Post from First Trust Economics Blog

Brian S. Wesbury – Chief Economist
Robert Stein, CFA – Deputy Chief Economist 

Aug 23rd, 2021

Narratives get more energy these days because of social

media and cable TV, but they’ve always existed. Back in the

1970s, one narrative was that inflation was not caused by too

much money creation by the Fed, as Milton Friedman argued.

Instead, it was caused by OPEC or “inflation expectations.” And

politicians came up with a plan…it proved disastrous.

In October 1974, with inflation running at about 12% (no,

not a typo), President Ford announced a plan to “Whip Inflation

Now,” which was supposed to reduce inflation, not by tightening

monetary policy, but by changing consumers’ habits.

Consumers were encouraged to wear “WIN” buttons.

The good news was that this approach was a more freemarket

method than the government-enforced wage & price

controls imposed under President Nixon. The bad news was that

by ignoring monetary policy as the ultimate source of inflation it

was destined to fail.

The theory behind the WIN campaign was that inflation

was caused by consumers spending too much money, so reducing

inflation required consumers to save more and spend less, by, for

example, growing their own vegetables, car-pooling, and using

less energy in their homes. The idea was that changing consumer

spending habits would wrestle inflation under control.

It’s easy to look back now and laugh at this absurd attempt

to reduce inflation. Alan Greenspan, who worked for Ford in the

White House, wrote in his book “The Age of Turbulence” that,

at that time, he was thinking, “this is unbelievably stupid.”

These days it appears the Fed has come full circle and is

trying to create more inflation. We decided to give the campaign

a name : Start Inflation Now. And maybe the Fed should print

some SIN buttons.

That, in a nutshell is the policy proposal published by David

Wilcox, a former influential research director at the Federal

Reserve, and David Reifschneider, a former Fed economist and

adviser to Treasury Secretary Janet Yellen (who backs the

reappointment of Jerome Powell).

In particular, Wilcox and Reifschneider want the Fed to

raise its 2.0% inflation target to 3.0%, which would let the central

bank run a looser monetary policy. They believe this looser

monetary policy would help create more jobs, reduce

unemployment, and even reduce racial inequities.

We think consistently higher inflation is a bad idea.

Printing more money is not a path to sustainable prosperity.

Higher inflation would make business planning more difficult

and reduce the “real” (inflation-adjusted) wages of workers,

particularly those with the least bargaining power, including

lower-income workers.

Nevertheless, we think a higher inflation target is being

discussed internally at the Fed. What this means is that even

though the Fed is talking about “tapering,” it is highly likely to

maintain a far easier monetary policy than what otherwise is

warranted. Even if the Fed moves toward tapering its bond

buying, short-term interest rates will still be near zero. The Fed

is still going to be loose even when QE is done.

For now, the Fed still says it expects inflation at about 2.0%

next year as well as in the years beyond. We think inflation will

be higher than that next year and, if the Fed doesn’t explicitly

reject the idea of a new higher 3.0% target, may be higher for

many years to come.

Money is a contract between government and the people.

A stable currency is essential for a stable economy. With the M2

measure of money now 33% higher than it was in February 2020,

total spending – prices plus real output — will end up 33% higher.

That doesn’t mean a 33% increase in the CPI; after all

productivity is growing. But this is more extra money than the

US economy has absorbed since the 1970s. We may have more

than one book written by advisors in DC today that echo what

Alan Greenspan thought back in the 1970s.

Narratives work for political entities in the short-run, but

often lead to disastrous outcomes over time. We will be

watching the new SIN policy closely in the years ahead.