Have economists lost the plot on inflation? Price hikes reached 7 percent in December, a rate not seen in 40 years. But the real story is how economists predict, debate, and respond to inflation. This goes deeper than the usual demand-side (fiscal and monetary policy) and supply-side (transportation gridlocks, regulatory bottlenecks) polemics. Instead, it strikes at the heart of the public role of economists.
Inflation began its precipitous march in early 2021. In January of that year, the figure was a modest 1.37 percent. By April, it jumped to 4.15 percent, well above the Federal Reserve's long-run 2 percent target.
Some economists shouted from the rooftops that surging prices were here to stay. Others insisted they were "transitory." The truth is, neither side comported itself well. Both behaved in a way that lessened the credibility of the economics profession.
Inflation doomsayers are now taking victory laps. But many of these self-proclaimed prophets forecasted wrong for years. Where was the hyperinflation they warned us about in 2008-12? As the old economics quip goes, these fellows predicted nine out of the last one inflationary events. Meanwhile, inflation minimizers are nursing their bruised egos. They deserve it. Not only did they dismiss the prospect of high inflation as it began, they denigrated anybody less sanguine than they were as cranks.
A nuanced perspective on inflation satisfies neither side's political agenda, which explains why it's so rare. Yes, both demand-side and supply-side factors matter. While government budget deficits don't usually cause inflation, COVID-19 relief in the form of direct checks is a plausible exception. Stimulus checks immediately boost household wealth, so they pack a greater punch than other kinds of government spending.
As for the Fed, the money supply grew faster than money demand starting in early 2021. Add that to supply-chain problems and you have a classic inflationary recipe: too much purchasing power chasing too few goods.
Still, the "both sides have a point" truism misses the fundamental problem with the economics commentariat. Thomas Sowell—a model for the salutary public role of the economist—warned against putting "decisions in the hands of people who pay no price for being wrong." We usually apply this to politicians and bureaucrats. But it applies to the economists who advise them, too. Economics can and should inform policy debates. But the tragic consequence has been the politicization of economics. This plagues both the left and right. Each side has its scientists-turned-pundits, trotted out to proclaim the speck in the other team's eye while overlooking the log in its own.
Americans are caught in the middle of a showdown between dueling experts. While each side can score points in the short run, it comes at the price of economists' credibility in the long run. Americans are already losing faith in public institutions. Congress and the bureaucracy are reaching new lows in popularity. Public health officials are now routinely ignored. Whatever our ideological disagreements, surely we can acknowledge Americans are better off when our institutions are functional and those who staff them competent. This applies to economics, too. Nobody wins when economists assume the role of court intellectual.
Economics is a science. It helps us understand human action and predict how societies produce and allocate resources. However, economists' expertise does not give them a privileged voice in the public square. The art of self-governance is broader than the science of economics. Once upon a time, before they marched on Washington, economists understood this point.
For economists to prove their worth as experts while remaining democratic citizens, they need to re-learn the virtues of targeted reforms that satisfy democratically accountable coalitions. This brings us back to inflation.
Complaining about the Fed's bond purchases or Tyson's meat markups won't cut it. If the right gets fiscal and monetary rules, the left gets strategic investments in human and physical capital. Both plausibly curb inflation, the former by taming demand and the latter by boosting supply. Whatever the solution, consensus and buy-in matter just as much as the technical economics. We can't keep drawing up plans under the assumption "our" side will ram them through when the time comes.
Frank Knight, a leading economist of the early 20th century, wrote about democracy as a system of governance by discussion, not domination. Economists should give Knight another look.
The inflation debacle reveals economics is being used not as a tool to solve problems but a weapon to win battles. This is far more dangerous than bad forecasting. We can ignore politicized predictions. But we can't ignore politicized science.
Alexander William Salter is the Georgie G. Snyder Associate Professor of Economics in the Rawls College of Business at Texas Tech University, a research fellow with TTU's Free Market Institute, and a senior fellow with the American Institute for Economic Research.
The views in this article are the writer's own.
