Washington Wednesday - Price controls

MARY REICHARD, HOST: It’s Wednesday the 9th day of March, 2022.

Glad to have you along for today’s edition of The World and Everything in It. Good morning, I’m Mary Reichard.

NICK EICHER, HOST: And I’m Nick Eicher. It’s time for Washington Wednesday. Up first: a policy prescription to fight inflation.

President Biden outlined his plan in the State of the Union address last week. And the Federal Reserve plans next week to raise interest rates. But are these steps the right prescription to get prices under control?

Here to help answer that question is Jerry Bowyer.

He is the chief economist at Vident Financial and author of The Maker vs. the Takers: What Jesus Really Said About Economics and Social Justice.

REICHARD: Jerry, good morning!

JERRY BOWYER, GUEST: Good morning, Mary. How are you?

REICHARD: Doing well and glad to talk to you. Well, let’s start with root causes. In your view, what’s behind the inflation we’re seeing right now?

JERRY BOWYER, GUEST: Good morning, Mary. How are you?

REICHARD: Doing well and glad to have you on. Well, let’s start with root causes. In your view, what’s behind the inflation we’re seeing right now? What factors caused or contributed to it?

BOWYER: Well, inflation is, as Milton Friedman says, always and everywhere a monetary phenomenon. Inflation is a decrease in the purchasing power of your currency. So you can think of it as the price of something going up means that your currency buys less. So that happens when there is an imbalance between the production of currency and the production of goods and services. If you have too much money chasing too few goods, that is the perfect storm for inflation. And that's what we have.

We have too much money because the central bank has created enormous sums of a monetary base and M-1 and M-2, which are just different measures of money. When there's a lot of it around, that drives the price up. Your currency is worth less, because you've made more of it. Just like any piece of art, if you start creating identical copies of that piece of art, the value of it goes down, and money is the same thing.

So, why are we doing that? Why have we created so much money? A couple of reasons. One, the creation of money is in and of itself seen as stimulatory. This goes back to John Maynard Keynes, who was brought up during the Victorian era. He rejected all of the worldview of the Victorian era and its focus on thrift, and said that really the way to get prosperity is to get people spending. Well, how do you get people spending? Well, if you create inflation, people think prices are gonna go up so they go out and buy things. The other thing is if people are saving, well, if you're saving, you're not spending. Well, if we punish people for saving, by, for example, putting inflation into the system, so that you're saving money, but it's losing value—because the currency is losing value—that will goad people into spending. So we got the idea that simply creating money supply was stimulative. It isn't. In addition, we got the idea that the government spending money on stimulus plans would also stimulate, which it doesn't. And then the double whammy there is since the government is doing this with borrowed money and regular savers aren't willing to lend enough to our own government by buying bonds, the central bank comes in and creates new money to fund this spending. So these things coming together, there's a kind of a vicious cycle, that becomes inflationary. And on top of that, if you have an administration or policy approach which is hostile to growth, that's the “too few goods.” All of that adds up to the highest inflation in 40 years.

REICHARD: That’s a very good primer. Of course, Fed Chairman Jerome Powell announced recently that the Federal Reserve will likely soon raise interest rates to fight inflation. Can you describe how that would help to slow inflation, if it will?

BOWYER: Well, when they say that they're raising interest rates, what they're really saying is raising interest rates is taking money out of the system. Lowering interest rates is putting money into the system. So what happens is the Fed board meets together and they decide whether to pursue an easing course or a tightening course. And then they instruct people at their trading desk to either create money and use it to buy bonds from banks, or to sell those bonds and destroy the money. Take it out of existence.

So raising and lowering interest rates is really kind of the way they describe what is in essence a process of either creating or destroying money supply. Nobody in America has this authority. They can simply create an entry in an account. They can just say, “Let money be.” That's why it's called 'fiat' money. so it's almost divine prerogative here. The Fed actually has the authority to say, “Let there be money in an account.” And then they can take that money, and they can give it to banks in exchange for bonds. So, the conversation about raising or lowering interest rates is a little confusing because it's really a cover. What's actually happening is what they call open market operations. They're buying and selling bonds, and either creating or destroying money.

