Big Government is the Largest Driver of Inflation

In 2020, state governments forced many businesses to close their doors temporarily for “15 days to stop the spread”. Fifteen days turned into months, and in the progressive state of California it was longer than a year. Knowing that cutting off people’s ability to work and generate income would have disastrous economic consequences, the government directly and indirectly compensated people to stay home. This created a drop in the productivity of goods and services while the newly found free time and money from the treasury resulted in an increased demand for the limited amount of stock available during the pandemic. As a result, inflation shot up causing a rise in prices.

The response to Covid-19 is not the sole cause of our recent spike of inflation, although it did unmask it to the public as a serious issue for the first time in decades. Instead, it is a symptom of a larger disease in which government sucks up limited resources while printing money from thin air to cover its deficits, which in turn idrives up prices through inflation. The increased spending of the Biden Administration went on to make a bad problem worse. Out of control spending by big government takes away resources from citizens through taxes, expands the money supply, and is the largest driver of inflation during the 21st century.

Massive Federal Spending

For fiscal year 2024, the federal government’s budget deficit was $1.83 trillion. The entire budget for that year was $6.9 trillion, which means that they took in over $5 trillion from taxes and other revenue. The total US GPP for 2024 was just over $29 trillion. Under that metric, a little more than one out of every six dollars was sent to Washington in the form of taxes with the federal government’s total spending of money they have and money they borrow accounting for almost a quarter of the nation’s GDP. 

In 2023, the government spent $6.1 trillion for that fiscal year. That makes the spending increase between the two years to be 12.83%. The GDP for the entire United States economy only increased by 2.8%. The government is increasing syphoning resources at an unsustainable rate given the increases in total government spending and the widening year to year budget deficits. 

Quantitative Easing

During the Financial Crisis, the Federal Reserve employed Quantitative Easing which is the purchasing of financial assets by the central bank in order to stimulate the economy. In Keynesian economic theory, a recession’s end can be jump started by increased government spending where the beneficiaries from that would have money to spend in the rest of the economy and then prosperity can “trickle down” from the public sector workers to the private sector ones. So the US government, led by President Obama, employed this policy and when there were not enough buyers of bonds to bridge the deficit, the Fed stepped in to purchase the remainder.

And when the spark did not ignite like the policy makers had hoped, they doubled down and tried harder and harder. Things did eventually get better, as they usually do in business cycles because that’s how cycles work, but the end result was that a ton of money was created and pumped into the financial asset market. The 2010s saw a massive stock market boom (or bubble) that came from a flood of new money that was looking for a place to park. Real estate prices also increased steadily too during this period. 

Being Paid Not to Produce

Welfare programs, like many things, began with good intentions but it has gradually turned into a system that once gave people a chance to get up after a setback into a crutch that they can never get rid of. Medicaid has been in the news lately with Speaker Mike Johnson saying “single mothers with two small children just trying to make it. That is who Medicaid is for. Not for twenty-nine-year-old males sitting on their couches playing video games”.

Medicaid is government funded health insurance for extreme low-income Americans. In most states, for a single adult under the age of sixty-five with no kids, you need to make up to 138 percent of the federal poverty level to qualify for the program. Currently that would be an income of $21,000 or less. Which means that making $21,100 would make you disqualified and you would lose the “free” benefit.

Health insurance is very complex (thanks to regulations) but it would cost a healthy thirty-year-old on average about $477/month to buy private insurance which comes out to $5,724 per year. So this single adult would need to make $26,724 to enjoy the same lifestyle they had at $21,000. Some people are willing to sacrifice but a larger payout in the future and will take the setback, but for many, the step forward to work harder for a better life has been turned into be a step backward, and they will not do it because why would any rational person work more just to end up with less? Because there is a sacrifice needed to move out of them system, many are incentivized to stay where they are.

More Demand on Limited Resources

In 2021, The Infrastructure Investment and Jobs Act lived up to its name by allocating $7.5 billion dollars to build 500,000 public charging stations for electric vehicles while only actually having only eight built. It would be interesting to see how much each station actually cost to build but it would be a safe bet to say that Tesla can make them cheaper, better, and faster. But when it comes to the public treasury, the administrative state is not incentivized to be efficient and save money because it can always get more from the taxpayer and if that’s tapped out they can go to the Fed. 

But these inefficiencies hurt the average citizen in more ways that wasting tax dollars. Projects like these put the government in competition with private businesses for the limited quantity of materials needed to build these projects. This puts an increased pressure on prices while making everything expensive for everyone. When cars began to replace horses, the government did not fund the construction of gas stations, private businesses did that and they can do the same for car charging stations as well.

Biden’s plan for broadband for all is also squandering resources because the technology is outdated thanks to internet service providers like Starlink who use satellites instead of cables. But despite the better private sector option, the government pushed through with the project tying up labor and precious metals in addition to other materials. 

Current government spending is increasing much faster than the real productivity of the American economy. It’s on an unsustainable path towards a financial crisis that has the potential to make the Great Depression appear enviable. The only way to avoid it is to drastically reduce the size of the government and its spending so that deficits shrink below GDP and then turn into surpluses. Spending cuts alone might not do it, but if the government is removed as a player against the private sector then there is a chance for actual productivity increases to increase prosperity and decrease prices. 

America experienced its greatest growth during the industrial revolution where mass production lowered the costs dramatically for most consumer goods while new inventions improved our standard of living. This all occurred without the government having its finger on the scale or taking a cut. It could happen again.

Courtesy of Mises.org

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