Since the economic crisis began, two of the more hotly debated issues among liberals and conservatives have been inflation and debt.

Liberals generally argued that inflation wasn’t an issue and that continued intervention through aggressive fiscal and monetary policy was the best way to deal with the economic crisis.

On the other end, conservatives pointed out the terrible precedents and increased risk from inflation by expansionary monetary policy and the long-term consequences of continued government spending through debt.

Inflation – Who was right?

Here’s what inflation has done.

Overall, inflation is up about 16% since 2007.  The largest inflation anomaly year occurred in the early part of 2008, jumping about 4%, followed immediately by a precipitous decline in the latter half of 2008.

Liberals Inflation
Inflation

Some might say – well, that doesn’t address the debate, and it doesn’t if you’re a liberal.  (It doesn’t address the debate if you’re a conservative either, unless you’re a dishonest conservative.)

Here’s what’s happened on a year over year growth basis in the inflation rate.

Perhaps it’s difficult to see, although one thing is clear.  The inflation rate – the rate at which prices are appreciating – did not accelerate since the onset of the financial crisis.  Rather, the economy has seen disinflation (a declining, but still positive inflation rate as opposed to deflation, which is an actual decline in prices).

So, the figure below is exactly what liberals thought would happen, right?  Activist monetary policy didn’t cause increased inflation, as argued.

Not really.

inf2

Both conservatives and liberals generally agreed that inflation was not a short-term concern.

Liberals were arguing expansionary monetary policy would have no long-term effects on inflation, while conservatives argued the opposite.

We’re now approaching the time frame of which both liberals and conservatives were referring to.

And this is what should make liberals worry.

There’s growing consensus among economists that inflation is something to worry about and is probably coming much sooner than people and the Federal Reserve realize.

Inflation – Delving into the numbers

Here’s one chart to show why.  The chart shows the BLS’ hourly compensation index.  Does it look like it’s bottoming out?  Well, if you overlay short-term unemployment, as the NY Fed’s economists did, and do some simple modeling, you’ll find some pretty convincing evidence that higher inflation – based upon higher wage growth – is on the way, a story liberals really don’t want to hear.

hourly comp

What about the second issue – debt?  Weren’t liberals right on that?

The liberal argument was simply that reducing spending would hurt demand and thereby GDP.  By making this argument, liberals implicitly argued that debt doesn’t matter.

Whether debt matters is a question to be answered years down the road.  The demand/GDP question can be answered now.  Here’s what GDP has done since the federal government started cutting costs.

Overall, GDP is up about $1.6 trillion, and Private Investment and Personal Consumption are each up about $1 trillion.  Net exports are also up by $64 billion.

Over this same period, Government is down about $200 billion.

Liberals simply must give in that, perhaps, government isn’t the center of the economic universe.  Reducing government expenditures, by almost any measure, has been a big success.

GDP since 2009

On the whole, the numbers are simply starting to show a story liberals don’t want to hear.  Perhaps if conservatives gave in somewhat on their inflation risk story (although they are talking more long-term), liberals could find it in their honest hearts to recognize their supply-side-is-irrelevant argument isn’t panning out the way they’d like it to.

Inflation – Liberals should consider broader view

In the near future the Fed will see the writing on the wall that the inflation-vacation is over.  With increasing spending off the table – at least based on recent evidence – liberals will certainly push for a gas-pedal hogging Fed.  That is, unless they start to see a broader view of the economy.