The Politics of Inflation and Economic Stagnation: Theoretical Approaches and International Case Studies

By Leon N. Lindberg; Charles S. Maier | Go to book overview

9
Does Government Cause Inflation? Taxes, Spending, and Deficits

David R. Cameron

What causes inflation? Ronald Reagan in his first address on the economy reflected the conventional wisdom: "We know now that inflation results from all that deficit spending. . . . Bringing Government spending back within Government revenues. . . is the only way . . . that we can reduce and, yes, eliminate inflation."1 But is President Reagan correct in attributing inflation to the imbalance between spending and revenue? And is the large majority of Americans correct in identifying federal deficits as the primary cause of inflation? Are political economists such as Buchanan and Wagner correct in asserting that "the budget deficits that emerged from the Keynesian revision of the fiscal constitution injected an inflationary bias into the economic order. Empirically, the deficit-inflation nexus is strong and is widely acknowledged in popular discussion"?2 Is the Committee to Fight Inflation--a committee of thirteen that included two former chairmen of the board of governors of the Federal Reserve System ( William Martin and Arthur Burns), five former secretaries of the treasury ( Henry Fowler, Michael Blumenthal, Douglas Dillon, George Schultz , and William Simon), and an influential former chairman of the Council of Economic Advisers ( Paul McCracken)--correct in linking budget deficits to inflation?

____________________
1
Transcript of Reagan Address Reporting on the State of the Nation's Economy, New York Times, February 6, 1981.
2
James M. Buchanan and Richard E. Wagner, Democracy in Deficit: The Political Legacy of Lord Keynes ( Academic Press, 1977), p. 58.

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