Conventional Economics' Inflation Explanation is Bunk - a continuation, based on Jon Stewart's interview with a Reagan economist

(c) by Mark Dempsey

This continues a conversation that began here, and continued here.

 

This is also a reminder that, as currently configured, conventional economics is a form of advanced superstition--like 19th-century medicine when doctors believed bleeding patients would heal them. There's a long tradition of Americans following quacks, too. Even now, with 5% of the world's population, the U.S. has 22% of the COVID deaths.

“The point of economics as a discipline is to create a language and methodology for governing that hides political assumptions from the public” - Matt Stoller (Stoller is a former congressional staffer)

“Leading active members of today’s economics profession… have formed themselves into a kind of Politburo for correct economic thinking. As a general rule—as one might generally expect from a gentleman’s club—this has placed them on the wrong side of every important policy issue, and not just recently but for decades. They predict disaster where none occurs. They deny the possibility of events that then happen. … They oppose the most basic, decent and sensible reforms, while offering placebos instead. They are always surprised when something untoward (like a recession) actually occurs. And when finally they sense that some position cannot be sustained, they do not reexamine their ideas. They do not consider the possibility of a flaw in logic or theory. Rather, they simply change the subject. No one loses face, in this club, for having been wrong. No one is disinvited from presenting papers at later annual meetings. And still less is anyone from the outside invited in.” [emphasis added] - from James K. Galbraith’s Who are these economists anyway? 

In Jon Stewart's interview with a Reagan economic adviser (Steve Hanke),  Hanke asks "What causes inflation?" Then answers himself saying it's a product of the money supply only. This is straight out of Milton Friedman's Monetarist economics.

Meanwhile, not all economists agree. See Michael Roberts, for one example. Here's the graph Roberts publishes of the relationship between money supply and inflation. Hanke cannot explain the obvious lack of connection between the two lines, even if you factor in Hanke's suggestion there's a lag between money supply expansion and the appearance of inflation.

Hanke says he studied inflation in 157 countries (between 1990 and 2021) that had an increase in money supply. His assertion: inflation increased 1-to-1 relationship with that money supply. Where is this correlation in the U.S as outlined above in the graph? Hint: it doesn't exist. 

 

Unfortunately, this bizarre mendacity is absolutely nothing new in the pseudo-science of economics.

Stewart suggested supply shortages might have an influence on the appearance of inflation. Hanke answered: "Inflation is not global [please ignore the fact that we are connected to the global economy because we must import critical commodities] it's always locally created by the money supply." [Please ignore the obvious lack of correlation in the graph above!]

At the time of the interview with Stewart, Hanke said Japan had 3% inflation despite a national debt of 240% of GDP--which, according to Hanke, should correlate with a large money supply. Where is the inflation inevitable from such a large money supply? No answer. Japan's pays ~0% interest on its national debt and has low inflation even now (still 3% in 2022, says Google).

Conventional--especially Reagan's "supply side" and "monetarist"--economics is baloney. Remove the baloney, and nothing remains. For the long form of this, see Steve Keen's book Debunking Economics: The Naked Emperor Dethroned. Not an easy read, but, in contrast to charlatans like Hanke, Keen predicted the Great Recession of 2007-8 (and won the Revere prize for doing so). Conventional economists, Hanke included, did not predict this largest-since-the-Great-Depression economic event. Hanke's a con man, not a scientist, and his kind have traditionally been impervious to the facts cited here that contradict him.

Hanke accurately says banks create most of the money supply (90%). He adds deficit increases put that money supply increase on steroids. What he omits saying is that the central bank ("The Fed") therefore cannot ever control the money supply since it only makes 10% of the money. Monetarism is a transparent scam, but it dominates the headlines and much of what advises public policy.

Hanke decries Obama-era regulation (the weak tea of Dodd-Frank, which did not revive Glass-Steagall) as harmful. His point: After Dodd-Frank, banks began withdrawing their contribution to the money supply, and that regulation--not crooked mortgages, derivatives, and Ponzi capitalism--is what caused the Great Recession--something he did not predict, despite his "time lag" theory between money supply decrease and recession. 

 

By Reaganite Hanke's lights, it's always government (regulation, supervision) that's the problem. Deregulation is always good! (Please ignore the toxic weapons of mass financial destruction that appeared after Wall Street was deregulated.)

Hanke never mentions what the Fed did (unrelated to QE) in 2007-8: It extended $16-$29 trillion in credit to Wall St. (the figures are from the Fed's own audit). Where was the inflation during, or immediately after that boost to the money supply? It didn't occur. Is it really a surprise he omits mentioning this?

Stewart suggested that record corporate profits might be behind inflation. Hanke denies it. Except this graph shows Hanke's lying again:

Incidentally, the mainstream press is in the thrall of the pseudo-scientist economists too. The 10/29/22 Bee business section headline confirms this, virtually screaming: "U.S. Labor Costs Continue to Rise, fueling inflation." The story itself discloses that labor costs rose a modest 1.2% in the last quarter--not enough to keep up with core inflation. Three pages later in the same paper the headline announces Exxon and Chevron made $31 billion in profit--the highest in Exxon's 157-year history. So...are labor costs really driving inflation? Could corporate profits play a role?

