Thursday, December 21, 2017

debt and inflation vs. taxes in post-1930 American political economy

In political economy, the persistent temptations are debt or inflation to pay for govt spending. Both strategies push the costs into subtleties not likely to be seen-- or its causes/effects imagined-- by people who (reasonably) don't pay much attention to politics.

If you look at less-developed countries, they always have trouble with debt and/or inflation. In developed countries, the temptations are still there, but reasonably-effective institutions are usually in place to limit the damage. (That has a lot to do with why they're "developed"!)

In the American context, the temptations didn't really get rolling until the larger government of the 1960s. (The New Deal was far more regulatory than fiscal, with its post-Lochner ability to bury costs by imposing on businesses.) Pre-Reagan, the temptations were more inflationary. But that was greatly reduced by Reagan/Volcker monetary policy and the Reagan/Congress tax reforms [the marginal tax rate cuts (top rate reduced from 70% to 28%) and the tax simplification which also "indexed" the tax code for inflation]. Prior, govt had tremendous incentives to use inflation to raise money directly and then indirectly through "bracket creep" in the tax code. Since Reagan, therefore, the temptations have become more fiscal than monetary.


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