Inflation – Yet again and again and again and…

In reference to Social Security we see statements like this one floating around out there:

“with a ton of baby boomers retiring and not enough workers there will be more money chasing too few goods = inflation”

The subject making the above statement is conjuring up the words of Milton Friedman (more money chasing too few goods) to warn us all that “inflation” is something to fear when it comes to federal spending and Social Security. The whole premise is pure nonsense. Now, why am I saying that it’s nonsense? Isn’t it true that his assertion could occur? Yes, it is a possibility, but only given some very extreme factors. In other words, the chances of Social Security causing accelerating inflation right now or in the very near future is extremely low. Here’s why.

First, when talking about inflation, we must know EXACTLY what we are talking about? Inflation arguments used to scare people away from the federal government doing its job by net spending are based on demand-pull inflation. Rather than rehash what we’ve discussed many times before, I’m going to describe, very clearly, how government spending will cause inflation and demonstrate why his statement is more nonsense than reality. Let’s address the concerns he has by first asking a few questions.

Is the US economy the size of Madagascar’s?
It is not.

Is there a functioning infrastructure in place, capable of producing output and expanding output?
Quite obviously!

With the actual unemployment rate today hovering around 9.8%, is there a labor shortage in the US?
There is not.

So, what is the situation so far? We know that the US economy is quite vast, there is a ready infrastructure to produce and there is no labor shortage. Now, with these questions answered, let’s keep the answers in mind and examine consumer spending and job creation. In other words, lets figure out how these unemployed people become employed.
Job creation is a by-product of consumer spending pressure on business to increase its production. In other words, if consumer spending increases, business responds by hiring more workers to meet the demand. Hey, Walmart has to keep the shelves full, right? If it does not, sooner or later, consumers will hit up Target and other competitors who are willing to keep the shelves full.

On the macro level, consumer spending can be financed three ways:

1. Federal deficits
2. Exports
3. Private debt

With number three being highly unstable, let’s turn to exports. For years the US has been importing more than it exports. What this means is that more US dollars are flowing out of the US than into it. As a result, there is a deficit present in the external sector. Given this fact, exports aren’t going to finance an increase in consumer spending. Thus, it is up to number one, the federal government, to fill the spending gap by adding more US dollars to the economy through net spending (deficits). Lastly, let’s define demand-pull inflation and then put the pieces of this puzzle together so we can finally see the big picture.

To get demand-pull inflation, the kind that the subject above refers to:

The level of spending must exceed the REAL ability of the US economy to produce goods and services.

In other words, there must be no more room for output. This can occur when the production infrastructure is very small, damaged or destroyed, or when there are simply no more workers to be found anywhere to employ to increase output. Given the current state of the US economy where the production infrastructure is quite sound and that unemployment sits at 9.8%, demand-pull inflation isn’t a concern.

Now, where does this leave Social Security?

Many people think that Social Security can go broke. This is total nonsense perpetrated by politicians. The US Government cannot go broke, because it issues US dollars. Federal taxes do not fund any federal spending and this includes FICA. You are not paying FICA taxes into the system to fund your Social Security benefits, nor are you paying FICA to fund current beneficiaries. You are paying FICA, which is nothing more than a huge income tax on working people, to prevent politicians from ending the program. That was FDR’s idea: to provide the illusion that its your money and because of that, you would fight to keep the program. Nothing more. Thus, Social Security cannot go broke – period.

So, the problem with Social Security is never funding. The real problem with Social Security is production. Are their enough goods and services being produced so that beneficiaries can buy them, right along with everyone else?

Absent of a natural disaster, a world war or a nuclear war, there is plenty of room to increase output. Naturally, if the US Government decided right now to increase Social Security benefits to $20,000 per month, yes there might eventually be a problem with the price level. But, as things stand today, benefits are low enough as they are and as long as any spending by Social Security beneficiaries along with all of the other consumers who are spending results in output, there is no problem.

So, to sum up, the US economy is vast, it has a functioning production infrastructure in place capable of increasing output and it has more than enough people willing and able to work that cannot find a decent job. Therefore, as long as spending; which means both federal government spending and consumer spending results in output, there will be no accelerating inflation as a result of that spending.

You can relax now.