So how would raising rates? Well, what I would say is to the degree that they are taking money—if they created too much money, and they're taking it out of the system, that's a way of fighting inflation. The question is, are they willing to do enough of it? Because at this point, what's expected of the Fed is not nearly enough to contain this inflation.

Paul Volcker and Ronald Reagan teamed up. Volcker seriously pulled back on inflationary forces on the monetary side. Reagan had his back. And Reagan also cut taxes so that there were more goods being produced. So instead of too much money chasing too few goods, Volcker dealt with the too much money. Reagan dealt with too few goods by doing supply side tax cuts that helped us produce more goods. And eventually those things came into equilibrium and inflation was beaten for a generation and then a generation arose which remembers not Volcker and Reagan, and we're falling into the same stagflation formula we did before under Nixon and Carter.

REICHARD: Let’s talk about what President Biden said in his State of the Union address to curb inflation. I’m going to quote him: “Let's pass the Paycheck Fairness Act and paid leave. Raise the minimum wage to $15 an hour.” And he mentioned boosting U.S. manufacturing capacity. Jerry, do you think those measures will work to curb inflation?

BOWYER: No. Of course not. Does he? Does anybody? Or is it just inflation is the headline, let's take our policy agenda, and try to glom it onto that headline? I don't see how raising the minimum wage to $15 an hour would fight inflation. I'm not even hearing them try to rationalize that. Increasing the cost of labor to lower the price of things that labor produces? That doesn't make any sense at all. Also, increasing the cost of labor to the point where people are priced out of the market. Not everybody can produce $15 an hour worth of goods and services when they start out. When we said we raised the minimum wage to $15 an hour, that's a dishonest description. What we're doing is illegalizing wages under $15 an hour, which means we're illegalizing starter jobs. Because very few people will have a starter job skill set that's going to pay $15 an hour. People start out, they work for a few years, they get better at the job, and they kind of grow into – they get more productive and their wages rise. By basically saying anybody who's working for $14 an hour—that's the market wage—will henceforth not work at all. And if they're not working, then what are we doing? Then we're paying them not to work. So we have more welfare payments that's financed by deficits, which are financed by new money creation by the Fed. So, to the degree that has an impact at all, it's more monetary easing, more pressure on the Fed to keep creating money and therefore more inflation.

REICHARD: Okay Jerry, imagine that your phone rings tomorrow and it’s the White House. President Biden wants your plan to get inflation under control. What’re you going to tell him?

BOWYER: He wants my plan. Well, it’s going to stretch my credulity that he would call on that. But if he does, what I would say is, first of all, depends on what you're thinking about the Fed, Mr. President. I don't think the Fed really should be independent. I think the Fed is a creature of Congress. So I think the president could do what Reagan did with Volcker. Reagan didn't control Volcker but he had Volcker’s back. In other words, Mr. Chairman, if you think you need to reduce money in circulation in order to beat this inflation, I'm not going to attack you politically. You can do the right thing.

He ought to look at what Reagan did, which is a commission to look at fixing the price of the value of the dollar to gold, which sounds like a really crazy idea except all the greatest growth times in American history, we were either officially or unofficially linked to the gold price. So starting that conversation would put pressure on the Fed to not debase. Plus it is the constitutional position. All the constitutional notes that talk about monetary policy, assume a gold or silver standard back. The other thing the president can do is instead of talking about getting rid of the tax cuts, the supply-side tax cuts, cut more. We're in stagflation—stagnant growth and inflation. The president can get rid of the 'stag' by cutting taxes and lightening up on regulation. The Fed can get rid of the 'flation' by reducing the money supply, but the President can also give the Fed rhetorical cover like Reagan did to Volcker. I don't see a Reagan-Volcker when I look at Biden and Powell. And so that would not be my base case, but if they did that, I think we could deal with the stagflation issue pretty quickly.

REICHARD: Jerry Bowyer is chief economist at Vident Financial. Jerry, thanks so much!

BOWYER: Mary, a great pleasure to be with you.

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