Tagged: Fiscal Crisis

Hyperinflation: Still A Threat

With the outcome of the 2020 election still in limbo, so is the fiscal future of our country. On the one hand, it looks like the Democrats may be down to a slim nine-seat majority in the House, a majority that could easily fracture with continued ideological battles within that party. On the other hand, the outcome of the presidential election remains unclear, with investigations continuing of what role the Dominion election software played in the vote count.

Then, of course, there is the Senate majority, which hinges on the outcome of runoffs in Georgia.

If the Democrats secure both chamber in Congress and the presidency, we are likely going to see a tidal wave of new spending, funded in part by much higher taxes, in part by the application of Mad Monetary Theory. If the Republicans hold on to the Senate and the White House (assuming that there is substance to the Dominion-related accusations), there will be some measures taken to dampen excessive deficit spending. It is also possible that if the Republicans prevail, the moderates in the Democrat party will be emboldened, enough so to start working with Republicans on spending containment measures.

That is what America needs. It will, however, require Congress to be on quick feet in order to contain our fiscal crisis, primarily because doing so will help us reduce the threat of high, monetarily driven inflation.

I have written about this threat in the past, pointing to monetization as one of three bad ways to deal with a runaway debt crisis. I have also pointed to the threat that excessive money printing poses to our very free-market capitalist economic system, and to how exorbitant money-printing helps inflation the stock market.

This last point is crucial. Vastly inflated equity markets is the first step that an over-monetized economy takes on its route to hyperinflation. The next step is that the money flows into the real sector of the economy and ends up being spent by government and by households. When that happens, the transmission mechanisms of hyperinflation go to work.*

We are not there yet, but the stage is set for it. All we need to do is continue down the current path of completely irresponsible, monetized entitlement spending. (If we really want to fuel the inflation fire, we add tax increases to the mix, as MMT proponents want.) In fact, this transmission mechanism is nothing new: we have seen glimpses of it in the past, partly – curiously – in relation to two supply-side driven tax reforms. This tells us that it is a bad idea to continue down the same path; if we want to get our current fiscal crisis under control, we need to address the spending side of the equation.

Figure 1 reports the velocity of money in the U.S. economy. This metric, which is the ratio of GDP to money supply, shows how “often” we use the same money in order to pay for all our economic transactions in a given time period (usually a year; here the data is reported quarterly). The higher the velocity, the smaller the money supply relative GDP, and vice versa.

A decline in monetary velocity means that more money is idling in the economy. The real problem occurs when the velocity falls below 1, as it means that part of the money supply is not being used at all for the purposes of economic transactions. That money is not going to just lay idle in some bank account somewhere, but will find its way to profits. If there is no transactions demand for it, banks and investors will put it to speculative use. And, as mentioned, in a monetized welfare state, where a big chunk of government spending is paid for with printed money, inflated equity markets are the preamble to high inflation in consumer prices.

Figure 1

Sources of raw data:
Federal Reserve (Money); Bureau of Economic Analysis (GDP)
  1. The Reagan tax reform, which was necessary to end the punitive taxation of personal income, did not come with the necessary spending reforms. Furthermore, as David Stockman so pointedly explains in his book The Triumph of Politics, the Laffer Effect upon which the tax cuts relied, was in turn dependent on high inflation to yield the surge in tax revenue needed to close the budget gap. That inflation did not materialize; since spending continued to grow uninhibitedly, the budget deficit prevailed. In response, America had her first encounter with money printing for the purposes of covering up Congressional fiscal excesses.
  2. In sharp contrast to the 1980s, the ’90s offered fiscal restraint on the spending side, but not on the tax side. Presidents Bush Sr. and Clinton both signed into law new tax brackets, thus destroying the clear, transparent federal personal-income tax code that Reagan put in place. Clinton’s spending restraint worked to his and to America’s advantage, conspiring with a long growth period to close the federal budget gap entirely. Hence, the fiscal demand for newly minted dollars went away and monetary velocity increased again.
  3. The Bush Jr. tax cuts adjusted some of the errors that his father and Clinton had made. At the same time, the 9/11 attacks injected a big chunk of uncertainty into the economy, causing Congress and the White House to run over to the Federal Reserve and ask for help. The decline in velocity was brief, though, and to Bush Jr.’s credit the economy grew reasonably well during his White House tenure. In fact, if the Great Recession had not happened, we would likely have seen a balanced budget in 2009.
  4. Then came the Obama years, with the most ridiculously tepid economic recovery in recent memory. That was only partly Obama’s fault – by this time the welfare state had begun permanently suppressing U.S. economic growth – but his administration’s regulatory spree and onerous Obamacare reform certainly did not help. Thanks to the slow growth, the Treasury again started tapping into the Federal Reserve to plug its budget hole: for Congress and the President, Quantitative Easing became a way of life. And monetary velocity started plummeting.

