Don’t trust economists to manage the economy. Read the musings of Fed Governor Steven Miran if you’re skeptical. Except that we’re getting ahead of ourselves.
Before contemplating Miran and his odd musings about economic growth and inflation, it’s useful to reference a recent opinion piece by George Will at the Washington Post. In “363 miles that transformed America,” Will informed readers of what they can’t be informed of enough: falling prices aren’t an effect of Fed fiddling, rather they’re a sign of soaring economic growth reflecting production spread across a growing number of hands.
Thanks to the Erie Canal connecting so many working hands that had formerly toiled alone, the cost of seemingly everything plummeted as specialization skyrocketed. Will writes of how “By 1850, the price of a wall clock had plunged from $60 to $3.” Keep the previous miracle in mind with work in mind. It’s all about the getting, which is a reminder that trade among workers loves workers more than anyone else precisely because it elevates their productivity at the same time that it relentlessly pushes down the cost of getting in return for productivity.
These basics of trade and economic growth rate airing ahead of contemplating the thinking of Miran. In a recent interview with the New York Times in which he made his case for a half-point reduction in the Fed funds rate, Miran observed that “If you keep policy this tight for a long period of time, then you run the risk that monetary policy itself is inducing a recession. I don’t see a reason to run that risk if I’m not concerned about inflation on the upside.” Translated, Miran thinks the economy faces a great deal of weakness due to what he deems a “tight” Fed, which means growth born of an “easy” Fed wouldn’t be inflationary. The discredited Phillips Curve lives…
Contra Miran, economic growth does not cause the rising prices that the simplistic associate with inflation. As Will’s wall clock example vivifies, falling prices are the surest sign of rising growth. Looking back to the opening of the Erie Canal, as the U.S. became a great deal more interconnected by the canal, worker productivity soared as prices fell.
There’s quite simply no tradeoff, downside, or “overheating” effect from a booming economy. There’s just rising productivity (economic growth) alongside more getting at costs that continue to decline. More on growth in a bit.
Seeking to further bolster his low inflation, rate cut case, Miran cites a substantial decline in immigration thanks to President Trump’s crackdowns, including presumably the hideous deportation of central Americans that ICE agents have unsurprisingly found at places of work. Of the belief that a reduced number of “illegal immigrants” will shrink demand for housing and apartments, Miran sees this as another driver of falling inflation. If we’re willing to accept Miran’s definition of inflation whereby it’s a demand phenomenon as opposed to an effect of currency devaluation, by his impressive illogic the answer to future inflationary breakouts is to arrest existing members of the workforce, put them out of work, or both. To say that economists make astrologists appear serious is hardly an exaggeration.
Pivoting back to economic growth, Miran adds to his case that he expects “a sharp downturn to materialize in the economy in the future if policy remains this restrictive.” Except that if the Trump economy is as great Miran believes, the inflow of domestic and global credit will more than overwhelm the Fed’s alleged stinginess.
Which in too many ways misses the point. The main point is that Miran has a prominent role at a central bank that is said to be economically powerful. Miran is loud evidence that it’s not.
Originally posted to Real Clear Markets.
