Tuesday, August 2, 2022

Teaching Pigs How to Fly

The Editorial Board of the Wall Street Journal on 7/26/22 wrote about the "Economic Mess We Are In."

It is about time the WSJ awakened to the well known tradeoff between inflation and output. The economic mess is simple. The Fed and the Congress tried to stimulate the economy and now that they have a little growth going on they realize that they created a firestorm of inflation. Why this is a surprise to our learned friends at the WSJ is quite puzzling.  I am old as dirt and I remember teaching this simple truth in the 1970s. 

Anyway, what interests and amuses me is what the WSJ thinks we should be doing about the confluence of economic weakness and high and rising inflation.  They seem to have learned or relearned the simple lesson -- if you fight inflation, then you might get a recession. Since they don't want to cause a recession it is beyond funny to see what policymakers are now talking about -- please whisper this -- supply-side economics. 

No, they didn't actually say the four-letter word supply-side but they are basically proposing what amounts to what we used to call supply-side policy. They advocate using tight money to squeeze out the inflation. But to offset the impacts of the decline in aggregate demand, they recommend "economic growth" policies to stimulate supply. If that isn't resurrecting old fashioned supply-side economics, then I don't know what else they have in mind. 

When I was teaching I would use chalk on a blackboard. This kind of policy was popular in the 1970s and it was shown by a downward shift in aggregate demand coupled with an outward shift of aggregate supply. The diagrammatic result was a new equilibrium with higher output and lower inflation. Economic Nirvana! 

Sophisticated economists and journalists laughed at this kind of macroeconomics. I always thought it made sense but then I also thought Bevis and Butthead were funny. 

That's all history. Today the reality is that some people want to see tight money coupled with a fiscal policy inducing economic growth. The words are a little different but it all amounts to a leftward shift in Aggregate Demand and a rightward shift in Aggregate Supply. 

Will it work? Maybe. It depends on a couple of things. First, the Fed has to tighten money enough to reduce the growth of aggregate demand and inflation.  Second, Congress has to use taxation and spending in such a way as to promote more output directly without increasing aggregate demand. 

Maybe? I say maybe because neither the current Fed nor Congress has much experience with either of these policy actions. What are the odds that they know how to do this and are willing to try? Not very high. Kinda like teaching pigs how to fly. 


7 comments:

  1. Dear LSD. Will it work? Naw-w-w-w-w . . . . Whether the Fed even if it tinkz it knowz how much to tighten or does tighten moola enough or not is irrelevant. And whether Kongrez uses taxation/spend’n to achieve wut it tinks is the desired outcome also is irrelevant. Huh? You ax “why?”

    Drum egg roll: Cuz both de Fed/Kongress are in the proverbial ground-hawg-day revolv’n door Chinese-fire-drill like a doggy chas’n its tail round ‘n round. Wut wud work? Both de Fed ‘n Kongrez close doorz, pak up, and leave the D.C. swamp. O-o-o-o wut a rosy vaccum!! That’d allow sane humanodz to pursue their animal spirits to improve their well-bean ‘n self-interest widout govomit interference.

    Wut er de oddz of that happen’n. Nill, nada, ‘n none, of course. If yer gunna teach pigz to fly make shure that porcine has put on lipstick.

    But, herz some gude oddz. ‘appy ‘our is com’n ‘round reel soon. Cheerz!

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  2. “If "con" is the opposite of pro, then isn't Congress the opposite of progress?"

    I mean, Biden was in the Senate for 370 YEARS and we still didn't get anywhere ;)

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