Inflation Is the Mother of Big Political Change
By Holman Jenkins Jr, 10/22/21, Wall St. Journal

Since excessive inflation is one characteristic outcome
of a fiat money system, who is really surprised that such
a moment might be on us again? The table would seem to
have been set for a long time: Unruly govt borrowing.
Mounting regulatory burdens & disincentives to business
& workers. A decline in labor force participation. The
peculiar unwillingness of a large cohort of young men
to pursue either work or schooling.

Then came the pandemic & the pandemic spending binge,
which shifted public demand away from services (no longer
available) to goods that supply chain struggles to deliver.

Jerome Powell, the Fed chief, posits a happy ending:
Production resumes, goods & services flow in abundance,
inflation is transitory. But he knows it’s not that simple.
An apparition of central bankers is the dread inflation
psychology, but inflation expectations don’t become embedded
in consumer heads because of childhood trauma, but because
consumers detect a mindset of policy makers to accommodate
inflation. And Powell, whose renomination is pending, must
subordinate himself & his monetary decisions to a fast-rising
new agenda in Washington: a whole-of-establishment effort
to keep Donald Trump from returning to the White House.

Inflation is like Covid: If it gets loose, it will dominate
our politics. It causes great unhappiness but also makes
new things possible.

In the 70s, the inflationary crisis imploded a large govt
establishment occupied with trying to fix the supply &
price of air travel, truck transport, rail services &
consumer energy supplies. It imploded a tax system that was
found to be constantly promoting people into higher brackets
even as their real income and living standards declined.

All in all, quite a revolution in govt’s role in the economy
began under Carter & continued under Reagan, & was echoed
all around the Western world.

Today’s inflation would be hitting an economy with
rigidities of its own, mostly of a different kind. Zoning
rules depress the supply of housing; licensing restrictions
depress the supply of personal services. Wind and solar
mandates tax the reliability of the grid. Means-tested
entitlements make it less attractive at the margin for
Americans to work.

We may discover other vulnerabilities but two gaping ones
weren’t part of the story in the 70s. In 1977 federal debt
was 34% of GDP; today it’s 125%. And the share of Americans
who’ve experienced direct govt aid has quadrupled. It now
comprises over 50% of the population, & that’s before our
vast pandemic spending & Joe Biden’s welfare ambitions.

Which means a lot could go kerblooey & fast. Rising
interest rates could double or triple today’s $400 billion
interest bill on the national debt. Overnight, this item
could rival Social Security and Medicare as the biggest
single budget outlay.

The available options would only compound the public’s
unhappiness with inflation: large tax hikes & spending cuts,
central bank finance of deficits (leading to more inflation)
or heavy-handed measures to force private depositors to
hold govt debt, essentially expropriating private savings.

Though Social Security benefits nominally are indexed for
inflation—a 5.9% increase has been announced for next year—
Congress knows well how to claw back benefits by taxing
them. For programs like Medicare & Medicaid that deliver
in-kind benefits, the even simpler expedient is to cut
reimbursements to providers, which users will experience
as declining quality and longer wait times.

To the upwelling of voter aggravation, add Congress’s
likely targeting of indirect benefits that effectively put
almost 100% of Americans on the dole. These include the
mortgage-interest deduction & tax-free employer-provided
health care.

When voters are angry & at wit’s end as they are when
inflation is unraveling their expectations & life plans,
new things become possible, good & bad. Evolutionists
talk about “punctuated equilibrium.” A bout of society-
transforming inflation would certainly get us off an old
& exhausted equilibrium & onto a new one that we can hope
will prove sustainable in the long run.

Nobody planned our giant experiment in a welfare-cum-
administrative state. Its incoherence has long been
showing. Many of its features aren’t even about fixing any
problem but about satisfying constituencies who want
power over their fellow citizens.

All things that live must change & adapt. That includes a
fiscal state that so demonstrably has run out of gas that
almost everybody, from the most woke to the most Trumpian,
senses it in some fashion.

https://www.wsj.com/articles/inflation-political-change-debt-spending-cuts-adapt-11634928785

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