Subsidize demand, restrict supply.
In Specialization and Trade, I make the claim that most government intervention does not conform to the textbook model of dealing with market failure. In that model, when the market produces too little of something (use of masks in a pandemic), the government is supposed to subsidize either supply or demand. When the market produces too much of something (air pollution from automobiles), the government should penalize either supply or demand.
In practice, politicians don’t follow the textbooks. They obey interest groups. Every interest group once to see its supply restricted and its demand subsidized. So the national government subsidizes home purchases, but then at a local level it restricts housing construction. The government subsidizes the demand for health care and higher education, but it uses licensing and accreditation rules to restrict supply.
It occurs to me that virus policy is “subsidize demand, restrict supply” writ large. Lockdown-type rules restrict supply. And “stimulus” subsidizes demand.
What do you get when you subsidize demand and restrict supply? Higher prices. Eventually.
Arnold, sorry but you are relying on standard macro. Whatever inflation is this year and the next one, it will be the result of how price indexes are built. There have been already some relative price changes –via both increases and reductions in nominal prices– but little inflation (forget about the nonsense column that TC wrote). Changes in relative prices will become important if lockdowns are imposed for several months, but I doubt they will because the Dems soon will be afraid of how people react to their malice, mendacity, and hypocrisy. They will make noise until January 20, but I bet that soon after they will relax compliance and forget to renew the restrictions.
After January 20, inflation will be a problem if the new “stimulus” programs aimed at consumption, investment, and inventory accumulation are financed by printing money. The problem of government borrowing is that it cannot continue forever. Given the large stock of public debt and the prospect of “stimulus” and other programs that the rotten and corrupt democrats and their new friends want to undertake, if they intend to go ahead with most of them in 2021, it will not take too long for financing them by printing money.
This is not inflation:
https://advisorsmith.com/data/thanksgiving-dinner-costs-up-10-percent/
“The problem of government borrowing is that it cannot continue forever.”
Can anybody prove this? I used to believe this, strongly. Then weakly.
Now I’m not even sure it’s true (any time more than my lifetime ~= forever > 2 decades).
Yet for many decades Japan’s gov’t has been borrowing, hugely.
The Baby Boom inflation in 70s America was more because of a huge new demand (higher prices) and lagged supply responses – plus money. And oil-price shocks, and globalization shocks, and Japanese imports of cars.
Yeah, Zimbabwe, Venezuela – places where the supply of locally produced goods failed to adjust.
If your theory doesn’t explain low-inflation, high gov’t debt, high budget deficit Japan (often), it is missing something.
https://www.economicshelp.org/wp-content/uploads/2014/11/japan-government-debt.png
The USA is more like Japan than Venezuela, tho also different from either.
I know little about Japan but I have just looked at some research papers and my impression is that Japan will never be an exception to the idea that “government borrowing cannot continue forever”. If you look at the graph of the debt/GDP ratio in your comment, you can see that it has been under 250% for the past several years and it stopped increasing. The research papers confirm that the Japanese government has been concerned about the sustainability of financing large deficits by borrowing and most analysts now expect that the ratio will decrease slowly.
Indeed, that doesn’t prove the impossibility of financing government deficits by borrowing forever. But it’s not easy to find the extraordinary conditions under which that may happen. As in Japan, if the U.S. were to face an accelerated increase in the public debt/GDP ratio to over 200%, I’d expect political pressures for a government’s commitment to reduce gradually the deficit. At some point, nobody would like to bet how much more the ratio could continue to increase.
“Once” is a homonym for “wants”.
I pursu’d a maiden and clasp’d a reed.
Gods and men, we are all deluded thus!
It breaks in our bosom and then we bleed.
-Shelley
This is not market failure but a lack of market freedom — owners of restaurants aren’t being allowed to open their doors! If it goes on much longer, I expect to see speakeasies re-emerge.
You will get higher prices for those things the demand for which has been subsidized while the supply is being restricted. But those are not *all* things. If the monetary authority is targeting inflation, the prices of other things will decline, so that there is no general inflation.