INTERVIEW: Mind the Fiscal Gap

By Reuvain Borchardt

Prof. Peter Boettke, an economist of the Austrian School, is the University Professor of Economics and Philosophy at George Mason University; the BB&T Professor for the Study of Capitalism; and the Director of the F.A. Hayek Program for Advanced Study in Philosophy, Politics, and Economics at the Mercatus Center at George Mason University.

He earned his BA in Economics from Grove City College in Pennsylvania, and an MA and a PhD in Economics from George Mason University.

Boettke has authored or co-authored six books. He is also the Editor of the Review of Austrian Economics and the Associate Editor of the Journal of Economic Behavior & Organization.

Let’s start on a happy note and talk about recession.

Goldman Sachs announced last week that its economists say there’s a 20% chance of recession in the next 12 months, down from their previous projection of 25% in June. That’s far below the economists polled by the Wall Street Journal, who put the probability at 54% — which was also a sharp drop from the previous two WSJ polls conducted earlier this year, which had it at 61%.

Here at Hamodia, instead of polling a bunch of economists, we’re giving the floor entirely to you! What do you think the odds are of us having a recession in the next year?

Right now, it seems like cutting down the percentages of us falling into recession is a wise thing to do.

One of the things that’s going on is that we have pursued rather poor policies monetarily and fiscally, prior to the attempt by the Fed to bring inflation under control. Inflation is not temporary. It’s not caused by Putin or anything like that. It’s caused by the way that we decided to pay for the pandemic. We really jacked up the money supply, we spent and we’re continuing to spend a lot of money.

As we say in economics, ceteris paribus, or holding other things constant, those things would have deleterious effects. But if at the same time there is also very rapid technological improvements, or increasing trading opportunities or whatever, those could be having positive effects.

We’ve had some amazing technological developments, which increase productivity. We’ve also returned to global trade; we’ve gotten over the supply-chain problems and stuff like that. And so those factors offset, and we are pointing in the direction of progress. The tailwinds are a little stronger than the headwinds. And so we’re pushing and making progress, though not as much progress as we would have made had we not engaged in fiscal irresponsibility and monetary mischief. But we are pushing forward, and so I think that tomorrow will be better than today. But it won’t be because of the policies that the government has followed, in my opinion; it will be in spite of them.

I presume that by “monetary mischief” you mean low interest rates, and “fiscal irresponsibility” refers to the pandemic stimulus.

Right.

The explosion in the money supply occurred during COVID. It shot up tremendously. And government spent, and is continuing to spend, incredible amounts of money.

Both Republican and Democratic governments confuse things; they think of government spending as part of GDP, rather than that the real economy is economic activity absent government spending. And so we kind of overestimate how well the economy is doing because of government spending. We live in an age of “the economics of illusion,” as a famous book by economist Albert Hahn was titled.

But it is the reality that we’re also seeing tremendous increases in productivity caused by advances in technology. So those have to be taken into account.

Let’s talk about inflation. Firstly, how do you define inflation?

An excess supply of money over the demand for money. So it’s not just an increase in the supply of money — it’s an increase in the supply of money not matched by an increase in the demand for money.

So there’s too much money pumped into the economy relative to the goods and services.

Yes. And that drives the price up.

Price increases on an individual item wouldn’t necessarily indicate an inflated money supply; it could be because of a particular factor in that item. So inflation is indicated by price increases across the board. But what if, in theory, you introduce a major new factor, like a pandemic that shuts down shipping — could that be responsible for a price increase across the board without being called inflation, since it’s not due to an increased money supply?

This is a very important question because of the issue of whether or not that was temporary. Inflation is a prolonged increase in prices.

So you have to shift between those two things, whether this was due to the money supply or just a supply shock because of the shipping shutdown.

During the pandemic, I unfortunately had a fire in my house, and it took forever to replenish the furniture, because a lot of furniture comes from Vietnam and it was stuck out in ports. That’s a supply shock, not a money-supply thing. So you have to be very careful about how you would sort out the supply shocks from the money issues.

Well, the economy has reopened for some time now; why are costs still increasing? I’ll give one example that I’m sure you’re not aware of: A major kosher beef producer just announced massive price increases in domestic beef; many cuts are rising by 39%, some by a lot more. Why would this still be going on now, when we are no longer in COVID shutdown, the money supply has been tightened, and the inflation rate is dropping?

Prices adjust upward in ragged ways, just like they adjust downward in ragged ways. So there just might still be some time lags involved as the money works its way through the economy. And producers are trying to recoup from the costs that they face and their input prices, so their margins become more and more reduced. This is true across the board. When you go into a supermarket, you still see higher prices. Or you see less quantity for the same price, known as “shrinkflation,” when a product will cost the same as it did before — but it’s smaller than it used to be. That’s a form of inflation as well.

