The Welfare State and Inflation

Investopedia.com defines “inflation” as “a gradual loss of purchasing power that is reflected in a broad rise in prices for goods and services over time” (https://www.investopedia.com/terms/i/inflation.asp). When prices rise, some are quick to blame the increase on greedy corporations, who seek to maximize profit at the expense of the working consumer. Others blame the increase in prices on the government increasing the money supply by spending more than it confiscates. Henry Hazlitt argues that although it is true that many factors can cause the prices of individual commodities to fluctuate, when most or all prices rise together (but not necessarily at the same rate), the likely culprit is the government spending more money than it brings in via taxation. Hazlitt states: “When the welfare state spends recklessly, runs chronic deficits, expands credit, and prints more money, prices begin to soar...A rise of nearly all prices or of most prices out of tens of thousands, indicates the operation of a common cause...Prices do not rise today because businessmen have suddenly become greedier than they were yesterday.” (p. 29-31).  When program and policy evaluators try to identify the “root causes” of an affordability crisis associated with rising prices, they should ask whether the deficit spending to fund the programs they are evaluating may be contributing to the problem.

Reference

Henry Hazlitt, (1969). Man vs. The Welfare State, Ludwig von Mises Institute, p. 29-31.