On Monday morning I appeared on Mike Ferguson’s American Viewpoints show on NewsTalkSTL in St. Louis. We talked about inflation.
Later that morning I appeared on Paul Molloy’s FreedomWorks show in Tampa, FL, also to talk about inflation.
I’ll add links to audio if I find them.
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Posted in Economics, Media Appearances, Monetary Theory
I’m quoted in a Washington Times article about today’s Producer Price Index release:
Ryan Young, a senior fellow at the libertarian Competitive Enterprise Institute, said the Fed should consider acting even sooner than March.
“The Fed is waiting too long to act,” Mr. Young said. “It has said it will wind down its bond-buying program and raise the federal funds rate starting in March. These are the right things to do, but they should have started months ago.”
With the producer price index rising at an annualized 9.7%, well above inflation’s annualized 7.5% pace, he added that “things are likely to get worse before they get better.”
“The Producer Price Index is a leading indicator, which means it is a sign of things to come,” Mr. Young said. “While we are unlikely to reach Carter-era stagflation territory, we are getting uncomfortably close.”
Read the whole article here.
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Tagged inflation
This press statement was originally posted on cei.org.
Inflation is on the rise again, hitting the highest mark in 40 years, according to government figures. CEI Senior Fellow Ryan Young says the Fed, Congress, and President Biden have specific action items that would help get inflation in check:
“Inflation is up yet again, now to a 7.5 percent annual pace. That means the money supply grew 7.5 percent faster than did goods and services over the last year. The Fed can get them back in sync if Congress and President Biden let it. That means keeping political activists off the Fed’s board and not pressuring the Fed to keep money loose during an election year. That is one bipartisan tradition that must stop.
“While Congress is mostly powerless over the money supply—or should be—there is still plenty it can do. Cutting it out with the trillion-dollar spending deficits would be a good start. So would enabling more economic production by removing tariffs and other trade barriers that are clogging supply networks and loosening labor, permit, and licensing regulations that block people from pursuing better opportunities.”
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This press statement was originally posted on cei.org.
The Federal Reserve today signaled an interest rate hike is coming in March to combat inflation. CEI Senior Fellow Ryan Young believes the Fed needs to act more quickly and points to other tools the Fed, Congress, and the Biden administration should use to lower inflation and help the economy.
Statement by Ryan Young:
“Inflation is happening because the money supply is growing faster than are goods and services. Job number one for the Federal Reserve and other policymakers is to get them back in balance. The good news is that, as expected, the Fed announced it will do this by raising interest rates. The bad news is that it will wait until March to do so. It will also continue its inflation-inducing bond buying program until March, instead of ending it right away. There is no good reason for the delay.
“Interest rate hikes work by slowing the velocity of money, so even if the quantity of money doesn’t change, inflation goes down because each dollar is spent and re-spent fewer times.
“The Fed does have another powerful tool at its disposal besides interest rates—open market operations. By buying and selling government bonds, the Fed can add or subtract from the money supply very quickly. Since inflation is high, the Fed should sell from its portfolio, and remove from circulation the dollars it receives.
“The Fed instead signaled that it will continue to buy bonds until March, even though its portfolio has doubled in just the last ten months and now stands at $9 trillion. While there is a case to be made for gradualism, this is still a mistake.
“Re-syncing the money supply to output is a tricky business, especially when economic activity ebbs and flows with the pandemic. It is easy to overdo it or underdo it. But the Fed can get inflation back under control if Congress and President Biden can resist the temptation to interfere. Unfortunately, it’s an election year, and political interference with the Fed is a bipartisan tradition dating at least back to the Eisenhower and Johnson administrations, respectively.
