Since the onset of the economic crisis in late 2007, liberals and conservatives (and economists with like-minded leanings) have been ferociously debating two issues – inflation and debt. On inflation, liberals generally argue that inflation wasn’t an issue. By arguing such, liberals were able to claim that the best way to deal with the economic crisis was aggressive fiscal and monetary policy. On the other end, conservatives focused on the terrible precedence and increased risk of higher inflation, should central banks around the world address the economic crisis through expansionary monetary policy. On debt, liberals contended that debt didn’t matter. Instead, liberals argued that continued government spending through debt was the correct response to the economic crisis. Conservatives countered that an expansion of government spending through debt issuance was the wrong solution, pointing out that the government spending wouldn’t provide much support to the economy and that expansionary fiscal policy sets a terrible precedence.
Which Camp Was Right?
The following is a look at what inflation has done since 2007. Inflation is up about 16% since 2007, which, on the surface, would support what conservatives had been saying.
Of course, liberals would counter, saying that the cumulative inflation doesn’t address the debate. Instead, what we should be looking at is the change in the inflation rate across time. This look – a year-over-year comparison – follows.
Perhaps it’s difficult to see, but one thing is readily apparent. The inflation rate hasn’t bumped up, rather, the economy has experienced slight disinflation (as opposed to deflation).
Doesn’t the figure below show that liberals were right? Not really.
During the ongoing debates, both conservatives and liberals appeared to be in general agreement that inflation was not a short-term issue. Instead, the issue was, and still is, about long-term inflation prospects. Presuming the long-term refers to anything, the beginning of the “long-term” that liberals and conservatives were referring to is probably starting around now (six years after the onset of the financial crisis). This time of reckoning should make liberals worry.
Why? Because there’s growing view among economists that inflation is something to be concerned about and it is likely sooner on the horizon that many expect, according to a recent Federal Reserve paper looking at the predictive power of short-term unemployment compared to other unemployment measures.
The following is one reason why. The chart shows the hourly compensation index produced by the Bureau of Labor Statistics. If you’re like most analysts, it certainly looks like it’s approaching a trough, right?
Interestingly, if you do what the NY Federal Reserve’s economists did and overlay measures of unemployment with wage inflation, you’ll come to the same conclusion – inflation is on the way. And that’s something liberals don’t want you to hear.
Moving on, weren’t liberals right on debt? In a nutshell, the liberal argument was that debt incurred by increasing government spending was worth it because it would boost GDP. Did it? Here’s what’s happened with GDP since government starting reducing spending.
Since 2009, GDP is up around $1.6 trillion, with Personal Consumption and Private Investment each up a little less than $1 trillion. Net exports are up $64 billion. How has government done? Government spending is down a little less than $200 billion.
Liberals probably don’t want to repeat this story. By and large, the chart shows that reduced government spending is correlated with increased economic growth. Some conservatives might even be surprised by this one.
Overall, it looks as though the short-term stint in low-inflation territory is over. It also appears that reducing government spending didn’t hurt the economy. Liberals probably don’t want you to hear this story.
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