However, all of that pales in comparison to what the coronavirus packages have done to our money supply. The velocity free-fall during the QE years, which was brought to an end by Janet Yellen, has been concentrated into a free-fall this year. For two quarters in a row our velocity has been below one. While the plummet seems to have tapered off, it does not take much to cause it to decline again. Another artificial economic shutdown would certainly do the trick, but even without that we are at great risk if Congress decides to do more “stimulus” spending.

We need a new fiscal doctrine in Washington: structural spending reform.

*) In my soon-to-be-published Socialism or Democracy: The Fateful Question for 2024, I point to this very mechanism: excessive, monetized welfare-state expansion causes hyperinflation.

Covid-19 and Medicaid for All: Part 2

This the second part of my article on the recent epidemic and government-run health care takes a look at the health care systems in Europe. In most countries over there, government is the main payer – in many cases the only meaningful funding source – for medical services. This has put the health care systems across Europe under stress in a way that we have not experienced here in America.

At the heart of the problem is, as I explained in Part 1:

-The advancement in medical skills and technology that come from research and innovation; and

-The decoupling of that cost increase from the free market that is necessary under a government-run system.

Under a free-market system the cost increases from advancements in technology and skills are mitigated by medical providers who learn to do more with less. He who excels at that will be more successful. By contrast, a government-run system has no limitations on cost hikes. Since government does not spend its own money it does not have any incentives to do more with less. Therefore, it maxes out what its taxpayers can afford – and then some – whereupon it has to turn to health-care rationing.

This is precisely what we have seen in Europe. Countries like Italy, Spain, Greece and Cyprus are frightful examples of what happens when government can no longer deliver on its health-care promises.

More on that in a moment. First, let us see what happened when European health systems were confronted with Covid-19.

Government only has one method for containing costs: rationing. Also known as “waiting lists”, health-care rationing is unavoidable under a Medicaid-for-All style system. To use Sweden as an example – a very popular country among the American left – their health care system costs every working adult 14 percent of their pre-tax income.[1] This is just the direct tax; there are services provided by local governments and there are subsidies from the central government that add up on top of this tax.

In total, the cost for hospitals, clinics, as well as ambulatory, elderly and rehabilitative care, amounts to about 12.5 percent of the Swedish GDP. To cover this entire bill, In other words, the 14-percent health care tax on personal income does not cover the full cost. Health districts – regions or landsting as they used to be called – also get substantial funding from the central government. All in all, Swedish taxpayers surrender about 20 percent of their personal income to government, solely for the funding of their health care system.

What do they get for the money? To begin with, patients have to dole out a substantial amount of money out of pocket. Based on OECD and Eurostat health expenditures data, out-of-pocket costs – we know them as deductibles and copays – account for 16 percent of the total funding of Swedish health care. This is money that patients have to pony up after government has imposed its heavy taxes on their incomes.

Swedish health care is also rationed. The Swedish government tries to conceal aspects of this problem; to take one example, Sweden does not report the staffing structure of its health care system to the EU statistics agency Eurostat. Other countries do this; in Greece, 24 percent of all hospital employees are medical doctors; about as many are nurses or midwives; just below 30 percent are other medical professionals or employees; and the rest are administrators.

We are going to review the staffing structure later. It is important to do so, as the staffing structure conveys important information on the quality of the health care a patient can expect. Put simply, the more medical doctors there are, and the more medical doctors there are per capita, the higher the presumed quality of care.

Likewise, one can measure access to health care by the staff-to-population ratio. All other things equal, the more health care staff there are per capita, the more accessible health care will be. Again, no such profile is reported by the Swedish government, [2] but Eurostat and the OECD publish valuable data for other European countries.

First, though, we turn our attention to another metric with useful information on health care quality: hospital beds. Figure 1 reports an interesting trend in the number of hospital beds per 1,000 residents. The trend is prevalent across Europe:

Figure 1: Hospital beds per 1,000 residents

Source: OECD

The density of hospital beds has declined across the board, with more health-care procedures shifting from in-patient to out-patient. However, there is a distinct outlier in Figure 1, and – again – that is Sweden. This hard-line single-payer system, which has a practically universal ban on private hospitals and – again – relies almost entirely on government for its funding, underwent a catastrophic rationing reform during the 1990s. Today, Sweden ranks at the bottom among its European peers in terms of hospital-bed supply.