“There are plenty of things for the political branches to do besides meddle with Fed policy. Getting rid of obstacles to economic growth will help to rebalance the money supply with goods services. Congress and President Biden should remove tariffs, which raise the prices of hundreds of billions of dollars of goods by as much as 25 percent. Federal and state officials should loosen port and trucking rules that artificially clog supply networks. State and local officials should end excessive occupational licensing and loosen overzealous permit, zoning, and land-use restrictions that block opportunities for millions of people. And since deficit spending adds to inflation by increasing the money supply, all levels of government should spend less.”
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The Senate will not vote on the Build Back Better (BBB) spending bill this year, though they might take it up again next year. It does not have 50 votes without Sen. Joe Manchin’s (D-WV) support, which appears not to be forthcoming. This is a good thing for two reasons. One is inflation. The other is that Gross Domestic Product (GDP) and unemployment numbers are well on their way to pre-pandemic levels. A stimulus bill was never needed in the first place. There are policies Congress and state governments should pursue, but more deficit spending is not one of them.
Monetary policy has a much bigger effect on inflation than does fiscal policy, such as stimulus bills. Even so, Build Back Better would likely have added between a quarter and a half a percentage point of inflation on top of what we are seeing now. And it might have lasted for a decade or more, depending on how many of its temporary spending programs would have later been made permanent.
Considering that the Federal Reserve has traditionally targeted 2 percent inflation, BBB would have eaten up a big chunk of its usual inflation “budget.” Inflation is currently at 6.8 percent, the highest since 1982. The Federal Reserve today announced it would taper money supply growth. It will slow down a bond purchasing program and end it altogether in March, and will likely enact a series of up to three interest rate increases during 2022.
Since money supply growth is inflation’s biggest component, high inflation will be with us well into 2022, no matter what Congress does. But BBB-caused inflation on top of that would have made a bad problem even worse.
Manchin, and likely other Senate Democrats, may realize this is not a good look going into the midterm elections. President Jimmy Carter made important accomplishments in trucking and airline deregulation, and he appointed Paul Volcker as Federal Reserve chair, who ultimately slowed down the monetary printing press. But in the popular mind, Carter’s legacy is stagflation. If President Biden wants to avoid sharing Carter’s legacy, he should be quietly happy that his signature legislation is now on ice. He should see to it that it stays that way.
Biden should also avoid interfering with the Fed as it works to taper down today’s inflation. Since inflation can spark a temporary boom, politicians have always been tempted to put pressure on the Fed to goose the numbers a little leading into an election. (Lyndon Johnson and Richard Nixon were particularly egregious in this regard, as Peter J. Boettke, Alexander William Salter, and Daniel J. Smith argue in their book Money and the Rule of Law.) But the tradeoff of an inflationary boom now is a bust later.
There is no guarantee that Congress and President Biden will learn the right lesson. When inflation’s temporary stimulus effect wears off, policy makers are tempted to reach for the bottle again, rather than risk a hangover recession and hurt their chances for another term in office. This short-term thinking is what led to the 1970s stagflation. Had the process continued longer than it did, the result could have been Argentina-esque. It is crucial that today, Congress and President Biden respect the Fed’s nominal independence.
Fortunately, inflation is unpopular with the public. And economic fundamentals are in reasonably good shape, which means there is no need for inflationary stimulus. People hunkered down when COVID-19 hit, and are opening up when they feel safe—and when regulations allow them to. We aren’t through it yet, and it’s too early to tell how much effect the omicron variant will have. But the COVID recession had no stock market crash, no financial crisis, no housing bubble, no savings and loan scandal, or any other underlying economic illness. Traditional Keynesian stimulus does not apply to today’s economy. Build Back Better might be the biggest example of a #NeverNeeded policy yet.
The best thing that can be said about Build Back Better is that it was fighting the last battle, not the current one. Less charitably, Build Back Better was essentially a Democratic version of the PATRIOT Act, in which policy makers used a crisis as an excuse to put a bunch of longstanding wish-list items into a bill, and then market it as a must-pass crisis response. Not only would BBB have increased inflation, it would have used up more than $1 trillion dollars of resources that almost certainly have better uses than paying political favors—most of them COVID-unrelated.
