Last week’s Blue Tsunami drove home the fact that affordability is now the central public issue of our time, if this wasn’t clear already. A small-scale civil war has broken out among conservatives over the war on Iran, in which pundits like Tucker Carlson, Megyn Kelly and Mark Steyn are squaring off against “neocons” such as Mark Levin about the administration’s decision to rain hell upon the Iranian regime, this effort now receiving the blame for the historical midterm shellacking. Even Vice President JD Vance put his weight behind this argument. The truth, I’m afraid, is much more banal: The problem voters have with the war is that it drove up gas prices, and nothing else. Which isn’t to say we should dismiss out of hand the public’s beef with it — and surely there are legitimate arguments to be made against it.
Either way, Americans were suffering from ever-increasing consumer prices before the war in Iran took off, and the simple fact is that the second Trump administration has been unable to stem the tide or even waylay public concerns, partly because of bad choices on his own part but also due to an inherited legacy of poor choices going back 60 years. This pesky inflation problem isn’t going anywhere unless and until we address its roots.
Those roots can be traced as far back as the Johnson administration. Prior to 1965, no American was concerned about inflation. But that year, Washington took on two expensive commitments at once: Johnson’s Great Society programs at home and a rapidly escalating war in Vietnam. Neither was paid for with a serious tax increase. What made it inflationary was the fact that the administration put intense pressure on the central bank to keep money cheap rather than let borrowing costs rise, and the latter complied. More dollars were chasing goods than the country could produce, and inflation climbed from 1.1% in early 1965 to 3.5% by August 1966.
Two things then turned this problem into a two-decade disaster. First of all, Washington had little incentive to fix it, because tax brackets weren’t adjusted for inflation back then, so rising wages automatically pushed families into higher brackets and handed the government a large real tax increase without Congress ever needing to legislate it. Secondly, people adjusted: workers expecting 8% inflation demanded 8% raises, employers raised prices to cover the wages, and the cycle fed itself. To make matter worse, the external brakes came off too, as Nixon ended the dollar’s link to gold in 1971 and the oil shocks of 1973 and 1979 sent energy costs soaring. Inflation eventually reached almost 15 percent by the early 1980s.
Ending this vicious cycle took deliberate pain. Paul Volcker, appointed Fed chairman in 1979, pushed the federal funds rate to a peak of 20% in June 1981, driving the economy into recession with unemployment at 10.8% by late 1982. It worked, and inflation largely disappeared for forty years. The lesson in one sentence is this: The government committed to spending it wasn’t willing to tax for, kept credit cheap so the bill wouldn’t come due visibly, and the bill arrived anyway in the form of higher prices, which cost far more to fix than an honest tax increase would have.
This lesson had largely been unlearned when COVID-19 broke out. From 2020 through 2022, Congress adopted the following legislation in response to the pandemic:
- Coronavirus Preparedness and Response Supplemental Appropriations Act (March 2020) — $8 billion
- Families First Coronavirus Response Act (March 2020) — $192 billion
- CARES Act (March 2020) — $2.2 trillion
- Paycheck Protection Program and Health Care Enhancement Act (April 2020) — $483 billion
- Consolidated Appropriations Act, 2021 (December 2020) — $915 billion in COVID relief provisions
- American Rescue Plan Act (March 2021) — $1.9 trillion
- Inflation Reduction Act (August 2022) — $499 billion
- Total — roughly $6.2 trillion
Based on calculations made by the nonpartisan Committee for a Responsible Federal Budget, the net cost to the U.S. taxpayer of the COVID spending bonanza was about $5.1 trillion. A staggering $3.4 trillion of this happened under Trump’s watch in 2020, by the way. A defensible argument can be made that this unprecedented spending was necessary in the face of a world-wide pandemic keeping people locked up in their homes, but it’s notable regardless given the fact that the resulting runaway inflation didn’t start until Joe Biden was president and, as a result, was pinned on him rather than his predecessor.
Nevertheless, ARPA and IRA poured gasoline on an already raging bonfire and amounted to an outright dereliction of duty on the part of the Democrats in 2021. It also should be noted that, when the IRA bill was still in its infancy and called “Build Back Better”, Schumer, Budget Committee Democrats and the Biden White House agreed on a $3.5 trillion target, and we have Joe Manchin to thank for putting the kibosh on that malodorous number.
