Earlier this week a prominent economist opined at Bloomberg that “even a recession might not tame inflation.” Most reading this are wondering why what’s conventional wisdom among economists rates mention. Which is the problem. To economists, and certainly to the economists at the Fed, the answer to inflation is economic contraction.
In reality, economic growth is all about falling prices. Getting right to the point, the surest sign of economic growth is falling prices. Figure that investment is what powers greater productivity, and greater productivity results in lower-priced goods across the board. Lest readers forget, it was during the ‘Roaring 20s’ that former luxuries of the automobile variety dropped in price precipitously. Same with radios, another luxury in 1920 that was common by 1930. Repeat it over and over again: falling prices are the surest sign of economic growth.
So while prices are at best an effect of inflation, and inflation is solely a currency phenomenon born of a shrinkage of the measure, it cannot be stressed enough that contraction would never tame prices. See above. Contraction is a consequence of a lack of investment. Stable and rising prices are the surest sign of a sluggish or declining economy. Economists have it backwards, Fed economists most notably.
This came to mind while reading Washington Post columnist Catherine Rampell’s recent critique of GOP presidential front-runner Ron DeSantis’s speech line about the Federal Reserve pursuing digital money in order to limit our ability to buy guns and gasoline. Supposedly the CBDC will be used to track our purchases. In DeSantis’s words, “You go and use too much gas, they’re going to stop it.” The Florida governor followed with “You wanna go buy a rifle, they’re going to say no, you have too many, too many of those, you can’t do it.” Rampell referred to DeSantis’s analysis as “bonkers,” and that’s putting it lightly.
About the Fed, it’s doubtful readers can count on even one hand the number of economics writers who regularly ridicule the central bank more than yours truly. Still, with his critique of the Fed DeSantis took it too far. One senses DeSantis knows he did. Dumb he isn’t. Policy ignorant he isn’t. Which was why the attack was so unfortunate. DeSantis is wise enough and knowledgeable enough to craft impressive, articulate critiques of the central bank. And there’s much to criticize. Please re-read the opening paragraphs of this opinion piece for clues.
The simple truth is that the economists who populate the Fed almost to a man and woman believe that bankrupting businesses and putting people out of work is the cure for inflation. Sadly, more than a few Republicans believe the same as their ignorant reverence for the late Paul Volcker reminds us. It’s incorrectly believed to this day that the answer to the 1970s inflation was mass unemployment, and Volcker is lionized to this day for centrally-planning the unemployment that was allegedly necessary to break the ‘70s inflation. Yes, people must suffer for suffering the horrors of inflation. It’s all so ridiculous. Breaking inflation is about shoring up the currency (a Treasury function), not putting people out of work. Yet Volcker hagiographers believe…against empirical realities and logic.
Which brings us back to DeSantis. As arguably the smartest of the GOP candidates, he could be the one to credibly criticize a backwards understanding of inflation that infects the Federal Reserve and the political class more broadly. That’s what DeSantis should be talking about when criticizing the Fed. How sad for him to lower his good mind to the bonkers stuff.