by Mario Rizzo
“An essential point in the social philosophy of interventionism is the existence of an inexhaustible fund which can be squeezed forever. The whole system of interventionism collapses when this fountain is drained off: The Santa Claus principle liquidates itself.” Ludwig von Mises, Human Action: A Treatise on Economics, 3rd edition, p. 858 (1966).
During the bad old days of the Bush Administration I wrote a post, “The Disorderly Bankruptcy of the Welfare State.” I stand by it all.
Now comes along Frederic Mishkin of Columbia University who makes the following argument in a Wall Street Journal article. I agree with it, except in one important respect. This is my summary of his points:
1. Ten year Treasury yields are rising with the effect that thirty-year mortgage rates have risen by a similar amount.
2. This rise may choke off economic recovery.
3. Long-rates are rising partly because of the massive fiscal deficits projected into the indefinite future.
4. Increasing Fed purchases of Treasury bonds would lower rates only temporarily.
5. Such a policy would seriously damage the Fed’s “inflation-fighting credibility.”
6. The only way out of the “box” is for the Federal government to get serious about controlling spending on entitlements like Social Security, Medicare and Medicaid.
7. This will lower long-term deficits and thus lessen the pressure on interest rates.
8. Mishkin holds out hope that the entitlements can be controlled – something about setting up a commission.
What should we make of these points?
I agree that the Fed is motivated by the belief that a rise in interest rates will choke off recovery (#2). So the alternative seems to be considerable inflation or reduction in the rate of growth of entitlement spending. (And, of course, no new entitlements that are not fully paid for.)
The Federal government will not, I suggest, control entitlement spending in any rational way. (Thus I disagree with #8.) The pressure groups are out there. The political system does not have what it takes, especially in the context of the current incoherent proposals to expand healthcare coverage.
So it looks to me that inflation is the most likely result. Inflation is not going to be directly and publicly produced. It will be the byproduct of doing nothing by the elected political officials. It can be blamed on other factors like rising commodity prices. However, there are indeed political constraints on the amount of inflation that is acceptable.
Although there will be a bias in the system toward inflation, the entitlements will not escape consequences. Cuts will be made in a disorganized and lumpy manner as I pointed out in December. People will not be pleased. Neither will I, as I approach the age where I am “owed” largesse. However, cup in hand, I will be the guy on the street with the smile of being right.