Seventeen Nobel laureates in economics recently signed a letter in support of President Joe Biden’s $3.5 trillion Build Back Better legislative package. This proposed legislation would provide funding to expand education, health care, child care, and climate efforts. (See https://fortune.com/2021/09/21/nobel-prize-winning-economists-back-joe-biden-build-back-better-plan/)The media and administration fail to mention that these Nobel prize-winning economists also expressed support for a proposed $2.9 trillion increase in taxes to pay for the program. That would be the largest tax increase in history.
The seventeen also wrote: “Because this agenda invests in long-term economic capacity and will enhance the ability of more Americans to participate productively in the economy, it will ease longer-term inflationary pressures.” This is, of course, not about a forercast of future economic developments, but only a concllusion expected to follow on the basis of certain assumptions.
“Eased Longer-term Inflationary Pressures” Versus Actual Inflation over the next five years.
the Equation of Exchange
For the reader who had no macro principles course in college, or who forgot what was taught there, consider the simple economics of inflation. The basic principles involved have been well understood by great minds from the days of Adam Smith. J.S. Mill didn’t use the so-called Equation of Exchange, but would have been comfortable with its message. The form of current usage of the equation we owe to Irving Fisher and it dates back to 1911. It reads MV=PT. In that equation, M represents the total quantity of money in circulation in the economy, V is velocity or the rate at which money circulates from “hand to hand,” P is the price or the price level, and T represents the number of transactions in a given period. To keep it simple, the bottom line is that if the money supply expands greatly through government expenditures without an equal increase in taxes (i.e., if the government expands the money supply beyond the amount required to pay for the current national output of goods and services) there will be a proportionate increase in prices.
championed monetary theory
Professor Friedman’s solution to long term financial stability was to increase gradually the money supply over time just enough to pay for a modest annual increase in the GDP (Gross Domestic Product) or the annual growth in available commodities and services. In its time the Equation of Exchange was a landmark theory, and many still consider it to be an important mathematical description of a nation’s monetary life.
John Stuart Mill wrote about it.
As far back as John Stuart Mill, political economists (as economists were then called) grasped the fundamentals of the equation of exchange. A single paragraph from Mill’s Principles of Political Economy demonstrates the principles involved in an expansion of the money supply through government activity. He wrote:
“But it is a significant fact that even after all the evils inflicted on our country by over-issues, in spite of the temptation to misuse paper money if it is in any way permitted, in spite of all the warnings of history, there seems to be a dangerous acquiescence in the presence of government paper money in our currency. It is an open pitfall, tempting to evils whenever sudden emergencies arise. It ought not to be allowed to remain any longer.” (Principles Of Political Economy By John Stuart Mill [New York: D. Appleton And Company, 1885, p. 420]
The most famous example of hyperinflation seems to be the German case. After World War I ended, the allied powers declared Germany to have been the cause of the war (an arbitrary insult, since Hitler hadn’t yet appeared and the Germans were not markedly more sinister than the other bellicose powers involved) and the victors insisted that the Germans pay large reparations. The Germans, of course, did not say “OK, OK, we were wrong, so come ahead and loot our shops.” Instead, they decided simply to print the money they were expected to pay. They turned on the printing presses and the prices obediently shot up, Biden style. Before long they were into a hyper-inflation that made the price of a loaf of bread roughly equivalent to a wheelbarrow full of cash.
The monetarist theory was popularized by Milton Friedman, who ultimately won the Nobel Prize for his work. Friedman shows that the money supply is the primary factor in determining inflation/deflation in an economy. Monetary policy, controlling the growth of the supply of money in circulation in the economy, is a more effective means for stimulating the economy or, on the other hand, slowing down the rate of inflation than fiscal policy is. Fiscal policy attempts economic management through government expenditures and tax policies. Monetarism is the main policy alternative to macroeconomic theory or Keynesian economic theory; monetarists favor limited government intervention in the economy, while Keynesians argue for active intervention through government expenditures and taxation.
The seventeen signees of the “Approbation for Joe” document have long been employed as professors at the nation’s top universities. They include Treasury Secretary Janet Yellen’s husband George Akerlof, Sir Angus Deaton, Peter Diamond, Robert Engle, Daniel Kahneman, Oliver Hart, Eric S. Maskin, Daniel McFadden, Paul Milgrom, Roger Myerson, Edmund S. Phelps, Paul Romer, William Sharpe, Robert Shiller, Christopher Sims, Robert Solow, and Joseph Stiglitz.
Placing them in random order, consider some of the main thrusts of their research.
George Akerlof, asymmetric information and the market for lemons; Peter Diamond, unemployment, social security, and taxation; Daniel McFadden, discreet choice, and random utility theory; Joseph Stiglitz, globalization and inequality; Paul Romer, economic growth theory, innovation and “Mathiness” (you’ll have to ask Romer what that is); Paul Milgrom, ethics, agency theory, and economics, organization and management; William Sharpe, finance and capital asset pricing; Robert Solow, sustainability, economic growth; Edmund S. Phelps, Statistical theory of racism and sexism, monetary policy and rational expectations; Robert Shiller, finance, efficient markets; Daniel Kahneman, happiness (he should know about this, he’s an economist), thinking, and behavioral economics; Sir Angus Deaton, health and mortality, development, and globalization; Christopher Sims, Econometrics of Macroeconomic and Monetary Policy; Oliver Hart, Contract Theory; Robert Engle, econometrics of climate change and financial stability; Eric S. Maskin, auctions, uncertainty and soft budget constraints; Roger Myerson game theory, and corruption.
