Elizabeth Ames on June 28, 2022
In his semi-annual report to Congress on monetary policy, Federal Reserve Chair Jerome Powell recently testified that central bank interest rate hikes intended to cool inflation could well lead to a recession.
Powell’s admission was met with some surprise by the media. Yet the deliberate engineering of recession — an approach known as “austerity”— is an inflation “remedy” used all too often by governments and central banks.
The policy is based on a decades-old theory known as the Phillips Curve — that blames rising prices on prosperity. You want more growth, the thinking goes, create more money. Want to “cool down” prices and a “hot” economy? Bring on recession. People may lose their jobs and their livelihoods along the way. But it’s all for the greater good.
Former Obama Treasury Secretary Larry Summers, one of the first to warn of the inflationary consequences of Biden spending, insists that taming inflation will require enduring unemployment rates from five to 10%.
This reasoning, however, is belied by history. America endured six consecutive quarters of declining GDP during the stagflation of the 1970s, while the inflation rate nonetheless tripled. On the flip side, no one talked about inflation in the 1990s, when annual GDP growth got as high as 4.8%.
So why the continued influence of the Phillips Curve in 2022? One reason is the ambivalence about growth on the part of many Democrats, who regard economic matters like “job creation” and “prosperity” much as they do policing and the military. They’re things you’re supposed to say you’re for, while secretly holding your nose.
A growing economy may help you get elected. If only that didn’t mean making things easier for loathsome corporations and rich people. And what about all those carbon-spewing vehicles?
This ambivalence is one reason that President Joe Biden maintains he’s a “capitalist” who doesn’t want recession — while he goes about beating up the economy by hobbling energy production and imposing billions of dollars in costly regulations. The only “growth” that this president and his media acolytes can truly get behind is the growth of government bureaucracy. Yet past experience has shown repeatedly that a healthy, expanding private sector is key to taming monetary inflation.
Monetary inflation — the loss of currency value that drives up prices — is generally blamed on “”too much supply.” But that’s not the whole story. Money is fundamentally a measuring instrument that provides a unit of value, enabling people to trade. Like everything else in the economy, its own worth is determined by the ratio of supply to demand.
The handful of governments that have successfully tamed inflation have done so through pro-growth policies that increased their economy’s appetite for money. They adopted a strategy that monetary scholar Nathan Lewis calls “The Magic Formula” — low taxes and stable money.
Germany and Japan ended post-World War II hyperinflation by implementing such policies. Both nations saw their economies take off and became economic powerhouses by the 1960s.
In the early 1980s, then-President Ronald Reagan and Fed Chairman Paul Volcker used a similar playbook to finally end the 1970s “Great Inflation.” Volcker began with a period of severe tightening. But he followed this with a monetary policy that loosely pegged the greenback to commodity prices — a system roughly resembling a gold standard. Inflation fell from double to single digits. The price of oil plummeted and the energy crisis vanished.
The newly stable dollar was accompanied by two rounds of historic tax cuts that Reagan promised would further reduce inflation by stimulating productivity. Stagflation gave way to the Roaring 80s, with GDP growth at one point peaking at over 7%. Inflation, meanwhile, remained low throughout the decade.
Reagan’s pro-growth triumph paid off in a record mid-term victory. The president carried 49 out of 50 states, becoming the oldest man at the time to hold the office.
Joe Biden, are you listening?
Elizabeth Ames is co-author with Steve Forbes and Nathan Lewis of INFLATION: What It Is, Why It’s Bad, and How To Fix It (Encounter Books).
The views and opinions expressed in this commentary are those of the author and do not reflect the official position of the Daily Caller News Foundation.
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