Friday, January 18, 2008

Is Inflation Inevitable?

Inflation is inevitable as long as government spending, taxation, and regulation continue to inhibit productivity gains by stifling innovation, entrepreneurship, and risk-taking. The historical record shows as much:

Real GDP is nominal (current-dollar) GDP divided by the GDP deflator, a measure of changes in the overall level of prices for the goods and services that make up GDP. I derived five-year averages from the estimates of real GDP and the GDP deflator for 1790 through 2006, as provided by Louis D. Johnston and Samuel H. Williamson, "The Annual Real and Nominal GDP for the United States, 1790 - Present." Economic History Services, July 27, 2007, URL : UPDATE (01/30/08): The averages for 2005 include estimates of real GDP and the GDP deflator for 2007, as issued by the Bureau of Economic Analysis on January 30, 2008.
Before the early 1900s -- before federal income taxes were made constitutional, before government spending rose from less than 10 percent to about 30 percent of GDP, before the Federal Reserve was created, and before the nation's businesses were engulfed in a regulatory tsunami -- the U.S. experienced prolonged periods of deflation, accompanied by rapid economic growth.

The only sustained periods of deflation since 1900 occurred in conjunction with the deep (but relatively brief) recession of the early 1920s and the Great Depression of the 1930s.

The real issue is not inflation per se, it is government. Inflation is a symptom of chronic, government-induced, economic weakness. There is no way, really, to "fight inflation" but to remove the heavy hand of government from the economy.

Related posts:
"The Destruction of Income and Wealth by the State" (01 Jan 2005)
"Why Government Spending Is Inherently Inflationary" (18 Sep 2005)
"Ten Commandments of Economics" (02 Dec 2005)
"More Commandments of Economics" (06 Dec 2005)
"Liberty, General Welfare, and the State" (06 Feb 2006)
"Monopoly and the General Welfare" (25 Feb 2006)
"The Causes of Economic Growth" (08 Apr 2006)
"Slopes, Ratchets, and the Death Spiral of Liberty" (03 Aug 2006)
"The Anti-Phillips Curve" (25 Aug 2006)
"Median Household Income and Bad Government" (18 Sep 2006)
"Toward a Capital Theory of Value" (12 Jan 2007)
"Things to Come" (27 Jun 2007)
"The Laffer Curve, "Fiscal Responsibility, and Economic Growth" (26 Oct 2007)
"A Political Compass: Locating the United States" (13 Nov 2007)
"Intellectuals and Capitalism" (15 Jan 2008)