It is important to note the Swedish hospital massacre. It happened during a very serious fiscal crisis, one that I covered in detail in my book Industrial Poverty. To mitigate heavy losses in tax revenue, government resorted to drastic tax hikes; at one point the tax-to-GDP ratio topped 60 percent. Yet despite bone-crushing increases in taxes in the midst of an economic crisis, government still could not balance its budget. Gasping for air in the chokehold of fiscal panic, the Swedish government coupled its confiscatory tax hikes with a long series of very hard spending cuts.

One of its many cost-slashing measures was to dramatically “reform” the health care system. The plunge in hospital bed supply was part of that “reform”. Another was to fire a lot of administrators at hospitals, forcing medical professionals to take over administrative duties and thus spend less time with patients. This, of course, only exacerbated the rationing of medical services.

It is here that the coronavirus epidemic brings together Medicaid for All, our current budget deficit and the challenges that come with a health-care epidemic. So long as the health care system can provide treatment on an out-patient basis, the decline in beds is of no consequence. The problems start piling up when a public-health epidemic breaks out and its treatment requires widespread in-patient treatment, i.e., hospitalizations.

The coronavirus outbreak provides an excellent test case for how responsive a health-care system is, or is not, to such an event. Behold Table 1 below, which compares hospital-bed supply to Covid-19 mortality rates as reported in May 2020 at the height of the epidemic by the Johns Hopkins University Covid-19 database.[3]

Interestingly, countries with a bed count above four per 1,000 residents have a visibly lower mortality rate than countries with a bed ratio below four:

  • In the left column in Table 1 are the countries with a bed count above four (average 5.85); their mortality rate is 6.27 percent;
  • In the right column in Table 1 are the countries with a bed count below four (average 2.94); their mortality rate is 8.52 percent.

Of the 15 countries in the higher-bed-count group, only three had a mortality rate above ten percent, while more than half had a mortality rate below five percent. By contrast, in the low-bed-count group five out of 12 countries experienced more than ten percent deaths, while only four saw mortality below five percent:

Table 1: Hospital beds and Covid-19 mortality

 BedsMort. BedsMort.
Sources of raw data: OECD (beds); Johns Hopkins University (mortality)

The numbers reported here are experimental, of course. They are based on two important premises:

  1. The hospital bed count, which is from 2017, is assumed to be representative of the bed-count number for 2020. This is an imperfect assumption, but with the exception of chainsaw-like reductions in hospital funding as in Sweden in the 1990s, the supply of beds only changes slowly over time.
  2. The bed count includes all hospitals, in other words psychiatric ones as well as those for general-admission purposes. This could be challenged as too blunt of a bed count, but there has also been anecdotal evidence in European media during the epidemic that beds in specialized facilities have been converted for the purposes of treating Covid-19 patients. Therefore, using the totality of hospital beds is a reasonable measure of the epidemic-response capacity limit of a nation’s hospital system.

Despite the experimental status of this comparison, it does suggest that health-care systems that are starved for hospital beds tend toward higher mortality rates.

Table 2 compares the same bed count, in the same two groups, with the coronavirus infection rate, or the number of confirmed cases per million residents. The average rate of coronavirus cases in the higher-bed-count group is 1,772 per million residents, with five of the 15 countries above 2,000 and eight below 1,000. Among the lower-bed-count countries, nine out of 12 exceeded 2,000 cases per million residents. Not one of these countries had an infection rate below 1,000, making for an average of 3,013:

Table 2: Hospital beds and ratio of Covid-19 cases

 BedsCases BedsCases
Switzerland4.533,571United States2.774,344
Germany8.002,111United Kingdom2.543,571
Sources of raw data: OECD (beds); Johns Hopkins University (cases)

Again, countries with a more generous hospital system are better prepared to deal with a public-health threatening epidemic than those with a more stingy health care system.

The next question is how the staffing and funding structure itself affects a health care system. More on that in Part 3.


[1] It is technically known as a municipal income tax, but a portion of the 30+ percent tax charged by municipalities is dedicated to the health care districts.

[2] They do report their numbers to the World Health Organization, but since their database suffers from other incompletion problems, it does not help in determining the structure of Swedish health-care staff.

