Geithner's ‘Story of Inflation'


Treasury Secretary Timothy Geithner assured us recently that President Barack Obama was “absolutely willing” to jump off the fiscal cliff. Geithner also believes that the Federal Reserve has nothing to do with causing inflation. That should be surprising because we know that if the Federal Reserve prints money faster than the economy grows, we should expect more inflation over time, all other things being equal. At least, that's what Nobel economists say.

Several years ago, when Geithner was president of the Federal Reserve Bank of New York, his bank published a series of comic books to explain economics to youngsters. One title, in 2006, was “The Story of Inflation.” You can still buy it on Amazon and similar places. A few years ago, the Federal Reserve Bank of Atlanta awarded the “Lesson Plan of the Year” (second place) for teaching materials incorporating this comic book.

It is easy to understand why President Obama believes that Congress should raise taxes and permanently eliminate the debt ceiling. “The Story of Inflation” explains it all.

Geithner's comic agrees that the definition of inflation is a general rise in the level of prices. However, the next page instructs children (future taxpayers) that there are two major causes of inflation. The first is “demand-pull inflation.” That occurs when workers earn “too much money” and buy more goods and services. The federal government can stop that by raising taxes, reducing people's ability to buy, thus preventing inflation.

When one character in Geithner's comic complains, “If Congress passes this tax increase, we won't be able to buy a new car,” another character wisely retorts, “Well, at least we'll be fighting inflation.” If people want to remodel the kitchen, it is better for the government to relieve them of such temptations rather than risk inflation.

Later, a congressman remarks, “The country needs a tax hike to fight inflation,” to which another agrees, “Our constituents will never forgive us,” if we do not fund “increased economic and financial education and build bridges.” So, the Federal Reserve uses part of its budget to publish comic books to teach us that we cannot rely on the Fed; Congress must spend more money to pay for more financial education and, by the way, build bridges.

The second cause of inflation, readers were told, is “cost-push inflation.” If it costs more for producers to produce, that also causes inflation. Increasing workers' salary, for example, would cause “cost-push inflation.” I thought we should be happy when people earn more. In 1914, when Henry Ford doubled his workers' salary, people said that it was a good thing, an example of the benefits of the market economy. Yet, Secretary Geithner seems to tell us that pay raises could cause “cost-push inflation,” and this is a very bad thing.

Hence, in 2013, more than 77 percent of U.S. workers will see a payroll tax increase of 2 percentage-points. It is no wonder economics has the nickname, the “dismal science.”

Geithner's comic book acknowledges that a price increase “of only one item or class of items” does not constitute inflation, because that is not an increase in the “general price level.” However, the next page announces that things are different if oil prices rise. “Of course,” in that case, there can be inflation “because oil plays a key role throughout the economy.”

Notice the use of “of course.” People often use that term when an assertion lacks proof. Oil prices have risen and fallen over the years, sometimes dramatically. Yet, inflation occurs when the government prints too much money. The advantage of blaming the next bout of inflation on oil prices is that the government can accuse foreign countries and Big Oil, instead of itself.

Toward the end, the comic explains the Fed can “influence” money and credit conditions to make sure that they do not grow too fast or too slowly. His comic never suggests any problems with the Fed adding trillions of dollars in debt along with its zero-interest policy.

The Great Recession began with the unwinding of an explosion of debt. Inflation should be quiet for a while, because consumers are reducing private debt and banks are reluctant to lend in this economic environment. Still, the Fed plans to buy about $85 billion of Treasury and mortgage bonds every month in 2013, adding to its $3 trillion balance sheet.

Geithner, like the comic that his New York Federal Reserve Bank published, seems to think that the remedy for what ails us is additional federal spending, higher taxes and the Fed funding government debt. The fiscal cliff, to him, is like a cliff in a comic book – nothing to really fear.

Ronald D. Rotunda is the Doy & Dee Henley Chair and Distinguished Professor of Jurisprudence at Chapman University.

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