By Michael J. Medina
In advanced economies across the world, both public and private sector responses to the COVID-19 pandemic have fuelled a rapid increase in inflation that is described by some journalist outlets as a “shared inflation experience”. The causes of said inflation arise from various sources from supply chain disruption to expansionary monetary policy. Yet what is evident across the board is that firstly, prices are rising, and secondly, that this results from pandemic economic policy on the part of government and central bank actors alike.
A short qualification must be given here, as my two above points are not as equally obvious upon first analysis. The first point is verifiable based on statistics such as the continually rising Consumer Price Index (CPI) in the United States and climbing inflation rates in the UK, Canada, Australia, and the Eurozone. These five locations experienced CPI increases of 5.3%, 3.2%, 4.1%, 3.8%, and 3%, respectively year-on-year, drastic increases compared to pre-pandemic, when places such as the UK and Eurozone in particular were often seeing inflation rates below central banks’ inflation targets. Statistics aside, the current inflation experience is in stark contrast to the slack inflation rates pre-pandemic. Although it is easy to see that inflation has picked up across the board, its connection to the pandemic response by governments is a little more complicated.
As mentioned earlier, there are a variety of factors behind the rapid shared inflation occurring worldwide. However, it can be argued that nearly all of said factors result in some way from the response at-large to the ongoing pandemic. Whether this be continued near-zero interest rates on the part of central banks, early-to-mid pandemic spending booms following fiscal stimulus payouts by government bodies, or upticks in post-lockdown consumer spending creating a pricing bottleneck, the causal engines powering current inflation are owed to the crisis which spurred them.
For a more specific example, the US Federal Reserve in 2020 vastly expanded the M2 Money Supply via a $3 trillion quantitative easing effort in the name of pandemic economic relief. This amounts to nearly 20% of all U.S. Dollars in current circulation in the span of one year. The potential costs associated with this effort are yet to fully reveal themselves, but such large-scale actions might be assumed at the very least to incur some form of large-scale effects.
Additional insight on this point can be provided via analysis from the Austrian school of economic theory, which has dealt greatly with the impact of monetary policy as a cause of inflation. As the Austrian economist Ludwig von Mises once noted, price inflation is often the result of monetary inflation that occurs following from expansionary fiscal and monetary policy.
Between continued massive quantitative easing and disrupted consumer behavior with forced economic shutdowns, it is not an extraordinary claim to lay much of the “blame” for the current worldwide inflationary plague on the pandemic responses of countries’ various macroeconomic authorities themselves. It is worth noting here that such authorities are not confined to one sector or institution. They consist of any body with an arm in policy, be they government entities, central banks, or even private actors such as corporations and asset holders.
It is on this wider topic of crisis response and its ensuing effects that a useful source might be brought in. That source is the classical economic theory of French thinker Frédéric Bastiat (1801-1850), specifically his ideas of the Seen/Unseen effect division, and of the famous “Broken Window Fallacy”, which would go on to influence economists like the aforementioned von Mises. This article will not be discussing the finer points of Bastiat’s theory (for further reading on this topic see one of our previous articles), but rather its striking relevance to the pandemic-response efforts and their inflationary impact.
Both the Broken Window Fallacy, concerning opportunity costs, and the Seen/Unseen Division, between visible motivating effects and unforeseen subsequent consequences within economic action, provide lenses for analysis of government decision making and messaging on economic grounds throughout the pandemic. On this point we can ask the question of whether the policies which spurned the current inflationary moment were necessary given their alternative costs. Economists such as Bob McTeer have remarked on the usefulness of connecting Bastiat’s economic theory to opportunity cost/benefit analysis in decision making, stating that policymakers often base decisions on the clearly-seen facets of a situation, whilst ignoring potential unseen consequences.
In the case of the pandemic concerning the aforementioned cost/benefit analysis regarding opportunity costs, it is useful to compare the policy outcomes between countries with more and less restrictions and resultant economic policy responses. Countries such as Sweden, which avoided the harsh shutdowns of its other European neighbours, largely avoided the same level of economic hurt they experienced. However, the human toll of the pandemic in Sweden was meanwhile proportionally higher than many of its neighbours, a fact which showcases the importance of opportunity cost consideration to policymaking in any sector.