GDP is already back to where it would have been had COVID never happened. Today’s ultra-low 4.2 percent unemployment rate looks better than it is, because many people are staying out of workforce, either for safety reasons or because they are content living off of savings for a little while longer. But even accounting for that, employment is in decent shape, and labor force participation is trending back to pre-COVID levels. Job openings are there for the taking—though rapid inflation is making it difficult for employers and employees to figure out fair wage rates.
Congress will instead turn its attention to other issues, such as voting rights. But it turns out there are policies Congress can pursue to fight inflation from the supply side. Money is growing faster than goods and services, causing higher prices. Removing regulatory obstacles to making goods and services will help to bring money and goods back into balance.
President Trump doubled tariffs, and President Biden is pursuing nearly identical trade policies. Scrapping those barriers alone would help unclog supply networks while lowering prices on hundreds of billions of dollars’ worth of goods, from big items like cars and houses to children’s toys and clothing.
There is no good reason for truckers to have a minimum age of 21 during a shortage when there are 18-year-olds perfectly able to do the job well.
U.S. ports operate at roughly half the efficiency of more modern ports like Rotterdam, which is open 24/7 and is heavily automated. While there isn’t much Congress can do about this, the biggest obstacle here are labor union contracts. These need to be modernized to avoid another supply network crisis and keep the U.S. shipping industry up to global standards. However, Congress can repeal the 1920 Jones Act, which attempts to protect the U.S. shipping industry but instead has reduced it to an uncompetitive rump of its former self.
Similar Buy American-style regulations requiring U.S.-flagged ships to dredge U.S. ports are why many ports are badly behind on dredging projects, and are unable to host many modern container ships.
Over a quarter of U.S. jobs now require some sort of occupational license from the government. Sixty years ago, it was 5 percent. Federal, state, and local governments need to get rid of unnecessary licenses that prevent willing people from creating more goods and services. Besides being the right thing to do, it would help to fight inflation.
None of these policies has the attention-grabbing cachet of a trillion-dollar piece of legislation. But unlike the BBB, they would stimulate new economic growth and help get inflation back under control.
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Posted in Economics, Monetary Theory, Spending, Stimulus
Today at 5:30 ET, I will appear on the Lars Larson Show to talk about inflation.
I’ll post a link to audio afterwards if it’s available.
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Posted in Economics, Media Appearances, Monetary Theory
October’s inflation reading was the highest since the recession of 1991. November’s is the highest since the 1982 recession, at an annualized 6.8 percent. The reason inflation is usually highest during recessions is because governments attempt to restart growth through a combination of monetary and fiscal policy. It is troubling that today’s inflation is happening while the economy is growing and unemployment is low.
In fact, the misery index is now in double digits, which rarely happens outside of recessions. The misery index is the inflation rate plus the unemployment rate—economist Arthur Okun came up with it as an easy-to-use statistic for President Lyndon Johnson’s benefit, and it remained a key statistic throughout the stagflationary 1970s. It may be time to dust it off again.
While unemployment is a very low 4.2 percent, when combined with 6.8 percent inflation, the misery index currently stands at 11. For context, its all-time high was 21.9 in June 1980. It was below 5 for a good chunk of the 1950s, and was at 5.3 in April 2015. See a historical chart from the St. Louis Federal Reserve’s FRED database here.
Inflation happens when the money supply grows faster than the supply of goods and services, as I explained earlier. In today’s case, the COVID-19 pandemic shut down large swathes of the economy for an extended period. Even if the money supply had remained stable, the supply of goods and services temporarily went down. The effects are still being felt in today’s supply chain problems.
But economic fundamentals remained healthy. There was no financial crisis or popped housing bubble. People hunkered down for a while, and are in the process of coming back. This is why COVID-era growth has bounced back in close tandem with increased vaccination rates and decreased caseloads. When people feel safe to open back up, they do—and nothing is stopping them except for bad public policy.
