“People hate inflation!” — Christina Romer (UC Berkeley)
“Inflation is never neutral!” — Ludwig von Mises
Last week, I attended and participated in the annual American Economic Association (AEA) meetings in San Francisco.
For years, free-market economists have not felt welcome at the AEA meetings, despite an AEA poster welcoming “all economists” and a campaign to promote “diversity, equity and inclusion.” Free-marketeers end up going to the more accommodating Southern Economic Association meetings.
Indeed, I reported in the Wall Street Journal last September that the program committee approved tributes to Keynesian Nobel laureates Robert Solow and Ben Bernanke at this year’s AEA meetings, while rejecting my proposed session celebrating the 50th anniversary of Friedrich Hayek’s Nobel Prize. (See “American Economic Association Snubs Hayek.”)
The session on Solow was purely hagiographic, extoling the virtues of the legendary MIT professor, famous for his insightful discovery that a nation’s rising standards of living are largely due to countries inventing and adopting new technologies.
I suggested to the panel that Solow’s supply-side growth model contradicts the Keynesian notion that consumer spending and aggregate demand drive the economy. To my knowledge, Solow never commented on this contradiction.
Attacks on Milton Friedman
I also noted that Solow did no one any favors with his personal attack on the late Milton Friedman. After Friedman’s death, Solow claimed, “I’m glad there is no Milton Friedman anywhere today. Milton Friedmans are bad for economics and bad for society. Fruitless debates with talented (near-)extremists waste a lot of everyone’s time that could have been spent more constructively.” Seriously?
Bernanke’s Courage to Act…
The Ben Bernanke panel was a love fest, ending with a standing ovation for Bernanke, who appeared in person.
Ben Bernanke addresses AEA meeting: Moderator Christina Romer (UC Berkeley), Mark Gertler (NYU), Emi Nakamura (UC Berkeley); not shown is Peter Rousseau (Vanderbilt and secretary of AEA).
The panelists spoke of his deep research on the causes of the Great Depression, and how he learned from Milton Friedman and Anna Schwartz to have “The Courage to Act” (the title of Bernanke’s memoirs) in bailing out the banking system in 2008-09 after the worst financial collapse since the 1930s. He said he did not share Solow’s negative comments about Friedman.
But Bernanke’s new tool (directly purchasing Treasury and mortgage securities, known as quantitative easing, or QE) left the Fed with a $4 trillion debt on its balance sheet and suggests a legacy of worsening inflation. Indeed, the central bank has had a hard time reducing the debt. Bernanke said that he saw “no inherent danger” in quantitative easing and supported its use to counter the COVID-19 recession in 2020.
…And His Failure to Act
No one mentioned his failure to act in preventing the disastrous subprime and no-doc mortgage loans that that were all the rage prior to the 2008 real estate collapse. As Fed chairman, Bernanke was the chief banking officer of the United States.
In January 2007, soon after he replaced Alan Greenspan, he gave a luncheon talk at the AEA meetings in Chicago on the subject “Bank Regulation,” so he was well aware of his duties to protect the integrity of the banking system. I attended his talk and noticed that he used the words “crisis” and “panic” some 30 times. I brought this up to him this weekend, but he confessed that he did not anticipate the 2008 financial collapse and chose not to rein in the toxic mortgage business.
Surprise, Surprise! Political Diversity Comes to the AEA
But all was not lost. In fact, two new sessions were added to this year’s meeting that suggest a turnaround in political diversity at the AEA. One was on Trump’s economic policies and the other on inflation.
The two panels were organized by Jason Furman, the Harvard economist who worked for Obama. To his credit, Furman deliberately added free-market economists to counter the Keynesians on the panels (Ben Bernanke, Christina Romer, Oren Cass): John Cochrane from University of Chicago (now at Hoover) and Rich Burkhauser, who explained to the audience why he voted for Trump (which caused the audience to gasp).
Mark Skousen with AEA panelists Oren Cass (American Compass), Kim Clausing (UCLA), moderator Jason Furman (Harvard) and Rich Burkhausen (Cornell).
Most of the panelists are convinced that Trump’s second administration will achieve only marginal changes in the size and scope of government, and might even cause harm through his protectionist policies and bellicose attacks on foreign leaders. But Burkhauser, a member of the Council of Economic Advisors under Trump from 2017-2019, expressed confidence that Trump’s appointment of Kevin Hassett to the chair of the National Economic Council is a smart move and has the potential to reduce both inflation and the size of government, and maybe even discourage Trump’s protectionism.
