Writing in the Wall Street Journal, Alan Blinder argues that President-Elect Donald Trump’s economic agenda will spark inflation. “Almost every economist will tell you — as many did before Nov. 5 — that Mr. Trump’s proposed policies are inflationary,” he warns.
Blinder singles out tariffs, tax cuts, and deportations as causes. He also thinks politicizing the Fed is a concern.
But Blinder has been consistently wrong about inflation for the past four years. He failed to predict massive price hikes and misdiagnosed their cause. We have every reason to suspect he’s misleading us again. Based on his column, it seems he’s learned nothing and forgotten nothing since the COVID-19 pandemic.
Blinder correctly notes that tariffs will raise prices for American households. Tariffs cause a “one-shot price increase,” he acknowledges. However, this acknowledgement sinks his broader argument. A one-time increase in certain relative prices is fundamentally different from a sustained increase in the general price level. The latter is what economists call inflation.
Next, he says tax cuts cause inflation. This reeks of zombie Keynesianism. The argument is that increasing the government budget deficit, whether by increasing spending or cutting taxes, puts upward pressure on prices. Except it doesn’t: deficits alone can’t cause inflation.
An increase in the deficit changes the composition of total spending, but it only increases total spending if it is accommodated by monetary policy. As the residual determiner of aggregate demand, it’s the Fed — not Congress and the President — that’s responsible for inflation. Blinder qualifies himself by predicting “only a little inflation,” but what matters is that his framework for evaluating the relationship between deficits and prices is outdated.
What about deportations? Blinder asserts they “will be inflationary by restricting the supply of US labor.” Again, far too simplistic. Deportations will reduce the labor supply, driving up wages. But illegal immigrants are not just suppliers of labor. They are also demanders of labor, through the various goods and services they consume. Immigration crackdowns will lower both the supply of and the demand for labor. The net effect on wages is ambiguous.
Higher wages do not necessarily imply higher inflation. More likely, the wage increase Blinder predicts would result in a one-time increase in the price of some goods and services, not an increase in the general price level.
This brings us to Blinder’s least-bad argument: eroding Fed independence could result in perpetually higher inflation. Keeping the central bank independent from politics is supposedly necessary to promote responsible monetary policy. True, politicians on short-term election cycles have predictably bad incentives when it comes to interest rates and money creation. But it’s not clear that total Fed immunity, which is more or less what we have now, is any better.
Furthermore, we can question Blinder’s commitment to safeguarding monetary policy from electoral politics. When former New York Fed President William Dudley not-so-subtly suggested the Fed tank the economy so Trump would lose in 2020, Blinder was awfully quiet. Perhaps he thinks “independence” is only necessary to protect us from Republicans.
Suppose Trump succeeds in making the Fed more beholden to elected officials. That would at least be some kind of a responsibility mechanism. Right now, there’s none. No member of the FOMC, and certainly not Chair Powell, will face any professional consequences for unleashing the worst inflation in 40 years. If the politicians have more of a say in selecting and overseeing monetary policy makers, we can meaningfully change monetary policy by throwing out the politicians every two to six years.
Most monetary economists today believe that central bank independence results in better monetary policy. But many earlier monetary economists, including Milton Friedman, were skeptical of central bank independence.
“Is it really tolerable in a democracy to have so much power concentrated in a body free from any kind of direct, effective political control?” he asked. There are both political and economic problems associated with central bank independence, not least of which is that “it almost inevitably involves dispersal of responsibility.” Friedman was more optimistic about “legislating rules for the conduct of monetary policy.” This would “enable the public to exercise control over monetary policy through its political authorities, while at the same time preventing monetary policy from being subject to the day-to-day whim of political authorities.” I concur.
In short, Friedman knew what central bank independence really meant: central bank unaccountability. Friedman was far from a crank. And today’s monetary economists would do well to consider his view.
Blinder’s column offers more heat than light. This isn’t surprising. Ever since Covid, Blinder’s writings have studiously ignored anything written about monetary economics and macroeconomics since 1960. The result has been consistently bad predictions. So long as Blinder doubles down on Eisenhower-Kennedy era Keynesianism, he won’t have much to offer public discourse.