Michael Kinsley on inflation in the new Atlantic:
My specific concern is nothing original: it’s just the national debt. Yawn and turn the page here if you’d like. We talk now of trillions, not yesterday’s hundreds of billions. It’s not Obama’s fault. He did what he had to do. However, Obama is president, and Democrats do control Congress. So it’s their responsibility, even if it’s not their fault. And no one in a position to act has proposed a realistic way out of this debt, not even in theory. The Republicans haven’t. The Obama administration hasn’t. Come to think of it, even Paul Krugman hasn’t. Presidential adviser David Axelrod, writing in The Washington Post, says that Obama has instructed his agency heads to go through the budget “page by page, line by line, to eliminate what we don’t need to help pay for what we do.” So they’ve had more than a year and haven’t yet discovered the line in the budget reading “Stuff We Don’t Need, $3.2 trillion.”
There is a way out. It’s called inflation. In 1979, for example, the government ran a deficit of more than $40 billion—about $118 billion in today’s money. The national debt stood at about $830 billion at year’s end. But because of 13.3 percent inflation, that $830 billion was worth what only $732 billion would have been worth at the beginning of the year. In effect, the government ran up $40 billion in new debts but inflated away almost $100 billion and ended up with a national debt smaller in real terms than what it started with. Ten percent inflation for five years (if that were possible) would erode the value of our projected debt nicely—but along with it, the value of non-indexed pensions, people’s savings, and so on. The Federal Reserve is independent, but Congress and the White House have ways to pressure the Fed. Actually, just spending all this money we don’t have is one good way.
Welcome to the team! Slight addendum: Contrary to Kinsley, one guy has put out a way to get out from under the national debt (though right now he might not be in "a position to act").
The resistance to that plan is considerable, of course. Republicans and conservatives come under plenty of fire for resisting tax increases to balance the books. But they aren't the only stubborn ones. Read E.J. Dionne today, and you see that Democrats and liberals are just as adamant in their refusal to back serious spending cuts. Here's Dionne on the Ryan Roadmap:
Ryan gets points for being a genuinely nice person, and because he says outright what many other Republicans only mumble. But the path he suggests is exactly wrong. Weakening social insurance is the opposite of what the country needs to do now, and it doesn't even get us to fiscal nirvana. Ryan's plan, according to the Congressional Budget Office, would still leave us with a deficit of 5 percent of GDP in 2034 and would only then start dropping.
How is saving Social Security, Medicare, and Medicaid from insolvency "weakening social insurance"? Beats me. Just to be clear, the Roadmap preserves the current system for everyone 55 and older. And it sustains the basic programs for everyone else.
Dionne also says the Roadmap "would still leave us with a deficit of 5 percent of GDP in 2034 and would only then start dropping." But such an argument makes the perfect the enemy of the good. The CBO says that current policies will leave us with a deficit that is 5 percent of GDP in 2034 -- but, if nothing is done, spending explodes in the following years to the point where the deficit increases to 7 percent of GDP in 2059 (and keeps going from there). Consider that scenario, and the Roadmap doesn't look too shabby.
What few liberals and Democrats will say openly is that taxes must rise, and rise significantly, in order to pay for the welfare state. But the sort of tax increases required just to finance the government programs already in place would have deleterious effects on growth, employment, investment, innovation, risk-taking, and economic dynamism. These are real costs. And they wouldn't prevent Pelosi, Reid, and Obama's heirs from spending the additional dollar.
Government spending has emerged as a vote-driving issue. It's behind a lot of the resistance to the Obama health care plan. It motivates the Tea Party. One day soon -- maybe not in 2010, maybe not in 2012, but soon -- voters will have to decide which road to follow. As Obama likes to say, that's what elections are for.