MILTON FRIEDMAN’S REVENGE: Inflation Haunts the Biden Economy.
So how’s the U.S. government’s grand experiment in modern monetary theory turning out? Not well. Consumer prices over the past 12 months rose 7.5%—the most in 40 years—while real wages declined 1.7%, the Bureau of Labor Statistics reported Thursday.
The report jolted financial markets, as stocks fell and bond yields rose. But nothing in the January report should be shocking. This is what happens when the government massively expands the money supply and over-stimulates demand. Yet the Federal Reserve and Biden Administration last year dismissed inflation as “transitory.” They have belatedly dropped that line, but they still won’t concede that inflation is becoming more entrenched as price increases have exceeded 5% for eight months in a row.
Food prices increased 0.9% in January and 7% over the year. Gas prices ticked down 0.8% last month but are still up a whopping 40% from a year ago. It’s striking that the core index that excludes food and energy rose 0.6% in January—about twice as much as last summer—and is up 6% year-over-year.
The economy needed support early in the pandemic. But Congress’s $900 billion Covid relief bill in December 2020 and the $1.9 trillion in spending that Democrats passed last March were overkill. The enormous income transfers reduced incentives to work while at the same time giving people more money to spend.
Inflation is always and everywhere a monetary phenomenon. But if you include regulations that stifle growth or discourage people from working, it can become stagflation too. So there’s that.
The NYT article on MMT, written by Jeanna Smialek, is mostly a puff piece about Stephanie Kelton, MMT’s most well-known proponent. In glowing tones, it describes Kelton’s clothes, her office, her house, her neighborhood, her blog, her manner of speaking, her personal story, and so on, calling her “the star architect of a movement that is on something of a victory lap”. Very little is written about the background of the macroeconomic policy debate, and what does appear is highly questionable.
Typical fodder for the group of aging liberal women who don’t know anything about economics, or much else, that appears to be the NYT’s target demographic these days. Plus:
This is important because any attempt to engage with the actual substance of MMT quickly finds that such substance is curiously lacking. MMT proponents almost always refuse to specify exactly how they think the economy works. They offer a package of policy prescriptions, but these prescriptions can only be learned by consulting the MMT proponents themselves. There is no model here — no set of equations or definite formal statements that a layperson could use to generate their own MMT policy prescriptions without appealing directly to the gurus.
Every economist who has attempted to engage seriously with MMT literature has concluded the same.
So it’s a cousin to Critical Race Theory, then?
Plus:
As a coda, though, I should point out that the really scary threat to U.S. macroeconomic policy comes not from MMT — nor, at the moment, from the return of austerity. It’s from the people advocating price controls. Some decided non-fringe economists — James K. Galbraith of UT Austin, Todd Tucker of the Roosevelt Institute, and J.W. Mason & Lauren Melodia of the Roosevelt Institute, to name just four — have advocated adding price controls to our inflation-fighting toolkit, despite the fact that both theory and history offer us little reason to think the tool would be effective. In fact, a shift from a regime of demand management based on monetary and fiscal policy to one based on price controls and direct intervention in industry could spark runaway inflation as it did under Chavez and Maduro in Venezuela. The Biden administration hasn’t gone for price controls yet, but it has attempted to blame inflation on powerful companies, suggesting that Biden’s people might be thinking along these lines.
Wage and price controls also help turn inflation into stagflation or worse, and high prices into shortages.
Also: Yes, the Biden Stimulus Made Inflation Worse.
UPDATE: From the comments: “The function of most left journalism is to tell readers how they are supposed to feel about someone or something. The journalist uses connotative language cues as a code to indicate to the reader what they should feel. Writing about Kelton’s clothes, home, or way of talking is simply a way of cuing the reader on what the approved left attitude is toward her.”