Fiscal discipline is missing from the battle against elevated inflation, according to a paper published by the Committee for a Responsible Federal Budget last week.
As the economy grapples with supply chain issues and labor shortages, price levels rose 8.2% between September 2021 and September 2022, according to a report from the Bureau of Labor Statistics. The paper from the nonpartisan organization noted that lawmakers are working against the contractionary monetary regime advanced by officials at the Federal Reserve.
“Spending increases and tax cuts work to boost demand in the near term, while high levels of projected deficits and debt can boost inflation expectations. This is especially true if markets believe the government will attempt to inflate away a portion of its debt,” the paper said. “Enacting deficit reduction during a period of high inflation can also help to reassure markets that elected officials are committed to responsible policy and won’t attempt to undermine Federal Reserve tightening in the future should inflation persist.”
Deficits soared in the wake of multiple stimulus packages enacted in response to the lockdown-induced recession. Both Republicans and Democrats have presided over surges in the national debt, which reached $31 trillion earlier this month.
David Bahnsen, the founder of Manhattan-based wealth management firm The Bahnsen Group, explained to The Daily Wire that although deficits “have corresponded with periods of low prices and high prices,” the greater concern is that runaway spending “puts downward pressure on future growth, as certain future growth will be absorbed by repayment of debt.”
The Committee for a Responsible Federal Budget argued that monetary policy is more useful for addressing economic phenomena than fiscal policy, which is generally constrained by the political process, yet affirmed that lawmakers can still “reduce recessionary pressures” through deficit reduction. Among other measures, officials could pursue work incentives that relieve labor shortages and reduce the deficit to “temper demand.”
The paper added that such policies would “require large increases in unemployment.” Contesting the conclusion, Bahnsen argued that encouraging higher joblessness to slow the economy is a disproven thesis. “Growth absorbs money supply when the policy prescription is right,” he explained. “Remove impediments to the new supply of goods and services, and prices come down in a market economy.”
The Federal Reserve raised the target federal funds rate by 0.75% last month, a move which followed two identical hikes in June and July, in an attempt to relieve elevated inflationary pressures. Bahnsen asserted that rate hikes are not “even remotely effective” in controlling many prices faced by consumers, with the exception of the “absurdly hot” housing market, in which mortgage rates have neared 7%.
“The general price level increased because of the COVID shutdowns that brought new supply and new production to a dead standstill, followed by a reopening that brought demand back to pre-COVID levels without the corresponding readiness in supply,” he explained. “Other than the few parts of the economy that low rates were artificially inflating, rate hikes are not the right tool for dealing with skyrocketing energy prices, food prices, or health insurance premiums.”