[3] Please see: https://coronavirus.jhu.edu/map.html. Numbers were retrieved on May 16, 2020. The reason for choosing the month of May is to capture the readiness of a health-care system at the very onset of a crisis. More recent data would obfuscate the role of the institutional structure of the health care system itself.

American Debt Default?

A few days ago the Congressional Budget Office released a long-term outlook on government debt. Their dire prediction: by 2050 the share of the federal debt that is held by the public will have risen to 195 percent of GDP.

This is a frightful outlook, but it is only the beginning of the story. First of all, it does not include the debt held by other government institutions – an omission that should give us all pause – and therefore does not tell us the full impact that the debt has on the economy. When creditors look at buying U.S. Treasuries, they assess the debt default risk based on the entire body of debt; to them, it does not matter if the debt is owned by the Social Security Trust Fund or by the general public. Therefore, to not include the entire debt in the CBO calculation is to cushion the story in front of Congress and the American people.

Secondly, the CBO outlook does not take into account the effect on debt costs from a deterioration of U.S. credit worthiness. On the contrary, when CBO Director Phillip Swagel commented on the report at a Senate hearing, he noted that the U.S. economy is the strongest in the world, that our currency is a world reserve currency and that this means we are not in any imminent danger of a debt crisis. This is a mistake, albeit from Swagel’s viewpoint an understandable one: if he would start talking about the United States losing its credit worthiness he would most likely repel a lot of the audience he now had.

There is a third component that was left out from the CBO report, namely a discussion of the policy alternatives that Congress now has. However, it is not that hard to put together a list of what options our legislators have: there are three bad ones and one good. The three bad ones are:

  1. Austerity. This means, plainly, spending cuts and tax increases in order to balance the budget. Contrary to libertarian conventional wisdom, it is not a good option. It means spending cuts without corresponding tax cuts, thus raising the price of government either in absolute terms – spending cuts are accompanied by tax hikes – or in relative terms. This last part is the one that libertarians tend to not grasp: even if taxes are not raised, a spending cut increases the price of government. If you pay $100 in property taxes for your children’s schools and the schools cut their budget from $100 to $90, you get a poorer-quality education for the same money. While it may seem desirable in itself, this change in the price-product relationship means that we get less for the same money, while we could have used the $10 for private-sector spending instead. By choosing austerity, Congress will depress the U.S. economy on a broad scale, with the same detrimental effects as I documented in Europe during the Great Recession and the austerity response there.
  2. Monetization. This is perhaps an even more dangerous path, where Congress relies on the Federal Reserve to purchase large chunks of its new debt by simply printing more money. There is a downward slope of increasingly bad effects from this policy strategy, a slope that the Europeans got on ten years ago but shifted away from when they took to austerity instead. Venezuela, on the other hand, continued printing money at breathtaking rates, eventually causing hyperinflation. As I explained in a recent EconTalk episode of my podcast, we are inching closer to that precipitous point. We are not on the doorstep of hyperinflation – not at all – but the fuse that makes hyperinflation explode is lit, and it is shorter than most people think.
  3. Debt default. Yes, this is now an option that is being floated around in Washington, DC. It is talked about quietly, but when it is mentioned it comes with an inconspicuous moniker known as “debt restructuring”. This means, simply, that the U.S. Treasury unilaterally decides to only pay back cents on every dollar creditors owe them. This is the Greek solution, one that would have epic repercussions on our economy and our ability to function as a country for decades to come.

The third option has been unthinkable in the U.S. debate – until now. The Greeks had the same experience; for those who do not believe that the Greek experience is relevant to the United States, I recommend my paper for the Center for Freedom and Prosperity on the Greek crisis (Part 1 and Part 2). To make matters worse, the debt crisis does not even have to become a real debt crisis to have serious ramifications: the mere suspicion that the federal government would consider “restructuring” its debt could spark a surge in interest rates. At that point the cost of debt rises accordingly, in turn aggravating the debt situation by accelerating current government costs.

When default concerns raise interest rates, Congress has only two options: to take rapid action to curb the worries among lenders, or accelerate monetization. If the latter measure is already being used – as is currently the case – it is already exacerbating default concerns. Therefore, once default concerns raise interest rates, panic-driven spending cuts will dictate the fiscal agenda for Congress.

A coming episode of EconTalk at the Liberty Bullhorn will discuss panic-driven spending cuts in contrast to the kind of structural spending reform that constitutes the only productive path away from our looming debt crisis.