Inflation and Poor Governance: Is America Next?

Dr. Mark W. Hendrickson | Grove City College | Updated: Jun 09, 2008

Inflation and Poor Governance: Is America Next?


June 9, 2008

A recent International Monetary Fund research report listed the countries expected to suffer the worst currency depreciation—that is, the worst inflation—this year. Zimbabwe (a mind-boggling 300,000 percent-plus), Venezuela (25.7 percent), Bolivia (15.1 percent), Nicaragua (13.8 percent), and Argentina (9.2 percent) are the top five. What do these countries have in common? You could reply in two ways: 1) they are poorly governed; 2) they are leftist governments, which is simply another way of saying that they are poorly governed.

Indeed, it is difficult to think of any economic indicator that exceeds inflation as evidence that a country is poorly governed. Leftist governments—defined here as regimes unfriendly to private property, private enterprise, and private profits; regimes that constantly seek ways to redistribute wealth from the economically productive members of society to favored political constituencies; and regimes that reject free markets and instead expand government control over economic activity—invariably cripple production while increasing government spending. The inevitable result is inflation.

This is no mere academic discussion. It was less than 30 years ago that inflation in the United States was in the 13-14 percent range. Today, resurgent inflation in the United States is officially listed as 4 percent, but for many Americans, it feels much worse. Is it possible that we might break into the IMF’s list of the top-five inflation-plagued countries in the next year or two? To answer that, we should ask ourselves if we have sound governance or poor governance. Sadly, examples of the latter seem to be proliferating. The following are some examples:

In just eight years, U.S. federal spending has ballooned from $2 trillion to $3 trillion—a 50 percent increase at a time when the average private income increased only 28 percent.

At 35 percent, the United States now has the second-highest corporate profits tax in the world—absolute insanity in a time of intense global competition when Congress should be doing everything in its power to help domestic employers compete against foreign companies.

At a time when formerly communist countries in central and eastern Europe have adopted flat-rate personal income taxes less than 20 percent, and are booming as a result, the United States clings to an outdated Marxian, growth-retarding, class-warfare, graduated income tax, and at least one presidential candidate wants to raise those rates even more.

Last fall, Congress decided that financial institutions were making too large a profit on student loans, so they mandated lower returns on such loans. As a result, many private lenders have dropped out of the student loan market entirely, and Congress is now trying to bail out such lenders by empowering the Department of Education to purchase student loans directly from private lenders. Where will the Department of Education come up with the necessary funds? From higher tax revenues, of course.

Congress recently passed a $307-billion farm-subsidy bill. President Bush tried to get Congress to limit subsidies to those making no more than $200,000 per year, but Congress rejected that proposal, paving the way for subsidies to those with annual incomes over $2 million. Some senators solemnly intoned that they were doing this to prevent bankruptcies. Apart from the fact that the centuries-old trend is toward fewer agricultural producers (i.e., farm bankruptcies) as a result of improved efficiencies and economies of scale, and in spite of the fact that many farm prices are at multi-year highs, we should ask why Congress, instead of the marketplace, should decide which businesses survive and which do not? Central planning, anyone?

Congress’ recent denunciation of private oil producers include comments that perhaps Congress should “socialize” these companies, or at least increase taxes on them. Apparently, some members of Congress subscribe to the school of thought popularized by that eminent political philosopher, Jane Fonda, who has long felt that the cure for Big Oil’s alleged oligopoly is to create a federal monopoly. Does anybody seriously believe that monopolies are good for consumers? And another question: if Congress confiscates more profits from Big Oil, who will make up the resulting reduction in spending on discovering and developing oil reserves?

Congress is currently working on a multi-trillion-dollar plan to impose a cap-and-trade system on carbon dioxide emissions. The Wall Street Journal and others have already explained what a colossal boondoggle this would be, but the fundamental question is this: Why, at a time of record energy costs that are imposing great hardship on many Americans, does our government want to make the use of hydrocarbon energy sources even more costly?

If you keep your eyes and ears open, I’m sure you will discover other ways in which our government is seeking to expand its own reach while making Americans poorer. We are on a leftward course already, and we may accelerate our march in that direction after the November elections. If we do, don’t be surprised to see inflation get worse and the United States appear near the top of the list of the world’s most inflation-prone, poorly governed countries.

Dr. Mark W. Hendrickson is a faculty member, economist, and contributing scholar with the Center for Vision & Values at Grove City College.

Inflation and Poor Governance: Is America Next?