The early Reagan administration tried the "quantity theory of money" (Milton Friedman's theory that Hanke parrots). The administration abandoned it because it didn't work. The graph of money supply growth vs. inflation above shows that, despite Hanke's criticism, Fed Chairman Powell is correct in saying monetary aggregates don't correlate with inflation.

Trying to be sympathetic with labor, Hanke even says "The little guy gets screwed in inflation" - but even that's a lie if the little guy is a debtor. Inflation favors debtors since they repay loans with cheaper currency.

Hanke also denies that Reagan-era supply-side economics created lots of inequality. As for whether that's true, here's a graph that starts in 1980:

 

Reagan cut income taxes on the wealthy roughly in half, and between him and his successor, raised payroll taxes eightfold. Could those policy changes influence income inequality? Investigative reporter David Cay Johnstone says real median income for the bottom 90% of incomes has increased $59 since 1972. If that were an inch on a bar graph, the bar for the top 10% would be 141 feet high. The bar for the top 0.1% would be five miles high.

"Monopoly pricing/price gouging isn't a problem," says Hanke. Take a look at the chart of corporate profits vs. unit labor costs above. Hanke is obviously lying. But his lie gives intellectual cover to the corporate profit gougers.

Hanke admits some supply problems exist. For example, he wants shale producers to supplement the U.S.' oil supply and blames the Biden administration for restricting shale oil. Global warming is apparently not an issue to Hanke. I'll add that conventional economists like Hanke--William Nordhaus, in particular--have dramatically underestimated the impact of climate change, excusing the half-hearted, half baked public policies we now employ to address it. Hanke's just another one in that particular clown car.
 

The real reason the Fed is so adamant in opposing the quantity theory of money has nothing to do with Hanke's contention that the Fed wants to shirk responsibility. It's that the monetarist's quantity theory has been tried and hasn't worked. You might read Paul Krugman's Peddling Prosperity to get a fuller look at Friedman's failures, too. The Reagan administration abandoned trying to manage the money supply in the earily '80s because it became obvious that it didn't work as Friedman predicted--not a big surprise since private banks, not the Fed, produce the vast majority of the money supply.

Friedman was not a nice guy, either. He notoriously did not suffer fools gladly. Israeli psychologist Amos Tversky heard such an American economist [Friedman?] talk about how so-and-so was stupid and so-and-so was a fool, then responded: “All your economic models are premised on people being smart and rational, and yet all the people you know are idiots.” 

 

Friedman's acolytes advised the Pinochet government the U.S. installed in a coup in Chile to replace the elected socialist (Allende) with a criminal (Pinochet). Whoever the "Chicago Boys" (Friedman's students) could not convince, they had assassinated. Friedman was an evil little man who made the notion that profit excuses any unsavory practices, including murdering one's opponents, intellectually respectable.

That obvious scam artists like Hanke are still respected, and treated politely by the likes of Jon Stewart, is just another indication of the power of propaganda in U.S. public policy formulation. Why we can't have nice things! That might be inflationary!

I do wonder why Jon Stewart was so respectful to Hanke. When he interviewed con man stock picker Jim Cramer Stewart was not nearly so polite.

 

Why do Americans fall for such transparent scams? Aside from those who obviously benefit--that top 0.1% of incomes--philosopher George Santayana suggests "Americans are a primitive people, disguised by the latest inventions." Amen, brother Santayana.

Update:

From CNN:

Shell will buy back $4 billion worth of shares and increase its dividend by 15% after posting another gigantic quarterly profit thanks to strong oil and gas prices. The UK company posted net income of $9.45 billion in the third quarter, more than double the $4.1 billion it recorded a year ago. The result was driven by a strong performance in its oil exploration and production business, Shell said. The company’s stock at one point rallied more than 4% in London on Thursday as investors cheered the news. The additional buybacks will increase total share purchases for the year to $18.5 billion, some 10% of the company’s share capital.

 

Update #2:  May God Save Us From Economists.

Over the last half-century, economics has infiltrated parts of the federal government where it has no business intruding. It can be a useful tool for policymaking, but it’s become the only tool. It’s time for economics to back the hell off.

 

Update #3:  I'm not the only one who believes the Inflation Narrative is Fabricated, as is the response.

Update #4: US oil producers reap $200bn windfall from Ukraine war price surge Financial Times. But no! We must be concerned about increasing labor costs!

Update #5: Wall St. investor Richard Vague's article (here) denies inflation is connected to money supply growth. Excerpt: 

"Monetarist theory, which came to dominate economic thinking in the 1980s and the decades that followed, holds that rapid money supply growth is the cause of inflation.  The theory, however, fails an actual test of the available evidence.  In our review of 47 countries, generally from 1960 forward, we found that more often than not high inflation does not follow rapid money supply growth, and in contrast to this, high inflation has occurred frequently when it has not been preceded by rapid money supply growth."