How To Put The Genie Of Inflation Back Into The Bottle

Yakov Feygin in Noema (image by Roman Bratschi for Noema Magazine):

As President Joe Biden’s administration and its progressive allies push to pass an ambitious social spending bill, moderate Democrats are worried. They point to rising prices and postulate that we are facing an era of high inflation. Wouldn’t more spending after an already large pandemic stimulus make matters worse?

Those voices should consider what John Maynard Keynes said in a 1933 letter to President Franklin D. Roosevelt during the worst year of the Great Depression. First, he argued, the president should boost consumer spending and convince businesses to get back to what they do best: making and selling things. Then, once things were up and running again, he could pursue economic reform to fix the systemic problems preventing the economy from meeting its potential. Then, as now, many conflated the ideas of “economic recovery” and “economic reform.” The purpose of economic recovery is to spend to prevent a crisis from spiraling. The purpose of reform is to spend so that we do not have these problems in the first place.

The U.S. economy is facing inflationary pressures not because of too much government spending but because, for almost two decades, there has not been enough. Our country simply does not have the kind of productive capacity that can create high, widespread growth without some inflation. We need to spend on building up that capacity so the economy can run at peak performance in normal times — and so it can be more resilient through future crises.

More here.