under control for the last few decades. A federal jobs guarantee could change that pretty quickly.

#5: It would be an administrative nightmare. Finally, matching millions of workers to the jobs envisioned under a jobs guarantee would be an administrative nightmare to implement. State and local governments will be tasked with finding the productive work to do, but how do we train millions of people to do these jobs? How does the Department of Labor oversee the millions of new jobs to make sure they’re legitimate? What are the qualifiers for the kind of work that’s eligible? What if a right-leaning state wants jobs done that a left-leaning federal government deems unproductive or socially unacceptable like building an oil pipeline or opening up a coal mine?