Both Congress and President Biden responded to a different type of recession with the same tools. The result is high inflation during a period of growth. The solution is to spend less and get money supply growth back in sync with growth in goods and services. Instead, Congress continues to spend at a record rate, with more likely on the way. The Fed has indicated that it will taper back monetary growth, but not until next year.
Policy makers are unlikely to do the right thing on the money side. But they can help the goods and services side by removing trade barriers, getting rid of unneeded occupational licenses, speeding up years-long permit processes, repealing the shipping cost-raising Jones Act, liberalizing trucking regulations, and other deregulatory measures. These would spark growth while helping to tame inflation—and without adding to the deficit.
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This statement originally appeared on cei.org.
President Biden has re-nominated Jerome Powell to head the Federal Reserve, and CEI Senior Fellow Ryan Young expressed hope that Powell will make the politically tough decisions needed to get inflation back under control.
Statement by CEI Senior Fellow Ryan Young:
“Getting inflation back under control is a top priority. Jerome Powell’s renomination sends a needed message of stability. President Biden did not nominate a yes-man who will do as he’s told, though some of Biden’s other nominees may yet fill that role. Under the circumstances, this news is about as good as could be expected.
“Inflation is what happens when too much currency is chasing too few goods and services. Record government spending deficits are adding to inflation and will be made worse by the infrastructure and reconciliation bills. If Chairman Powell raises interest rates to tighten the money supply, which he should, those debts will become more expensive for the government to repay. But this will raise the ire of the White House and Capitol Hill. Making matters worse, politicians also generally favor looser monetary policy heading into an election. The Fed’s independence is always under attack, and the stakes are especially high during the COVID economic crisis.
“Fighting inflation also means removing trade, labor, and energy regulations that are clogging supply networks and preventing goods and services from being created in the first place. Chairman Powell has nothing to do with those policies, but he is still tasked with fighting their inflationary effects. He is not being set up for success, but President Biden could have done far worse.”
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Earlier this week I was on the Lars Larson show to talk about inflation. The audio is here.
I also appeared on the Dave Elswick show on the same topic. The audio is here, starting around five minutes in.
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Posted in Economics, Media Appearances, Monetary Theory
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Inflation remains high, with September’s numbers coming in at a 5.4 percent annualized rate, the highest number in a decade. The Federal Reserve’s target is 2 percent. While this is not a return to Carter-era stagflation, it is cause for concern. The economic recovery is difficult enough as it is, and high inflation only makes it harder. Inflation not only means higher prices for consumers, it means higher input prices for businesses, and is contributing to supply chain difficulties. That means consumers are facing price increases due to supply-and-demand factors, in addition to inflation.
Inflation is what happens when the amount of money circulating in the economy grows faster than the amount of goods and services. Keeping inflation in check means keeping those numbers in sync. Today’s record deficit spending is pushing them apart, by increasing monetary flows without necessarily increasing the amount of wealth being created. The upcoming trillion-dollar infrastructure bill, $3.5 trillion reconciliation bill, and $6 trillion annual budget will only make matters worse.
The Fed can help by raising interest rates, which it has indicated it might do early next year. Although politically independent, the Fed will likely face political pressure to keep rates low. Low rates can have a temporary, short-term stimulus effect, though at the price of a bust later. And there are the mid-term elections next year, likely before the bill would come due. Higher rates also make the government’s debt payments more expensive, making the big spending bills more difficult to pass.
If Washington wants to get inflation back to target levels, it needs to spend less while removing obstacles to wealth creation. In addition to fiscal restraint and respecting the Fed’s independence, that means easing back on permits, licenses, trade barriers, and financial regulations that are burdening supply chains and making it difficult for businesses to hire workers and create more goods and services.
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Posted in Economics, Monetary Theory, Spending
Inertia Wins! 