But it’s not borne out in the official inflation statistics.

Right.

Economic forecasting is no magical science! There are so many different offsetting factors in a lot of these issues that it’s hard to move beyond just the general principle of things to the particulars when making predictions. If it were easier there’d be a lot more billionaires who could buy low and sell high at the right time.

I would have to know more about the kosher beef industry to look at what input costs had raggedly adjusted up to those producers, so that their margins were cut into, and so they’re trying to now raise their prices to meet consumer demand. I’d have to look and see what the consumer demand is that’s going on, because there might be a demand shock that now all of a sudden it’s a particular time of the season when there’s more demand for those kinds of meats. I don’t know.

When the economy was shut in March of 2020, obviously nobody expected it to be shut for as long as it was, but do you think that there was any anticipation or any understanding of what a long-term effect the shutdown would have on the economy? And now that we do know the effects, do you think that if, G-d forbid, another pandemic should occur, the powers that be might say, “We’re not going to go through another closure and long-term shock to the economy; if you want to stay home you can stay home, but we’re not going to do any more forced closures”?

There was a really interesting article recently in Harper’s Magazine, which talks about what we’ve learned, at some level, from the pandemic, and the first author argues that we learned that the trade-offs that public health officials were unwilling to make are important to people and that they should have been willing to let individuals make them without just saying that there’s only one size fits all to address this. And they said there were certain contradictions that were made that actually caused us to lose faith in public health. Like when the George Floyd protests were going on, public health officials said these protests are so important that you have to go to that, but at the same time they were telling people they couldn’t go to their own family funerals or whatever.

And so people started saying, “What’s going on here?”

As to your first question, about whether they anticipated the effect of the shutdown, I think that you had a series of individuals who are public health officials who put a certain premium on their response to things above all other trade-offs. And they are predominantly from a particular ideological bent that believes government is not only the most effective corrective, but it’s really the only corrective, to our social ills.

And so they were quite comfortable turning the decision apparatus over to the government, rather than questioning whether or not we should have more variation, because we don’t really know, and we need to allow more variation in the experiment to be able to find out which strategies work.

And they had willing co-conspirators on the economic front. For example, the head of the Minneapolis Fed joined with a guy from University of Minnesota Public Health to defend a complete shutdown that the government pays for. And it made sense to them because in the intellectual zeitgeist at the time was a thing called Modern Monetary Theory, which said that, basically, government can decide to spend money however they want to and shouldn’t have any concerns; they’ll just print money and it will all work out.

And remember, it was the Trump administration that did this first, and then Biden just, like, put it on steroids, and kept it going further and further, because why wouldn’t he? It’s a major voting benefit for him; he was giving people money for free, and they say, “Yeah, that’s cool!”

This speaks to the falsehood about government spending. Like they sit there and say, “Look, we got rid of poor families.” Well, why? Because you gave them money. As soon as you stop giving them money, they’re not better off, they’re going to be worse off. So then the demand is, how can I keep giving them money? And so, because of the way we’ve done things, we’ve really put ourselves in a tough bind about how we get back to normal economic life.

Think about the debate that’s going on right now about student-debt cancellation. Biden lost the case in the Supreme Court. So what’s he doing? He’s going to the Department of Education and trying to do it through executive diktat. I was listening the other day to NPR, and they’re debating, isn’t it going to be a shock for the people who haven’t had to make student-loan payments for the last few years, now that they’re going to have to start paying. No joke, right? If I told you that you didn’t have to pay your mortgage payment for the last three years, and then all of a sudden it’s time to start having to pay the mortgage again, you’d be in for a shock. But that doesn’t mean you can live in a world where we never have to pay mortgages again.

So this is why they call this the “Great Reset” — they think you can overcome the whole market-oriented society and move toward a more government-generous society. And people like that. People like something for nothing.

When there’s a pandemic-induced shutdown, even some people on the Right accept government subsidies or stimulus payments; they say if government forced your business to shut down for the greater good, the cost should be borne by government, which means society as a whole, rather than the individual business owners, because you were forced to shut your business by government, not by market factors.

Being in a situation like that, where government intervention has more broad acceptance than it normally would, provides opportunities for those on the Left, who advocate for more government intervention generally, to institute policies they like and try to keep them for the long term.

One hundred percent correct.

In a normal time, if the costs of pursuing a policy were so astronomical, you would not pursue the policy. But in an era where you believe that the government can print money and not have to pay a cost for it, it turned into a disaster. And we’re faced now with the reckoning of that.