‘People Really Hate Inflation’
The real clash came in the second session on inflation. Christina Romer, the Berkeley economist who served under Obama, set the tone of the event by saying, “People really hate inflation.” That’s because inflation is, as Hayek said, “a tiger by the tail.” It doesn’t just raise prices; it causes supply-chain shortages, labor strikes, declining real wages and a boom-bust cycle. Inflation is probably the number one reason Trump won the election.
AEA panel on inflation: Moderator Jason Furman, Ben Bernanke (Princeton), Christina Romer (Berkeley) and John Cochrane (Hoover/Stanford).
Bernanke stuck to his neo-Keynesian view that the surge in prices was caused by a one-time “supply shock,” and that the Fed should continue its policy of 2% price inflation indefinitely to give the central bank flexibility in cutting rates when necessary.
Why Inflation Is Here to Stay
I asked Bernanke whether he agreed with the frequent criticism that the Consumer Price Index (CPI) — the official measure of inflation — grossly underestimates the rising cost of living in the United States. He quickly dismissed the idea, saying the Bureau of Labor Statistics does a good job of measuring price changes in over 1,000 goods and services.
John Cochrane took strong exception to Bernanke’s “supply shock” thesis, arguing that the only reason the supply shock in 2020-21 led to a sharp rise in price inflation was because Trump and Biden primed the pump with huge trillion-dollar deficits, and the Fed engaged in gigantic increase in the money supply. Both policies were overdone, he said.
Cochrane also agreed with the late Paul Volcker that Bernanke’s 2% inflation target is a dumb idea. Cochrane even went so far as to suggest that a mild deflation might be in order. His testimony was a breath of fresh air. But he was not optimistic that the government will get its house in order any time soon. Indeed, the Fed is more determined to fight deflation than to fight inflation.
Thus, since World War II, we have remained in a Keynesian era of chronic deficits, fiat money, never-ending wars and injecting liquidity whenever there’s a financial crisis, resulting in permanent inflation. (See chart below.)
The Final Verdict: Free Market Views Make a Comeback
Overall, I was happy to see some willingness to open the AEA meetings to free-market views. Hopefully, there will be more alternative views next year. Harvard economist Larry Katz, the incoming president of the AEA, promises more political diversity at next year’s AEA meeting in Philadelphia.
Who would have thought that Harvard, the old Keynesian sanctuary, would be the source of a marginal revolution in political diversity at the AEA?
Three Upcoming AAII Investor Events in Southern California
Economists at the AEA meeting don’t expect much change from the Trump administration, but I’m optimistic that the incoming president can achieve a second round of Reaganomics (reducing taxes, price inflation, government spending and regulations).
Over the next month, I’ll be speaking on “The Great Rotation: What Investments Will Do Well in the Trump Era, and What to Avoid” at three AAII (American Association of Individual Investors) meetings. They are open to my subscribers:
LA Chapter on Saturday, Jan. 18: Meeting is from 9-11 a.m. at the Hotel Angeleno in Los Angeles. First-time guests can attend at no charge. Details can be found here.
Orange County on Saturday, Jan. 25: Meeting from 10:30 a.m.-12 p.m. at the Fountain Valley Senior Center. Details here.
San Diego on Saturday, Feb. 8: Meeting from 9-11 a.m. at the Good Samaritan Episcopal Church, 4321 Eastgate Mall, in San Diego. Chapter website is here.
See you there!
Meanwhile, expect a big announcement shortly about our keynote speaker at this year’s FreedomFest, June 11-14 at the Palm Springs Convention Center.
Good investing, AEIOU,
Mark Skousen
You Blew it!
Fire Inferno in LA: Are Incompetent Government Officials Partly to Blame?
By Mark Skousen
My wife and I teach at Chapman University in Orange County, California, so we are well aware of the dangers of big fires that frequently occur in the Golden State, especially during the fall when the Santa Ana winds come through.
But this time, they came rushing through Southern California in the winter, when a small brush fire wreaked havoc and destroyed thousands of homes and parks in the beautiful Pacific Palisades area of Los Angeles as well as other parts of Southern California.
Everyone is now asking a lot of questions of LA government officials, especially Mayor Karen Bass, who was in Ghana when the fires occurred… and actually cut the LA fire budget by $17 million. Watch this story by FoxLA, where the mayor refused to answer questions.
Was this conflagration preventable? Critics complain that California is being destroyed by radical environmentalists who won’t allow the proper clearing of trees and debris in parks and the building of reservoirs. State and city officials are often selected on the basis of “diversity, equity and inclusion” rather than their expertise.
There were numerous complaints of non-working fire hydrants in LA during the firestorm.
California is known for excessive regulations and high taxes, and its “anti-progressive” attacks on business to the point where millions are leaving the state.
Let’s hope Californians learn the facts and make the right decisions to bring back the Golden State from the brink of disaster.
