Guild’s Alarm At Steve Moore Makes His Case
This article is from the archive of The New York Sun before the launch of its new website in 2022. The Sun has neither altered nor updated such articles but will seek to correct any errors, mis-categorizations or other problems introduced during transfer.
In a 2008 speech then Federal Reserve Vice Chairman Donald Kohn informed his audience that “A model in the Phillips curve tradition remains at the core of how most academic researchers and policymakers — including this one — think about fluctuations in inflation.” Translated, the entity (the Fed) that employs more economists than any other in the world is staffed near unanimously by economists who think too many people working and producing is the cause of inflation.
Implicit in their near monolithic view whereby they wholly redefine the nature of inflation is that during periods of growth, demand outruns supply on the way to rising prices. Worried about the latter, Fed Chairman Ben Bernanke spoke in 2007 of an alleged downside to global economic liberalization given his view that (“there seems to be little basis for concluding that globalization overall has significantly reduced inflation”) too many newly acquisitive Chinese workers would drive up the cost of everything. The problem is that there’s no basis for what is a consensus view inside the world’s foremost central bank.
Pointing out a basic economic truth that doesn’t factor into the models of most economists, demand is an effect of supply; as in surging global demand is logically a consequence of surging global supply. This is true domestically, and also internationally. No one can demand without supplying first, which means any price level would not be driven upward by increased demand.
After that, the Phillips Curve model that informs the thinking of Fed economists presumes that America is an impregnable economic island, as opposed to a highly advanced part of a global whole. Translated, millions of hands and robot arms around the world produce the iPhone, the Ford F-150, and the clothes we wear. The Phillips Curve model presumes surging domestic labor costs born of labor shortages during growth periods, yet the U.S. economy is a booming result of global supplies of labor.
The above applies to capacity too. The Fed’s economists have their “output gaps” and “capacity utilization” models, and they claim too much prosperity will lead to capacity shortages such that prices rise, except that the U.S. economy booms precisely because millions of hands and tens of thousands of factories well outside the U.S. are yet again integral parts of the U.S. production process. Don’t readers remember how frothing protectionist Lou Dobbs built a second career based on U.S. companies aggressively accessing global labor and capacity to produce goods and services?
Most important of all, the Fed’s demand-side, growth-causes-inflation models presume that what we buy powers progress, as opposed to investment. They’re confused. We all have infinite demands, but they’re limited by our ability to supply. We’re able to produce more and more (meaning supply) thanks to investment that makes us more and more productive.
This requires prominent mention because the instigator of economic growth (investment) is what mitigates any presumed labor shortages. Anyone who doubts this need only consider how often they deal with living humans when buying gasoline, movie tickets, airline tickets, not to mention the myriad things produced globally that they buy online.
Nowadays they’re at least delivered to us by humans, but those days are surely numbered. All thanks to investment. In short, the very growth that Fed economists think causes labor and capacity induced inflation is the surest sign that market-driven production enhancements are erasing any presumed shortages through automation, all the while pushing prices down. Economic growth is the enemy of rising prices, not an author of them. The Fed’s models are flamboyantly backwards.
What’s been written so far partially explains why I’m so thrilled that my friend Steve Moore has been nominated as Fed Governor. Precisely because he doesn’t buy into discredited, Phillips Curve-based views held by most inside the Fed, he’ll bring contrarian views to an organization desperately in need of outside thinking. I say this despite my own view that the Fed is hurtling toward irrelevance, and that its relevance has long been overstated by the various economic religions ascribing to it magical powers to either boost or shrink economic growth through what is logically impossible: “easy” or “tight” money.
That I think the Fed a legend in its own mind, along with all too many economists, pundits and politicians, speaks to an obvious disagreement with Mr. Moore about the central bank that he’ll hopefully soon be a part of. Mr. Moore views the Fed’s rate machinations as important, while I think they’re much ado about nothing.
Lest anyone forget, no one borrows “money.” They borrow what money can be exchanged for; tangible items like computers and office space, intangible services like consulting and communications, and most important of all, human resources. Crucial here is that the Fed cannot increase what individuals are borrowing money to attain, nor can it shrink it.
