Lazard chief executive Peter Orszag recently published an opinion piece in the Washington Post that exists as an essential economics lesson for left-leaning Keynesian economic thinkers, along with their erstwhile opposites on the supply-side right. Keynesian and supply-side have been in agreement in recent years that President Biden’s surely wasteful spending at the beginning of his administration created “inflation.” Orszag, citing a study he published with Robin Brooks (Brookings) and William Murdock (Lazard), has logically found that “the common story” about inflation’s cause, “covid-era stimulus,” is “more wrong than right.”
For background, when governments redistribute the wealth they’ve taxed or borrowed away, the spending that results from the redistribution only occurs insofar as those redistributed or borrowed from have commensurately less money to spend. Put in simpler terms, $20 that is taxed or voluntarily loaned from your pocket means you have $20 fewer dollars’ worth of “demand.”
The above has long been accepted wisdom on the right, and among supply siders in particular. All demand is a consequence of supply. Not anymore, apparently. Amid the rising prices that were a logical consequence (more on this in a bit) of a coronavirus-era shutdown of economic activity, Republicans (supply siders in particular) happened on their latent Keynes, and produced endless amounts of commentary about how President Biden’s $2.1 trillion American Rescue Plan (and other subsequently grotesque government outlays) had instigated the “excess demand” that was driving up prices and “inflation.” It seemingly never occurred to supply-siders that the laughable “inflation” narrative was not just wrongheaded (there’s no such thing as “excess demand”), but also an explicit rejection of supply-side economics itself.
Before returning to Orszag, it’s worth asking why Keynesian economic thinkers like Lawrence Summers and Jason Furman were in agreement with a myriad of supply siders that waste signed into law by Biden had caused “inflation.” This answer is simple: consumption-focused Keynesians have long believed that government spending expands the economy (an implicit plea for police to relax laws against theft during slow economic periods), that savings are an economic somnolent for shrinking consumption (actually they don’t – consumptive power is just shifted), and most ridiculous of all, that government spending doesn’t occur at the expense of private spending and investment. Again, supply siders used to disagree. No longer.
Back to Orszag, his opinion piece in the Post gently reminded both economic religions that “If the American Rescue Plan caused inflation, we should see that countries that provided more of such covid relief experienced more inflation. Yet other countries, including Germany and Britain, did a lot less covid relief and experienced similar inflation to the United States.”
Taking Orszag et al’s findings further, they studied prices in U.S. states more specifically. If the Keynesian/neo-Supply Side narrative had been true, then logic suggests that higher prices would have revealed themselves in states “where households received more support.” Except that they didn’t. In Orszag’s words that were quite dismissive of attempts by various economics religions to redefine inflation, “Inflation largely wasn’t caused by demand.” Actually, Orszag wasn’t dismissive enough.
Lest he or anyone forget, economics is about tradeoffs. That it is reminds the sentient among us that demand could never cause “higher prices” as is, and simply because a more expensive carton of eggs could only be purchased insofar as the buyer has fewer dollars to bid up other market goods. As for government spending causing the higher prices that some think is inflation, it remains true that the individual thieved, taxed, or borrowed from has fewer dollars to spend after all three scenarios.
Orszag’s own conclusion is that “supply-chain variables directly accounted for 79 percent of the rise” in what some refer to as “inflation” in 2021-22, but logic dictates the “79 percent” understates Orszag’s case. Think Adam Smith and the pin factory, or Henry Ford and his assembly lines: the cost of everything declines with great rapidity as the number of hands and machines cooperating in the creation of any goods grows. Well, yes.
In March of 2020 and beyond, politicians the world over happened on the shuttering of economic activity as a virus-mitigation strategy, and in doing so, eviscerated to varying degrees cooperative production and shipping relationships built up over and many years and decades. That prices were higher after this tragic lapse of global reason was not inflation, simply because command-and-control isn’t inflation. Here’s hoping more economic thinkers exhibit the courage that Orszag, Brooks and Murdock did in exposing the flamboyant absurdity of a narrative that obnoxiously redefined inflation altogether, all the while giving politicians (including Donald Trump) crucial cover from mindless errors foisted on the world twenty-one months ago.
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