Government spending won't reduce inflation

Posted: Tuesday, July 22, 2008

The article, "Economic woes spur talk of new stimulus plan" (Empire, July 17), seemed to suggest that increased governmental spending (economic stimulus) was a standard response to inflation. On the contrary, in classic economic theory the reverse is true.

Deficit spending encourages inflation; it does not cure it. Deficit spending by the government is the classic cure for an economic recession or depression. Higher interest rates and a reduced money supply are the classic cure for inflation.

For the last 10 months, the Federal Reserve Bank has been cutting interest rates and increasing the money supply in an attempt to keep Wall Street afloat. As a result, the value of the dollar has fallen, which has contributed to inflation and the increase in the price of oil. Economic stimulus may or may not be a good idea - and I am more enthusiastic about government spending that benefits Main Street rather than Wall Street - but no one should expect that it is going to reduce inflation.

Pamela Finley

Juneau



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