The goods, services and human resources that economic actors aim to acquire in the real economy are always on offer in the marketplace.The Fed can’t render the cost of real resources artificially expensive any more than it could decree the cost of those same resources cheap. To believe it could is to believe that artificial price controls of the rent control variety result in abundance.
Crucial here is that Mr. Moore knows this, notwithstanding his recent critiques of the Fed. He knows that while the Fed’s calcified economists believe they’re altering economic reality, that they can somehow decree credit cheap, in the real economy it’s as though the Fed doesn’t exist.
Figure that William Gates can borrow easily, so can Apple, but there’s probably no interest rate at which Sears could attain abundant credit right now, nor could most college grads walk out of a bank with money after asking for a loan to fund their start-up idea. Credit is plentiful in Palo Alto, but rather scarce in neighboring East Palo Alto where difficult economic conditions are the norm.
This is all a long way of saying that the Fed cannot instigate through its rate machinations; at best it can confirm existing market realities. As Mr. Moore’s mentor in Arthur Laffer has long said, the Fed is not a rate setter. It is instead a rate follower.
All of this fits in well with a classical model that yet again says demand is enabled by supply. Only those supplying copious resources, or those deemed by the marketplace as capable of supplying copious goods and services in the future, are capable of attaining credit in the real economy.
For anyone to pretend that the Fed can run roughshod over Say’s Law through interest rate meddling or so-called “money supply” management improperly presumes that the Fed can bend the laws of economics. It can’t. It should be stressed once again that the perception of the Fed’s oversold relevance will soon enough catch up to reality.
How this applies to Mr. Moore is that I’ll write opinion piece after opinion piece while he’s in the Fed’s employ with an eye on convincing him that the monetary mystics buzzing around him inside and outside the central bank, individuals who believe the Fed can engineer prosperity through rate fiddling and management of so-called “money supply,” are giving him bad advice.
Sorry, but to presume to plan money supply is to presume to plan production. There’s never a problem of “money supply” in Beverly Hills, Greenwich or Manhattan, yet it’s nearly always scarce in East St. Louis, Liberty City, and West Baltimore. As a supply sider, Mr. Moore intuitively understands the latter. Supply is what enables demand, which means the “money” exchangeable for goods and services is always and everywhere an effect of production first.
Money necessary to facilitate exchange finds producers, always. This would be true with or without a Fed, and with or without an American Treasury, or American Mint. Money wasn’t first created by the state; rather it was created by producers who needed an agreement about value that would enable producers of varying goods and services and varying wants to trade with one another. It’s all a reminder that the Fed couldn’t increase “money supply” in Buffalo any more than it could shrink it on the Upper East Side. In the real economy, there are no “money shortages” where there’s production.
About this, Mr. Moore and I disagree, as do we disagree that the Fed’s vain attempts to “hike” interest rates (all four of those attempts in 2018 having been reversed by market forces) had some kind of material economic and stock market impact. The easy-to-discredit notion that the Fed can engineer economic and market bliss/desperation (see “QE,” and other monetary engineering brought to you by central banks) has “you didn’t build that qualities” that free thinkers shouldn’t be associating themselves with.
Sorry, but Amazon’s greatness and its valuation was not facilitated by a central bank projecting its vastly overstated influence through an antiquated banking system. Just as John D. Rockefeller soared to brilliant heights sans a central bank, so would Jeff Bezos have. I’ll aim to convince Mr. Moore of this through voluminous op-eds. Indeed, I hope he ultimately brings immense skepticism about the Fed’s ability to achieve anything inside its walls.
Where Mr. Moore and I agree is that money isn’t an instigator as much as money quite simply is. Money is once again an agreement about value that facilitates the investment, production and exchange without which there is no economic progress. That’s why money has for thousands of years been created with stability of the unit of account in mind. It’s not money if it’s not stable, simply because stability of the measure is money’s sole purpose as a facilitator of trade and investment.
So while it’s decidedly not part of the Fed’s portfolio to set the dollar’s exchangeable value (either in terms of a commodity, a basket of commodities, or foreign currencies), it’s exciting to think the economists at the Fed who are wedded to floating, chaotic money will have to endure a different point of view. To economists whose jobs are an effect of real productivity taking place well away from their cushy world of academic delusion, floating money is a good thing.
