Abstract
In this chapter I show how the government creates inflation through so-called monetary policy. I also show the role “fiscal policy” has, if any, in causing inflation. The chapter also discusses how the government creates money ex nihilo and looks at some of the effects of inflation, particularly on profits and interest rates.
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Notes
Richard M. Salsman, Breaking the Banks: Central Banking Problems and Free Banking Solutions (Great Barrington, MA: American Institute for Economic Research, 1990), pp. 17–78.
Charles Goodhart, The Evolution of Central Banks (Cambridge: The MIT Press, 1988), pp. 4 and 19–20 and
Richard M. Salsman, “The End of Central Banking, Part I,” The Objective Standard vol. 8, no. 1 (Spring 2013), pp. 13–29. See especially pp. 13–14, 16, 18–19, 23, and 26–27 in the latter reference.
See George Reisman, Capitalism: A Treatise on Economics (Ottawa, IL: Jameson Books, 1996), pp. 229, 654, and 762–774 for more on this. Note that this is not changed if the assets are paid off over time, since their purchase price was determined at the time of purchase.
I demonstrate the truth of this statement in Chapter 4 of Brian P. Simpson, Money, Banking, and the Business Cycle, Volume 2: Remedies and Alternative Theories (New York: Palgrave Macmillan, 2014).
See Brian P. Simpson, Markets Don’t Fail! (Lanham, MD: Lexington Books, 2005), pp. 5–26 for a discussion of the appropriate functions of the government.
For a typical exposition of the “Keynesian multiplier,” see Paul A. Samuelson and William D. Nordhaus, Economics, 13th ed. (New York: McGraw-Hill Book Co., 1989), pp. 167–168.
Total spending on goods and services in the United States consists of gross receipts of corporations, partnerships, and nonfarm proprietorships, as well as annual wages for labor (for gross spending on labor). In determining wages, I assumed the wage rates for government workers were the same as wage rates for workers in the private sector. This makes my estimate of total spending less accurate than it could be but it is still a much better estimate of total spending in the economy than GDP, and doing it this way simplifies the collection of the appropriate data, especially for earlier years, which I use starting in chapter 5. Government spending is the government spending component of GDP plus the payment of wages by the government. Spending by individual consumers is the personal consumption component of GDP plus fixed residential investment. Fixed residential investment is consumption and not investment because it is spending not engaged in for the purpose of making subsequent sales (to the extent it is for homes people live in themselves and do not rent out or fix up and resell). All categories of GDP—government spending, private consumption spending, and business investment—were adjusted on a pro-rata basis by net exports. GDP data and its components were obtained from the Federal Reserve Bank of St. Louis, FRED database, series IDs GDPA (Gross Domestic Product), GCEA (Government Consumption Expenditures and Gross Investment), PCECA (Personal Consumption Expenditures), GPDIA (Gross Private Domestic Investment), PRFIA (Private Residential Fixed Investment), and NETEXP (Net Exports of Goods and Services). Data were obtained February 18, 2013. Wage data were obtained from the US Department of Labor, Bureau of Labor Statistics, historical hours, earnings, and employment data, Tables B-1 and B-2 at http://bls.gov/ces/tables.htm#ee. Wage data were obtained January 24, 2012. The gross business receipts value for corporations was calculated using data from the following source: Internal Revenue Service, “2010 Corporation Source Book, Publication 1053, Section 2,” http://www.irs.gov/uac/SOI-Tax-Stats-Corporation-Source-Book:-U.S.-Total-and-Sectors-Listing. Data for corporations were obtained February 18, 2013. Gross business receipts for corporations include business receipts, interest, interest on government obligations (total), rents, and royalties. For partnerships, the value was calculated using data from the following source: Nina Shumofsky, Lauren Lee, and Ron DeCarlo, “Partnership Returns, 2010,” Statistics of Income Bulletin vol. 32, no. 2 (Fall 2012), pp. 79–168. See Table 7—All Partnerships: Total Receipts by Selected Industrial Group, Tax Year 2010 on pp. 165–166. Gross business receipts for partnerships include business receipts, other income from trade or business, interest income, royalties, real estate rental net income, and other rental net income for all industries. For nonfarm sole proprietorships, the value was obtained from
Adrian Dungan, “Sole Proprietorship Returns, 2010,” Statistics of Income Bulletin vol. 32, no. 1 (Summer 2012), pp. 5–70. See Table 1 — Nonfarm Sole Proprietorships: Business Receipts, Selected Deductions, Payroll, and Net Income, by Industrial Sectors, Tax Year 2010 on pp. 18–27. The value for business receipts for all nonfarm industries was used. See the notes to the discussion on the calculation of gross national revenue for 2010 in chapter 5 for why gross receipts were calculated in the manner described above.
Gross receipts for 2008 were obtained from the US Census Bureau, Statistical Abstract of the United States: 2012, 131st ed. (Washington, DC, 2011), p. 491. Wages, GDP, and the GDP components were obtained from the same sources cited above.
See Roger A. Arnold, Economics, 5th ed. (Cincinnati, OH: South-Western College Publishing, 2001), pp. 208–209 for more on this.
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© 2014 Brian P. Simpson
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Simpson, B.P. (2014). How Does the Government Cause Inflation?. In: Money, Banking, and the Business Cycle. Palgrave Macmillan, New York. https://doi.org/10.1057/9781137331496_3
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DOI: https://doi.org/10.1057/9781137331496_3
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