As one may assume for all Nobel Laureates, these men are brilliant, wonderful scholars blessed with gifts of creativity and discernment.
They are also people. They are people who have mostly chosen to be engaged only minimally in political matters or politics (perhaps the reason why Paul Krugman was not included on this list?). They have doubtless borne as a part of their mindset the general sentiments of democrats for many years. Most academics are interested above all in their scholarly pursuits. To them, politics are a matter of secondary importance and they are generally disinclined to spend much time thinking about them. They do want to keep their hand in the topic enough to be recognized as authorities; after all, they are experts in their field, which is closely related to politics.
What is surprising is their rush to shore up the Biden administration’s policies, which I believe most economists would not wish to stake their reputations on.
Few of these 17 are deeply into monetary theory. If Milton Friedman were on the seventeeners’ list, it would be much more impressive. Many of them are Nobel Laureates not because of their discovery of new forces at work in economics, but because of their powerful skills in mathematics and econometrics. Many are really applied mathematicians or applied statisticians, if not both.
With regard to their general observations of the economy, they are much like other economists. Many such are interested in maintaining their credentials as good academics, so unless they are adherents of Friedman, the Austrian school, part of the growing Public Economics crowd, or are fans of the Chicago School, or of conservatism in general, they will be prepared on occasion to speak up in behalf of the democrats which have been their political home since early in life, long before they were famous Nobel laureates.
The Bidenomics of the Inflation Issue
Joe Biden says only the rich will be affected by the tax increases inherent to the proposed “Build Back Broke” legislation. The seventeen appear to take him at his word on this issue. But when one speaks of trillions of dollars of increased government expenditures, it is nonsense to say that the billionaires will pay for them. As I and others have shown elsewhere, there are simply not sufficient numbers of billionaires to cover these incomprehensibly large expenditures, even if you confiscated their entire incomes rather than simply taxing a large share of it.
Those who have reported on the expenditures involved here indicate that the legislation proposes large sums for new programs, but those sums are large enough merely to get programs initiated. Once they are initiated, additional huge sums will be required to keep them going. When Biden says all the costs will be covered, he is being disingenuous beyond his awareness.
It is a completely different issue to make the Biden claim that subsidies will reduce costs for individual families. He explains why these “social expenses” will no longer burden American family in a facetious manner; he should have taken some high school economics or engaged in a little common sense. When the government pays out subsidies so the recipients get a freebie, they are spared the expense because the government pays the bill. It doesn’t mean there is no bill for the subsidies. The actual bill is paid for by taxpayers, of course, along with the waste and fraud attached to such programs.
The inflationary problem arises when taxpayers do not pay; rather, deficit expenditures are, at least for the time being, not paid for by anyone at all. Our children and grandchildren will pay the bill (or suffer) later.
In inflationary conditions there is more money in the system than commodities and services for which the money is spent. The extra cash in the system is then spent by those lucky enough to hold it, as they try to outbid other consumers to win the too-scarce commodities for sale. Naturally, the process is all facilitated by sellers who will mark up their prices, knowing that those with cash will willingly relinquish it rather than go without the inflated item. The sellers can’t always be blamed for increasing their prices, since the prices they face in production or in purchasing commodities in wholesale markets are also rising. Everyone is affected by inflation.
So no, Joe, when the government is paying the bills, it doesn’t mean there are no costs for government and that inflation won’t happen.
The seventeen make intentionally vague claims that Joe’s development plan will increase the national economic capacity. How clearly we remember the last massive spending bill of the Obama administration, which doubtless serves as the model for Joe’s BBB plan. The massive expenditures under Obama/Biden were not used productively at all. Obama explained that they didn’t find any “shovel-ready” infrastructure projects to spend a trillion dollars on in their effort to “stimulate” the economy. The money dissolved in pork expenditures to bail out political allies from their fiscal mismanagement; it also provided government agencies with such things as new fleets of cars, new computers, etc. My book, Socialism: Origins, Expansion, Decline and the Attempted Revival in the United States provides a thorough review and analysis of the Obama fiscal legislation.
The seventeen write: ““Because this agenda invests in long-term economic capacity and will enhance the ability of more Americans to participate productively in the economy, it will ease longer-term inflationary pressures.”
The question is: how much increased capacity will we see from the social expenditures and the climate change spending of the socialist administration?
Moreover, there are important structural questions involved here. When the private sector develops the economy, subsidies are sometimes used to supplement the private investments derived from the wealthy. But the markets guide the investments and there is a demand for the products arising from the development. Where the government is in charge of the investments, as in the central planning of the Soviet Union, the consumer is far removed from seeing tangible changes in his consumption possibilities.
When the government confiscates the management of investments and development, as in the proposed Green New Deal, the results cannot be expected to have the same efficiency as is sought by private firms that must be profitable or perish. Of course, we must concede that the Green New Deal (totally eliminating air travel with its environmental impacts) would accomplish very reasonable train fares for the consumer’s travel to, say, Hawaii.
If, as the seventeen suggest, government’s investments do achieve expanded long-term economic capacity, they contend that it will enhance the ability of more Americans to participate productively in the economy. The question is, where will they find the Americans willing to participate productively in the economy? Currently, there is a major shortage of workers in the US economy. And socialism is just beginning! From the small number of trillions already spent, we have many who would rather enjoy leisure time at home rather than return to work. What will happen to incentives when we keep right on spending (without costs or inflation, of course) the five or six trillion dollars on social programs that the congressional fiscal gurus expect will be the final outcome of Biden’s proposed legislation? Socialists have traditionally provided people with strong incentives to slack rather than sweat. Biden and his seventeeners appear unlikely to avoid this pitfall.