Nobel economists were dead wrong on inflation: Don’t expect an apology
Last September, as the Build Back Better legislation was being considered in Congress, many members worried about the inflationary pressure of injecting an additional $2.4 trillion into the economy on top of the $4.1 trillion committed to the American Rescue Plan and the Cares Act.
When it looked like the Democratic majority might include enough deficit hawks to scuttle the bill, Nobel Laureate economist Joseph Stiglitz rounded up another 16 of the 36 living American Nobel Prize economists to declare, in an open letter, that whatever upward pressure on prices all this new money might bring there was no threat of inflation.
Forget what government statistics were already signaling. Many non-Nobel economists recognized that a clear case of demand-pull inflation was already underway. The price of used cars, the vehicles people buy when new cars seem unaffordable, led a clearly rising consumer price index.
The Nobelists’ letter showed that those signing had bought Team Biden’s novel argument that its enormous expansion of social welfare programs really was just a different form of infrastructure investment, just like roads and bridges. Gary Becker, the Nobel economist recognized for developing human capital theory 50 years ago, likely would not look at spending $410 billion on “climate resilience” as being as important as providing after-school enrichment programs for poor kids.
No matter. In an act of intellectual legerdemain, the wise men said that expanding social welfare programs would operate like old-fashioned countercyclical policy — unemployment checks would support a continuing but smaller level of consumer demand. This approach, a clever idea developed by practical post-war economists, was careful not to disincentivize job searching by setting benefits too high.
The laureates seemed to have overlooked that previous COVID benefits had often exceeded what tens of millions of workers regularly earned and that recipients displaced by COVID were never required to look for other work. While the high priests of economic “science” were cheering on higher federal spending, larger deficits and increased taxes, employers were and are continuing to deal with inflation face-to-face. They are forced to bid up wages, sometimes doubling them, to keep and get employees even as overall labor force participation seems unlikely to return to pre-COVID levels anytime soon. Higher labor input costs are certain to lead to higher prices for most goods and services.
The Nobelists assured that we would see a robust recovery because of President Biden’s “active government interventions.” Their presumed authority was used to give credence to the president’s continuously twisting storyline on inflation — that it was “transitory,” good for the economy, a “high-class problem,” Putin’s fault for invading Ukraine, and the greed of oil and food companies causing rapid price increases in gasoline and groceries.
Every economist has thought about markets, prices and inflation all their lives. Nobel laureates surely know the administration’s excuses are bogus. Annual inflation for the 12 months ending in February reached a 20 year high of 7.9 percent. In the first two months of this year, before Putin unleashed his war on Ukraine, monthly inflation was 7.5 percent. Inflation is now chronic, embedded and getting worse. In previous times, these kinds of numbers would have economists working night and day on policy fixes. Now, some have joined in Washington’s propaganda campaign trying to convince us that gas at $6 a gallon is a good thing because it encourages “inclusive growth” and a path to “facilitating our clean energy transition.”
Have they decided to overlook one of the first rules of economics, namely, that inflation always operates as a disguised tax on consumers, one that falls most heavily on the poor?
Today’s fashionable goals seem to have displaced the no-nonsense pragmatism that has long characterized economics as a discipline. Most economists know to be wary of making forecasts and certainly would not ignore the data at hand. There are too many examples of high-profile economists, including Nobel laureates, for whom the real future did not accommodate their visions.
During the infancy of modern economics, Irving Fisher, the most famous economist of his day, forecast a permanently rising stock market just two weeks before the 1929 Crash. Paul Samuelson, a Nobelist, held fast for 28 years to his prediction that the Russian economy would flourish under Marxism. And, in 2007, Alan Greenspan foresaw double-digit interest rates to combat an inflationary surge that is only now, 17 years later, becoming real.
Don’t expect a mea culpa from Stiglitz or his coauthors any time soon. Being an economist confers a magical identity that few other occupations enjoy. Economists know this and work to maintain it. They can be wrong, really wrong, and never pay a price. Indeed, while their pronouncements can lead to horrible policies that cause real people to lose real money betting on the wrong future, hardly anyone ever calls them out. They have a kind of intellectual immunity conferred by others who seem to think of economists as brainiacs of a different order. After all, no other academic discipline has an equivalent of the Council of Economic Advisors advising the president.
Shortly after the council was first formed, Harry Truman joked that he’d give anything for a one-armed economist — one who would give him definitive advice on monetary and fiscal policy. Maybe, in the old days, economists understood that a goodly amount of humility was needed to offset swagger.
Carl Schramm, an economist, is a university professor in the School of Information Studies at Syracuse University and former president of the Kauffman Foundation. His most recent book is “Burn the Business Plan” (Simon and Schuster) 2018.
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