Adding in Bastiat’s terminology here, it could then be argued that in a country such as the UK, which saw extremely harsh restrictions and resultant economic hurt, that the seen human and economic factors behind both lockdown and economic relief motivated policy considerably more than the (then) unseen opportunity costs of economic destruction. Bastiat’s assertion that“Society loses the value of things which are uselessly destroyed…destruction is not profit.” serves as a reminder of what was earlier discussed in this article, that current inflation is not only the result of monetary policy, but is also the consequence of over a year of state restriction of the economic system.
In the early months of the pandemic, there was boundless messaging both for and against restrictions and resultant economic responses. However, there is shockingly less public messaging on the part of governments concerning the current pandemic inflation that originates in-part fromthose responses themselves. Even in such messaging, the lack of governments’ causal recognition to the inflationary situation is striking. For example, when the US Government this year made embarrassingly tone deaf claims of a 16 cent cheaper Summer barbecue during otherwise widespread intense inflation, no mention was made as to the government’s role (unwitting or otherwise) in causing the price increases their statement seemingly ignored. This might be attributed to governments in early 2020 making decisions that looked upon the seen, but did not consider the unseen. We are only starting to reckon with the consequences now. However, it must also be said on this point that these decisions were made in a state of unprecedented emergency and uncertainty, which might possibly explain why the reaction seems hasty or ignorant in retrospect.
Therefore, when American media and government officials boast of supposed successful economic recovery from pandemic disruption (often on account of their own spending programs), they ignore that the economic hurt they seek to correct is the result of their own laws and policies. In the eyes of many policymakers, “recovery” is seen, but its costs, over a year of economic turmoil and now ever-increasing inflation, are deliberately ignored by those responsible. Government officials are seemingly content to label the present price surges as transitory” without much evidence to support such claims.
Should the consumer bottlenecks and monetary policy driving inflation continue or even intensify in the near future, there is no reason to assume the current situation will be “transitory” as it was in the recovery from the 2008 Crisis. Further, as the factors enabling ongoing inflation appear to broaden in scope to include sectors such as housing and mineral wealth, the opportunity cost of the initial disruptions and policies which helped to cause the current predicament might continue to rise, an extraordinary example of the unseen in action.
On a less charitable reading of policymakers’ economic responses, it might be argued that the lack of government and central bank recognition of their own policy effects is deliberate. Given some of these policies’ disastrous effects concerning wealth transfer and economic agglomeration, macroeconomic actors might want to conceal their role in enacting them to avoid blame for the current situation. The fact that drastic inflation itself is occurring is less-easily tied to economic policy actors, compared to the relatively unseen inflationary results of monetary policy, expressed in endless charts and data from central bank sources. This makes it easier for governments, banks, and supportive media to point the inflation blame finger (should they not merely dismiss it as transitory or even downplay it as intentional long-run policymaking) away from themselves. Otherwise, they might have to acknowledge why their relief better benefitted corporations and billionaires than the public and small businesses, and why the former hurt less from its resulting consequences than the latter.
With that said, such cynical observations are nothing new, for the broader discourse of economic recovery itself will always be somewhat tainted by the inevitable role of state actors within it. As Mr. Bastiat himself once described, the vulgar saying of “What would become of the glaziers, if nobody ever broke windows?” remains ever-relevant to a world in crisis. Relief efforts enacted by macroeconomic actors worldwide saw money by-and-large injected into the stock market, large individual asset holders, multinational corporations, and predatory tech monopolies. The common populace, meanwhile, have to face the direct consequences of their authorities’ actions, in the form of rampant price inflation with no clear end in sight.
All of this is not to say that pandemic response efforts are in themselves unjustified, but similarly the opportunity costs of such actions cannot be ignored. As the pandemic drags on, and wealth transfer and supply disruption exacerbate wider economic malaise, Bastiat’s words continue to hold relevance. Governments and Central Banks, the (willing or otherwise) architects of current inflation, have no incentive to change course or even acknowledge their responsibility, or further to not repeat their actions in future crises. Ultimately, when considering the current shared inflation experience, perhaps our focus should be not the broken window in plain view, but the eager glazier outside of it, holding a rock behind his back.
The views expressed in this article are the author’s own, and may not reflect the opinions of The St Andrews Economist.