How many eminent macroeconomists is one clear-thinking and literate economic journalist worth? Well if the journalist is Caroline Baum of Bloomberg.com, the answer is at least five. In a column this week, Ms. Baum, channeling Henry Hazlitt, demolishes the argument put forth by the IMF’s Olivier Blanchard, Ivy League Professors Ken Rogoff, Greg Mankiw, and Paul Krugman and Fed Chairman Bernanke that an acceleration of the inflation rate is the panacea for the still ailing U.S. economy. The gist of the argument of these luminaries of modern macroeconomics is that an increase in the inflation rate, say to 3 to 4 percent, will stimulate the economy in two ways. First, higher inflation will “help the process of deleveraging” by eroding the real value of debt, thereby reducing the burden of debt payments and encouraging spending. And second, an increase in the inflation rate will arouse expectations of future depreciation of the dollar and thus panic businesses and households into spending their hoarded cash. This argument is rooted in what might be called the “spending illusion,” the simplistic and deeply fallacious doctrine that the spending of money drives the economy. This doctrine originated in the writings of John Law, the notorious early eightenth century gambler, financial schemer—and central banker. Law’s doctrine inspired the monetary cranks of the nineteenth century as well as the founders of modern macroeconomics in the twentieth century, Irving Fisher and John Maynard Keynes. It remains deeply entrenched in the macroeconomic thought of the twenty-first century.
But Baum will have none of it. As she pointedly comments:
There is something fundamentally wrong when government prescribes the same policies that got us into this mess as the solution. The U.S. lives beyond its means. The federal government is running a trillion-dollar deficit for the fourth consecutive year, compounding its inability to make good on promises it has made to future retirees. Consumers binged on credit because home ownership was touted as a reliable piggy bank. All the postmortems on the financial crisis emphasized the need to save more, consume less. . . . If we need to save more, both individually and as a nation, the Fed shouldn’t encourage us to spend, spend, spend. And some economists want to introduce higher inflation into this toxic mix?
You would think that the increasingly evident failure of China’s inflationary monetary policy would give our own inflationists pause. China’s plan to promote consumption spending involved the building of spectacular new cities and shopping malls based on the belief that ”if you build them, they will come—and spend.” An arresting visual representation of this enormous malinvestment of capital and profligate waste of resources is captured in these eerie photos of completely empty Chinese shopping malls.
