Arthurian debt policy

Our anti-inflation policy is all wrong.

 

I understand the "raising interest rates" method of fighting inflation: It reduces the money flowing into the economy from borrowing. Less money means less inflation. I get it. But it is not a good plan.

Less money means less spending, and less spending means less inflation. But less spending also means less economic growth. That is why inflation-fighting often leads to recession. 

But recessions are not the big problem. They are only evidence of it. The big problem is that this anti-inflation policy, applied consistently, results in the consistent slowing of economic growth.

To maintain a policy where inflation is limited to two percent, as we did for many years, is to maintain a policy of low economic growth.

Economists ask: "Why is economic growth slow?" Growth is slow because of our anti-inflation policy.

Demand-pull inflation arises from too much demand, too much spending, too much money in the economy. By definition, in a slow economy there is not too much demand. Our inflation is not demand-pull.

Cost-push inflation arises from too much cost. Our inflation is cost-push. Some people say cost-push inflation is rare, but they are wrong.

Cost-push inflation is common because there is too much cost in our economy. Too much financial cost. In response to the financial crisis of 2007-2008, policymakers pushed interest rates down as low as they could go. That response was an admission that financial cost was too high.

The problem is not interest rates. The problem is debt. We have so much debt that reducing interest rates does not solve the cost problem, even when interest rates are as low as they can go.

We think of finance as the solution to all our economic problems. But that thinking has created another problem. That thinking has created the high cost of finance.

We have many policies that make credit more available. And we have many policies that encourage the use of credit. Therefore, credit use grows rapidly. But we have no policies designed to accelerate the repayment of debt. Therefore, debt grows to extremely high levels.

The personal income tax provides a deduction for mortgage interest. So we don't have to pay income tax on the money we use to pay the mortgage interest. In effect, this makes mortgage interest less costly for the taxpayer. That makes it less costly to have a mortgage. 

The policy makes it less costly for us to be in debt. It encourages people to be in debt.

That policy also reduces the tax revenue the government receives. But even if the cost to government was exactly the same, it would be better to have policy that encourages taxpayers to get out of debt.

Instead of getting a tax deduction for the interest we pay, we should be getting a tax deduction for paying down our debt ahead of schedule. This policy would help us get out of debt. It would reduce debt. It would reduce financial cost. It would reduce cost-push inflation. It would reduce the need to raise interest rates. It would reduce the policy-induced slowing of economic growth. And by reducing the cost of finance, it would bring some vigor back to our economy.

It has been a long time since people talked about economic vigor.