And so the economy is kind of in a weird spot, because it’s still growing, it’s still going ahead, but at the same time, we have these dysfunctions and deformations that are caused by all this inflation and monetary mischief and fiscal irresponsibility. And somehow we’re going to have to have a reckoning, and so I just don’t think that I could, in my crystal ball, say, “The economy is going to tank in the next year.” It seems like if the massive adjustment would have taken place, it would have already happened in the last six months — there was enough opportunity where we could have actually seen a real serious correction to the economy. But every time that it looked like it was going to be the case, a week later, it started to rebound and do okay.

Then we have the question of what exactly a recession is. Traditionally it’s been defined as two consecutive quarters of negative growth, and that happened last year, but the National Bureau of Economic Research, the official scorekeeper of recessions, decided we were not in a recession. Republicans said this is all politics, that we’re changing the definition of a recession to help the Biden administration. Do you agree that the Bureau should decide these things, or should it go by some firm statistic?

I’m an outlier on many levels here. I view inflation and unemployment statistics as having been manipulated because of politics. It was so effective back in the 1980s when Reagan used the misery index — you had double-digit inflation and double-digit unemployment. So when Bush Sr. was in power, Michael Boskin, chairman of the Council of Economic Advisers, redid the calculation so that in some sense you would never be able to have double-digit inflation and double-digit unemployment.

And so, to me, if you look at some of the statistics, and you look at the “fiscal gap,” which measures the promises government has made and our ability to actually pay for what we promised — developed by Laurence Kotlikoff, an economist at Boston University — all those numbers point in ways to suggest that we are in many ways insolvent as a country. And that many of the statistics we use are really not reliable. Like if you look at the unemployment rate, it seems  very low — yet we’re at historic joblessness. Because many people are no longer looking for work and are therefore not counted among the unemployed.

So there are so many economic numbers that don’t jive with the economic reality.

So you don’t have a problem with not using a hard statistic to define a recession, and instead having a bureau decide it, because the statistics are unreliable?

Yeah. And by the way, I think we were in a recession. I certainly don’t buy the idea that Bidenomics is, like, the greatest economics we’ve ever had.

One particular issue often on people’s minds in discussing the economy and inflation is gas prices. Over a year ago it hit the unimaginable $5 a gallon, and then it started going down, and nobody’s really talking about it much anymore, but it’s still quite high, well over $3.50 a gallon nationally. Why has it remained high — is it because of the inflated money supply or something specific to the gas industry?

Again, this goes back to details; there are a bunch of different factors going in there. But one of them was that Biden’s policies of limiting drilling cut the supply of oil way down. And also all the rhetoric about what they’re going to do to fossil fuels — all this affects the future planning for oil exploration. You can’t say things like, “I’m going to go to zero fossil fuels within a decade,” and then expect the oil companies to still invest the same way. They’re adjusting as well to the regulatory environment.

Cutting off pipelines caused problems. And then when the gas prices were so high it was hurting him politically, he used our national oil reserves. That affected the supply, but at the same time, there are going to be demand issues that are going on. And then there’s also just the general effect on prices caused by excess supply of money. And so there are at least three factors going on there: the demand side, the supply side, and the consequences of the high rates of monetary growth; and then that filtering its way through the economy. But I’d have to know a lot more details before I can break down to you what percentage of each was affecting the price.

Gas is probably the only product whose price is right up there in your face on a huge sign that’s constantly changing. And you frequently see articles in the news about the gas prices — not in business or market articles, but regular news articles — which you don’t see with other commodities.

Well, we drive our cars. That’s how we transport ourselves at the moment.

Now you introduce electronic cars, and you’re going to  mandate them and subsidize them — well, that tells you that people don’t want them. Just think about how weird that is.

Often when there’s discussion of high gas prices, Republicans say, “The prices are high because the Democrats don’t allow drilling. Let us drill more.” And the Democrats respond, “Even if more leases were granted tomorrow, it would take years for gas from those fields to come to market, so it’s not affecting today’s prices.”

You have to remember that oil companies are trying to maximize their profits over time. And when you eliminate the future supply of oil, it makes sense for them to withhold some of their current stock of oil to try to push it out further in time, rather than release it today, so that they can make those profits tomorrow since they won’t be able to replenish their supply.

So one of the things that’s missing in that Democratic response you mentioned is that you can run it the other way as well. You could tax 100% of the profits on the current oil supply and say that won’t affect the supply we currently have. But it will affect the investment decision for the future supply of oil. So, the price at the pump today doesn’t only reflect the supply and demand of that gas sitting in your gas station today. It also reflects the expectations of what the oil companies think they’ll be able to do a decade from now.

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rborchardt@hamodia.com