This week, we get this over at Economic Forces:
Also, nice little disclaimer:
"Here at Economic Forces, the objective isn’t to tell you what to think, but rather provide you with a framework for how to think. Armed with this way of thinking, readers can make their own decisions about whether the DOGE dividend is a good idea. Regardless, it is unlikely to lead to higher inflation."
Government spending and inflation is a little bit of a weird topic. No, government taxing-and-spending just redistributes purchasing power (inflation requires money printing), but as we learn between the post-GFC QE money printing and the covid ones, how that new money enters the system and whether government is a catalyst for having it hit people's retail bank accounts matter for the inflationary outcomes (i.e., prices).
Alright. First off, this DOGE description is fantastic:
This is the initiative that Elon Musk is running for the Trump administration in an attempt to cut wasteful spending and downsize the federal bureaucracy. People who have heard of this seem to have very strong feelings about it. Some are very enthusiastic. Some are extremely skeptical.
Yeah, I don't understand either... it's fun and useful? fun and irrelevant? not-fun and disastrous (Financial Times article literally thinks USAID spending is a matter of life and death)?
some have argued that this would just repeat the mistakes of pandemic-related policy. After all, the government sent people checks in the mail during — and arguably after — the pandemic. What followed was the most significant inflation that we have experienced in 40 years. Thus, wouldn’t these checks also just result in inflation? The likely answer is “no.”
"The mechanics of sending out checks is as follows. The U.S. Treasury department issues bonds. The proceeds of those bonds are used to give out checks to the American taxpayer. The Federal Reserve, in its expansionary stance, is purchasing U.S. Treasury securities on the open market. As a result, what is effectively happening is that these checks are financed by an increase in base money."
- if check-sending/gov spending is financed by new money (= money printing), the effect will be inflationary.
- if check-sending/gov spending is financed by cutting other expenses, how could it be?!
In that instance, whether the price level rises or falls depends on whether the increase in the supply of base money is greater than, less than, or equal to the increase in demand for base money.
This observation is also important:
It is also important to note that if this is a one-time issuance, at most this would lead to an increase in the price level. This means that there would be a permanent increase in the price level (a permanent reduction in the purchasing power of a dollar), but a temporary increase in the inflation rate.
Inflation is a rate-of-change of the price level. This is, for instance, the ways in which an increases sales tax or one-time tariff will result in one-time shift of the price level (and thus look like inflation) but won't be sustained over time.
Also, John Cochrane in his many writings, has a separate mechanism for this same effect, driven by expectations of government finances. Sending checks, if I remember Cochrane's points, is such an extreme, fiscally irresponsible move by the Treasury that households can spend down the proceeds hot-potato style (#736107) but even more so, anticipating taxes/fees/inflation.
Anyway, nice lil tidbit for how to think about inflation and whether government spending is inflationary or not.
As always in economics: it kind of depends!