No politician has ever stood at a podium and declared, “We’re going to fund this program by printing money and causing inflation.” That would be political suicide. Instead, they promise popular spending programs while simultaneously pledging to keep taxes low. It sounds like magic—getting everything you want without paying for it.
But as we explored in our last post, there’s no such thing as a free lunch, even when politicians make it seem otherwise.
The political incentive structure is straightforward. Spending money on programs that benefit specific groups is extremely popular with those groups. Whether it’s farm subsidies, infrastructure projects, education funding, or healthcare programs, the people who directly benefit become passionate advocates. They vote, they donate, they lobby, and they remember who supported their program.
Collecting money through taxes, on the other hand, is universally unpopular. Even people who philosophically support higher taxes rarely enjoy writing that check to the IRS. Politicians who raise taxes face immediate, tangible opposition from voters who see smaller paychecks and higher bills.
This creates a powerful incentive: promise spending increases, or at least no spending decreases, while promising tax cuts, or at least no tax increases. It’s the political equivalent of promising dessert before dinner without any vegetables.
Of course, basic arithmetic eventually intrudes on this pleasant fantasy. When spending consistently outpaces tax receipts, something has to give. Politicians face a choice: cut spending (unpopular with beneficiaries) or find the money somewhere else.
Borrowing becomes the obvious solution. Unlike tax increases, borrowing doesn’t show up immediately in anyone’s paycheck. Unlike spending cuts, it doesn’t anger powerful interest groups. It’s the perfect political tool—all the benefits of spending without the immediate costs of taxation.
But where does the government borrow this money from? Much of it comes from the Federal Reserve, which has the unique ability to create new dollars electronically. This isn’t technically “printing money” in the literal sense—most new money today is created digitally rather than physically printed. But the economic effect is identical.
When the Federal Reserve purchases government bonds with newly created money, it’s essentially funding government spending through monetary expansion. The government gets money to spend, the Fed gets bonds, and the money supply increases. Politicians get to keep their promises without raising taxes, at least temporarily.
This process has accelerated dramatically in recent decades. The national debt has exploded from about $5 trillion in 2000 to over $33 trillion today. Much of this increase represents spending that wasn’t matched by tax revenue—spending that was ultimately funded through monetary expansion.
Politicians didn’t set out to cause inflation. They simply responded to the incentives they faced: deliver benefits to constituents while avoiding the political costs of taxation. But economic reality doesn’t care about political incentives.
As we discussed previously, when the money supply increases faster than the production of goods and services, prices rise. The new money works its way through the economy, but not evenly or immediately. Those with first access to new money—primarily banks and major borrowers—benefit from being able to spend it before prices adjust. Everyone else faces higher prices without initially having more money to spend.
This is why inflation is often called a “hidden tax.” It achieves the same result as direct taxation—transferring resources from private citizens to government—but without the political transparency of explicit tax increases. Politicians can fund spending programs without taking responsibility for the costs.
The victims of this hidden tax are precisely those who can least afford it and least able to protect themselves. Retirees on fixed incomes watch their purchasing power erode. Workers whose wages don’t keep up with inflation see their living standards decline. Savers see the real value of their savings accounts diminish.
Meanwhile, those who benefit from new government spending programs receive very real, immediate benefits. A defense contractor gets paid today for weapons systems. A university receives federal research grants right now. Infrastructure workers get paychecks this week for building government-funded projects.
The costs—inflation—are spread across the entire population and delayed in time. The benefits are concentrated on specific groups and are immediate. This asymmetry makes the hidden tax politically sustainable in ways that direct taxation wouldn’t be.
Consider how different this would be if politicians had to fund spending through explicit taxes. Imagine if every new government program required an immediate, visible tax increase on all citizens. The political dynamics would change completely. Citizens would directly weigh the benefits of each program against its costs, and many programs that seem popular in isolation would face intense opposition when their price tags became visible.
This connects directly to our broader discussion of capitalism throughout this series. Voluntary exchange—the foundation of capitalist systems—requires that people make decisions with full information about costs and benefits. When you buy something in a store, you know exactly what you’re paying and what you’re getting.
Government spending funded through monetary expansion violates this principle completely. Citizens receive the benefits of spending programs while remaining largely unaware of the costs they’re paying through inflation. The price signals that usually guide economic decision-making become distorted when costs are hidden and delayed.
This system also violates capitalism’s principle of equal treatment before the law. In genuine free markets, everyone faces the same rules. But when government funds its spending through monetary expansion, it creates winners and losers based on their position relative to new money creation rather than their ability to serve consumers effectively.
The Cantillon Effect—named after economist Richard Cantillon—describes how new money benefits those who receive it first while imposing costs on those who receive it last. This isn’t market competition; it’s a form of wealth redistribution that operates outside normal economic channels and without democratic accountability.
Understanding this dynamic helps explain why inflation has become such a persistent feature of modern economies. It’s not an accident or a natural disaster. It’s the predictable result of political systems that reward spending while penalizing taxation, combined with monetary systems that enable politicians to bridge the gap through money creation.
The solution isn’t to blame politicians for responding rationally to the incentives they face. The solution is to change the incentive structure itself. This could mean requiring balanced budgets, limiting monetary financing of government spending, or simply making the costs of inflation more visible and immediate so that citizens can make informed choices about the trade-offs involved.
What it definitely means is recognizing that government spending isn’t free, even when it’s not funded through direct taxation. Every dollar of government spending represents resources that can’t be used for private purposes, whether that spending is funded through taxes today or inflation tomorrow.
Politicians may not explicitly promise to fund programs by printing money, but when they promise spending without corresponding tax increases, that’s ultimately what they’re promising. The printing press—or its modern digital equivalent—becomes the implicit funding mechanism for the gap between political promises and economic reality.
The next time a politician promises a new program while pledging not to raise taxes, remember that they’re not proposing to eliminate costs. They’re proposing to hide them, delay them, and shift them to people who can’t protect themselves from inflation’s effects.Learn more about capitalism here.
