Stop Inflation Without Causing Recession

Don’t repeat our historically dysfunctional approach to stopping excessive price inflation. The Federal Reserve uses a supply-side tool to stop excessive inflation by raising interest rates that works by constraining business enough to cause a cutback in working hours and layoffs that suppresses consumer demand. But postal bank accounts could be created to provide the Federal Reserve with a demand-side tool to directly reduce demand pressure to stop inflation without throwing the economy into recession.

When the Federal Reserve raises interest rates, it suppresses supply for seasonal, cyclical and other businesses that depend on short term liquidity to maintain and establish inventory and cash flow.  It suppresses business.  For example, farmers borrow money from the financial system to pay for seed, fertilizer and irrigation in the spring and to pay workers to harvest the crop in the fall, and pay it back after the harvest is sold. 

But production is cut back when borrowing costs increase as interest rates rise. This traditional approach suppresses both supply and demand as workers find less work and their incomes fall. High interest rates also cause businesses to put off long-term investments in plant and equipment that would increase supply. The economy slides into recession.

Inflation occurs when too much demand for goods and services is chasing too little supply. The financial markets exist to offer liquidity to businesses to maintain or expand the supply of goods and services. Countering the rapidly rising prices requires increasing supply while reducing demand. Current supply shortages call for encouraging supply. But the traditional Federal Reserve policy approach will do the opposite of what is needed.

Sure, suppressing business to lay off workers to reduce demand will work if you slam on the brakes hard enough. But trashing our economy to stop inflation is not necessary. What the Federal Reserve is missing is a demand-side tool to ratchet down demand when markets for goods and services become overheated.  

Under the Postal Savings Act of 1910, our post offices served as banks for 56 years from 1911 to 1966. You could go to any of our 34,000 post offices to cash a check or set up a savings account. The Public Banking Act, which was recently introduced in the Congress to create postal bank accounts, could be modified to provide the Federal Reserve with a demand-side tool to curb excessive inflation without throwing our economy into a recession.

Demand can be tamped down and supply encouraged by recreating the postal savings accounts and offering high interest rates in those savings accounts on balances up to some specified limit, such as $10,000 (with no interest earned on amounts above that limit), while leaving the rates in the New York financial markets relatively low to stimulate, not suppress, supply. 

Higher interest rates will encourage savings. Saving more and spending less is obviously what is needed when too much money is chasing too few goods. If we offer high enough interest rates in postal bank accounts dispersed in our 34,000 post offices around the country, excess demand can be reduced enough to stop inflation without forcing the economy into an unnecessary recession. This approach withdraws money from the economy by offering a return on investment, not by taxation. People will still be able to purchase their necessities, but will be motivated to delay or cut back on luxuries until the economy cools off and postal bank interest rates return to normal. 

This will especially benefit the elderly who need a good return on their savings to help finance their retirement. Having more people save more money will also serve as an automatic stabilizer by providing people with the savings they need to ride out economic downturns, which, in turn, will make such downturns shorter and less extreme.

Note that the Federal Reserve is independently financed from its bank fees and investments, which produce enough revenue such that the Federal Reserve donates more than $80 billion to the U.S Treasury each year. The Federal Reserve, not the taxpayers, can pay for setting up and operating the postal banks. The Federal Reserve could also help pay for postal employee pensions. This will reduce, not increase, the overall tax burden. 

With reasonable limits on the savings and loan amounts restricted to one account per person or small business, these postal banks can avoid interfering with the normal functioning of the commercial banking industry. Of course, banks will oppose any intrusion onto their turf, but the broader benefit to the country as a whole must be taken into account.

When the opposite conditions develop with low demand, high unemployment, and the start of a deflationary cycle, postal banks could offer small loans at relatively low interest rates to individuals and small businesses. Such a loan program has already been proposed in bills formulated in both the Senate and the House in the last few years such as Senator Kirsten Gillibrand’s Postal Banking Act as Senate bill S.2755 or Representative Rashida Tlaib’s Public Banking Act as House bill H.R.8721. These bills are aimed at helping unbanked and underbanked people who live paycheck to paycheck and suddenly face job loss, a medical emergency, an automobile accident, or some other event that forces them to go to loan sharks, pawn shops, payday loan dealers, or “cash now” providers who typically charge exorbitant interest rates.

Postal bank savings accounts offering high interest rates could attract middle-class and working-class people, and those with high marginal propensities to consume who tend to spend most of their income except when offered an exceptionally high interest rate on savings. This will provide the Federal Reserve with a demand-side tool to directly impact Main Street instead of relying on indirectly influencing demand through a supply-side tool aimed at Wall Street.  Targeting demand through postal bank accounts to stop excessive inflation or, alternatively, to stimulate demand in a weak economy will be much more cost effective in offering more bang for the buck, will be more direct and have a more immediate impact, use less money and be less disruptive of our economy than current Federal Reserve supply-side stabilization strategies. 

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Use More Creativity in Funding Government

Get your name on buildings, streets, programs and positions.

How did America create and pay for the best teaching and research universities in the world? What can government learn from this success story? When both carrots and sticks are known to motivate, why restrict funding to sticks (tuition or taxes) when carrots (donations and endowed chairs) could also provide money?

In my recent book (“Optimal Money Flow”) I proposed the taxpayer appreciation program (TAP), which would allow the naming of a taxpayer supported institution or edifice after those who pay an especially high estate tax. For example, at some point in the future, and with the approval of the appropriate board, a primary school in Omaha, Nebraska might be named “The Warren Buffett Elementary School.” Of course, you only get to die once so under TAP you could only get one institution or edifice named in your honor.

However, there is no reason that such naming should be limited to estate taxes or taxes in general. Universities allow donors to have their names attached to campus buildings, programs, scholarships and professorships. Whatever people are willing and able to fund might be considered for approval. Why shouldn’t the public sector explore this approach as well? Voters or their representatives could approve a particular donor to have their name attached to a building or road. You might be able to pay to have “Union” in Union Station or “Country” in Country Lane replaced with your name.

But what about funding actual government positions as endowed chairs? A donor named John Smith could donate a few million dollars to make Mayor Bill de Blasio the John Smith Mayor of New York City. If several wealthy people want to bid for naming an official government position, the naming of the position could be auctioned off. Of course the funding for these positions need to be large enough to pay both the future salaries and operating expenses of the named position. This would free up tax money to pay other expenses, or that tax money could be earmarked for a reserve fund to be used in an economic downturn instead of cutting back services or going into the red.

If having individual donors pay to have their names associated with key positions seems unseemly, with the approval of her family and next of kin why not create a “Go Fund Me” page to create a Ruth Bader Ginsburg Justice of the Supreme Court? The nation as a whole could show their respect and appreciation along with that of her important and wealthy friends and colleagues by funding a Supreme Court position in her honor. One of Georgia’s senators could be named the John R. Lewis Senator of Georgia. Endowed positions could eventually be created for every position in the Congress of the United States.

As the wealthiest Americans accumulate more and more money, they may wish to use their money more creatively than just investing it all in the stock market. Not every wealthy person has the ability and ambition to create an Amazon or a Tesla so offering them another way to get their name out there may be just what they were looking for. Alternatively, a “Go Fund Me” page for honoring our fallen heroes may be exactly what we need to reestablish our sense of commitment and unity as a nation. Let’s hope that our leaders will have the courage to give it a try. It has got to be more popular than raising taxes or running up the national debt.