They plainly misunderstand how problematic it is for real producers. Floating money is a huge barrier to progress precisely because it slows the trade that is a prerequisite for the latter. Economists seem to have forgotten that no one exchanges money; rather they exchange products.
Money just enables the exchange, but when its value is a moving target, winners and losers are artificially created where there used to only be winners. Is it any wonder that global trade disputes have surged since President Nixon’s fateful 1971 decision (cheered on by economists) to sever the dollar’s link to gold, thus setting all global currencies afloat?
Worse is what money without anchor means for investment. Economists don’t have to worry about this, particularly the demand-side economists at the Fed, mainly because their hopeless models are based on consumption. But in the real world, consumption yet again follows supply, and supply is driven by investment that constantly pushes up the productivity of workers.
Yet when currencies are floating, investment naturally lags as the uncertainty about returns necessarily slows investment. Translated, investors who are always and everywhere buying future currency streams don’t want to risk returns coming back in devalued dollars.
All of this explains Mr. Moore’s desire for money that holds its value throughout time. So while he’ll have the mystics buzzing around him, claiming they know the proper interest rate and proper “supply” of dollars to achieve a stable currency, hopefully he’ll instruct them that the dollar’s exchange value isn’t part of the Fed’s portfolio as is, all the while reminding them that the dollar merely lacks a price rule.
The good news is that Treasury could institute a price rule between breakfast and lunch, and markets would quickly adjust to it.
For believing in money that is money, and for lacking a PhD, Mr. Moore will suffer vicious attacks from the credentialed. He already is. He should know that his many friends will back him.
As for the economists who’ve pulled out the longest of knives, or who plan to, never forget the profession of which you’re part. Most of you believe that the job of central banks is to put people out of work in order to keep inflationary pressures down. You believe economic growth causes inflation, even though it’s quite literally the greatest foe of rising prices precisely because investment is what drives down the price of most everything.
To use but one of countless examples that support the previous truth, the fastest computer in the world today is three times as powerful and four times cheaper than the 2nd fastest computer built three years ago. Feverish, growth-enhancing investment continues to result in faster, more capable technology, that is also quite a bit less expensive.
Your same profession believes that government spending actually powers economic revival. Implicit there is that during slowdowns, the economy gains when Nancy Pelosi, Mitch McConnell and Donald Trump are arrogating to themselves enhanced control over resource allocation relative to Jeff Bezos, Michael Dell and Peter Thiel. Your pathetic theories are rooted in the view that central planning actually works, and that collectivism failed flamboyantly in the 20th century solely because the murderous governments that tried it lacked your allegedly wise minds.
But most damning of all is the criminally obtuse, yet largely monolithic view inside your profession that World War II ended the Great Depression. To believe a profession that compares unfavorably to astrology, and that is spectacularly wrong much more often, the maiming and killing of the people who power all economic advance has a growth upside.
Thinking about all this, thank goodness Mr. Moore isn’t one of you. Your profession has meant less than nothing for progress throughout history. Figure that the best books (Smith’s “Wealth of Nations,” Hazlitt’s “:Economics In One Lesson,” Ricardo’s “Principles of Political Economy and Taxation,” Say’s “Treatise on Political Economy,” and Mill’s “Principles of Political Economy”) were written by non-economists as is.
While the individuals who comprise the global “economy” never needed credential people of your ilk to prosper, it’s useful to point out that your cushy jobs that enable you to “think” 365 days/year are a certain consequence of economic growth that your models in no way enabled.
Rather than looking down on Mr. Moore, maybe learn something from him. And not just about economics. Watch as Mr. Moore acts decently in the face of cruel verbal assaults on him. Happy warrior that he is, Mr. Moore will smile despite the unsmiling things said.
Here’s hoping Steve Moore is confirmed as the next Federal Reserve Governor. Economists captivated by what’s easily disprovable and that can be murderous, arguably have the most to gain from someone they so outwardly disdain. So will those who simply want to understand how to be a good person.
Mr. Tamny is editor of RealClearMarkets, where this dispatch first appeared. JTamny@realclearmarkets.com. Image: Drawing by Elliott Banfield, courtesy of the artist.