Bernanke On the Defensive

Perhaps due to essays like mine, Ben Bernanke is on the defensive asserting that the Federal Reserve "didn't throw savers under the bus" as it drove the Federal Funds rate to virtually zero. Bernanke cites unnamed economists who argue that the natural rate of interest has fallen over the past two decades. On the one hand, I suppose we should be thankful that Bernanke recognizes there is something like a natural rate of interest that is not controlled by the Fed. On the other hand, the idea that it is zero seems unlikely. In light of Austrian Business Cycle Theory, it is not true that holding the interest rate artificially low promotes a healthy economy. Here is another example of how Fed rhetoric does not match economic reality, the subject of my contribution to The Fed at One Hundred: A Critical View of the Federal Reserve System.

Government Deficits All the Way Up

A well-known scientist (some say it was Bertrand Russell) once gave a public lecture on astronomy. He described how the earth orbits around the sun and how the sun, in turn, orbits around the center of a vast collection of stars called our galaxy. At the end of the lecture, a little old lady at the back of the room got up and said: "What you have told us is rubbish. The world is really a flat plate supported on the back of a giant tortoise." The scientist gave a superior smile before replying, "What is the tortoise standing on?" "You're very clever, young man, very clever," said the old lady. "But it's turtles all the way down!"  —Stephen Hawking, A Brief History of Time

According the the scientist, it may be turtles all the way down, but with fiscal policy, the Congressional Budget Office informs us that for the next ten years, we can expect budget deficits all the way up.

Notice that the expected gap between spending and revenue widens as the years go by. This does not bode well for our economic future. Government spending is a tax of resources taken out of private hands and consumed by government bureaucrats. Such consumption hampers, not facilitates, economic prosperity.

What Did My Parents Ever Do to the Federal Reserve?

That is the question I am left asking after considering various claims about the supposed worrisome consequences of lower prices. David Blanchflower calls price deflation "a major economic pandemic spreading thoughout the world." Justin Wolpers likewise warns us of deflationary expectations. Financial advisor Bert Whitehead asserts, "we really have a danger of deflation world-wide." The solution for those who share the fear is always the same, create more money, stimulate more spending, and higher prices will follow. Bank of England Governor Mark Carney soothes deflation worries, for example, not by acknowledging that falling prices are not socially harmful, but by assuring us that Europe will get back to price inflation soon.

As I said, after all of this chatter, I am left wondering about the ethics of purposely reducing the purchasing power for those who have worked hard and saved all their lives. Higher prices do not, in fact provide prosperity, but instead result in increasing economic hardship for people like my parents. In my latest column for the Grove City College Center for Vision and Values I conclude:

. . .Mom and Dad had the foresight and character to make the sacrifices necessary to stay out of debt. Indeed, they are Paul Krugman’s worst nightmare—a family determined not to live beyond their means. Now retired, like many in their generation they are enjoying life the best they can on an almost fixed income. Because they have no debt, they have been able to live without tremendous economic hardship thus far. The Federal Reserve’s inflationism, however, increasingly makes life for them more difficult as steady price inflation daily chips away at their livelihood. Since 2009, for example, the Consumer Price Index has increased over nine percent. This masks, however, significantly larger price increases for important necessities. Prices of dairy products are up almost 17 percent since 2009. Gasoline prices are up almost 11 percent despite the recent decline. Prices for meat, poultry, fish, and eggs have increased a whopping 26 percent since 2009. Higher overall prices do not help people like my parents at all. They instead act as a thief, snatching wealth away from them in the form of diminished purchasing power. What they long for is to see the value of their savings increase. Far from creating economic hardship for them, lower overall prices would be a boon.

Both sound economics and ethics, therefore, demand that we give up the anti-deflation rhetoric and the inflation it fuels. Charity demands that we cease striking fear into the hearts of the masses, softening them up for ever higher prices. The Federal Reserve should stop punishing people like my parents who have worked hard and played by the rules their whole lives. After all, what did they ever do to Greenspan, Bernanke, and Yellen?

Read the rest here.

Austrian Economics Research Conference

The AERC began today and so far, so excellent. My colleague, Jeff Herbener and I got here this afternoon just in time to hear David Rapp, Herbener's co-author, deliver their paper and then hear the Henry Hazlitt Lecture by John Tamny. Tamny is the political economy editor at Forbes and editor of RealClearMarkets.com. His lecture, "Government Barriers to Economic Growth: How Policy Error Gave Us the Great Depression, the Financial Crisis, and the Great Recession," was a tremendous, engaging discussion about how the state hinders economic prosperity with applications from the Great Depression, the financial meltdown, and today.