The Financial Pathology of the Postwar American Welfare State

James Rolph Edwards

doi:10.62374/jsk8r577

Authors

James Rolph Edwards Montana State University-Northern

DOI:

https://doi.org/10.62374/jsk8r577

Keywords:

indexation, disinflation, monetary decision, labor force, wage rigidity, wage and price inflation

Abstract

Chronic inflation in the U.S. is a post World War II phenomenon. Particularly puzzling is the period of accelerating inflation after 1964 and the rapid deceleration after 1981. Arguably, inflation was employed to solve certain problems of finance faced by political authorities benefiting from the expanding welfare state. Those solutionsdepend ed on certain deceptions of the public, however. In particular, successful vote maximization through redistributive politics required (1) taxing and raising taxes surreptitiously through inflation to hide the costs of the subsidies, (2) covert inflationary repudiation of much of the accumulating federal debt that was also being employed to hide the costs of redistribution, and (3) the successful use of inflation to reduce the disemployment effects of pro-union laws and income transfers. Accomplishing these things required accelerating inflation. Inflation stopped accomplishing its intended functions over the 1970s, however, because the public’s expectations of inflation became more accurate despite its acceleration, and certain costs of inflation rose. Thus the marginal benefits of inflationary policy to the governmental partisans of the welfare state fell below the marginal political costs, making a lower inflation rate optimal. This endogenous theory of monetary policy and inflation behavior may be termed the “political neutralization hypothesis”.

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