The mechanism by which this emergency (or not-so-emergency) spending happened was similar to what happened in the 1960s and ’70s. The government borrowed all these trillions by selling bonds to investors, and it then mailed the proceeds back out as stimulus checks, extra unemployment payments, and forgiven PPP loans. That money landed directly in ordinary bank accounts where people could spend it, and the total money supply in the country grew by a quarter in a single year, the fastest on record. Separately, the Fed bought up enormous quantities of those same government bonds from banks, paying with money it created out of thin air. Those purchases put no cash in anyone’s pocket, but they did hold interest rates down so the government could borrow at that scale without pushing up the cost of borrowing for everyone else. In other words, just like back in the 60s and 70s, the Fed enabled the cheap borrowing. Then all that new spending power ran into an economy whose supply chains were still hampered by the pandemic and couldn’t produce enough to meet demand.
TLDR: a lot more money chasing a lot less stuff, with cheap credit fueling the whole thing.
Now, borrowing money doesn’t automatically cause inflation. America ran enormous deficits at various moments from the 1980s through the 2010s and prices stayed calm the entire time. The reason is that bonds were sold to finance the debt and no new money was conjured into existence.
Whether inflation arrives is mostly determined by whether anyone is willing to say no. The Federal Reserve controls short-term interest rates directly, but the rate the government pays to borrow long-term is set by the bond market. When Washington borrows heavily, the flood of new bonds pushes those rates up, and borrowing gets expensive. At that point the Fed faces a choice. It can stand aside and let the market charge what it will, which forces politicians to face the consequences of their decisions. Or it can start buying the bonds itself with newly created money, holding rates down and keeping the borrowing cheap and painless. That second path is what Washington chose in the late 1960s and also in 2020, and it’s how both inflation crises were triggered. An independent central bank is the one thing standing between large deficits and rising prices, which is also why politicians like to lean on it when the bill arrives.
The most dangerous part about the present moment is not so much that a lack of affordability is threatening people’s livelihoods, though that’s a real issue. The real danger is that the thorough breakdown of education across two generations has led most Americans to unlearn the lessons of the past. As a result, they’re bouncing around from Biden to Trump and now to radical politicians who promise to challenge “the system” and propose more extreme alternative ways forward. Voters have become unmoored, especially the young, because they fail to understand what is happening to their country and to their pocket books.
Needless to say, Abdul Al-Sayed, James Talarico, and the host of other radical progressives voted into power on Tuesday will do exactly nothing to relieve the pressures weighing on average Americans. In fact, they will do everything in their power to enact policies which would make the problem worse. As it is, the federal government spent $7.0 trillion in fiscal year 2025 against roughly $5.2 trillion in revenue, borrowing $1.8 trillion to cover the gap. That’s about a quarter of every dollar spent, or 34 cents on every dollar collected. Three-quarters of that spending is on mandatory programs that pay out automatically under existing law plus almost a trillion (!) dollars in interest payments. What’s left for Congress to actually decide each year is $1.9 trillion of discretionary spending, a sum almost equal to the deficit itself.
The practical consequence is that the budget fights consuming all the political attention are staged over the only part of the budget too small to fix the problem, while the part that is growing fastest is also the part nobody is voting on. This is partly why the DOGE efforts went nowhere, and why its stated goal of trimming federal spending by a trillion dollars is pie in the sky. As long as pruning Social Security, Medicare, and Medicaid isn’t on the table, any efforts to rein in the federal government will go nowhere.
On that note: Social Security’s main trust fund is now projected to run dry in 2032 and Medicare’s hospital fund in 2033. Under current law that triggers automatic cuts, with every retiree’s check dropping an estimated 22%, right when the retired population is at its peak. Do you think President AOC will let that happen under her watch? No — she will lean heavily on lawmakers to cover the gap with borrowed money instead, and on the Fed to keep the printing presses rolling in order to relieve the immediate budgetary pain. And the result will be another round of massive inflation.
Even when facing this fiscal cliff of catastrophic proportions, no politician could survive proposing to take the knife to our nation’s lavish welfare programs. As Jean-Claude Juncker, the once prime minister of Luxembourg, is reported to have put it, “We all know what to do, we just don’t know how to get re-elected once we have done it.” So expect this problem to get worse before it gets better.
