The Errors of Populist Economics

A Conversation with Ryan A. Bourne

Populism is a bundle of bad ideas motivated primarily by grievances. Once result is set of economic preferences that will only make the country poorer.

With populism on the ballot in November, I've brought on my friend and old colleague Ryan A. Bourne to talk about the errors of populist economics. Ryan is the R. Evan Scharf Chair for the Public Understanding of Economics at the Cato Institute, and author of one of the best books about the pandemic, Economics in One Virus: An Introduction to Economic Reasoning through COVID-19.

A transcript of our conversation, edited for clarity, is below. You can also listen to it at my ReImagining Liberty podcast: Apple Podcasts | Spotify | YouTube | Pocket Casts | Overcast | RSS

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Episode Transcript

Aaron Ross Powell

We’re recording this the day after the Super Tuesday presidential primaries, and Nikki Haley has dropped out as of this morning. Barring some radically unforeseen complications, Trump is going to be the nominee for the Republican Party. Biden is going to be the nominee. So we’re repeating our election again. And it seems like a good opportunity to talk about economic populism, because if there's been one big change that Trump represented, it was a shift in the way that people on the right talked about economics, away from the free enterprise talk of Reagan and his followers, and to something much more populist and having more affinities for the way that we used to think lefties talked about economics.

What is it that this kind of economic populism gets wrong about the way our economy works?

Ryan A. Bourne

How long have you got? Aaron, it’s great to be with you.

I think the main fundamental difference that this type of thinking has from the way that an economist would usually go about thinking about the economy is that we believe that markets have really good value in the sense of the way that we interact with others on a day to day basis, enables us to engage in our subjective preferences about goods and services that we prefer, kind of consuming. And from that market, respondents act upon our wants and desires and try to serve us in the best way possible.

So in many ways, a market is incredibly pluralistic. I think where the national conservatives or the broader kind of new right come in is essentially they say, no, actually, there's kind of some objectively valuable things that go way beyond the role of government that traditional conservatives have sought. There's some objectively valuable things that actually, from the top down, we should pursue as a matter of economic policy. What markets are delivering is not optimal in some way. And therefore, we should use the power of the state through tax regulation, subsidies, all of these tools that traditionally we associate with the scaffolding of progressivism to pursue what they describe as the national interest or the common good.

Now, they interpret that national interest of the common good, or it seems to be that way, as an economy in which you have a much larger manufacturing sector and kind of heavy industrial base, one in which families look a bit more traditional. You have, in the sense of 1950s traditions, where you have one earner families, where quite often the wife stays at home and looks after children, where families are extensively supported by the welfare state, and where the power of government really is used more aggressively to inculcate certain values among the political community.

So I'd say the big difference, and I don't know whether this is necessarily an economic error, as you asked the question, but the big difference, I think, is the supplantation of the market as a pluralistic institution which enables us to fulfill our subjective ambitions and desires for this idea of a kind of objective top down. This is the national interest, and we're going to use the powers of the state to impose it.


In broad brushstrokes, that doesn’t seem to be completely nuts.

Let's say we could imagine a situation where you, Ryan Bourne, are telling us we should just have free markets, and the markets should do as they’re going to do and fulfill our subjective values. But if, as some people on, our friends on the far left might say, if that leads to a world where, say, one or two guys have basically all of the wealth, the rest of us have none, and live as serfs on their land, and because were entirely economically dependent on them, they exercise near total control over us in a domineering way and so on. We could say, even if that was the natural outcome of markets, there seems to be something undesirable about that. And so if the government could put its thumb on the scale in some this way or this way, to at least get us away from that, that's not crazy to think that we should maybe intervene. And, and so taking that as kind of, that's the extreme example of the argument that they're making, is that the markets are leading to a world that is radically worse than their preferred outcome.

Is the problem with that kind of thinking that markets don't actually do that? So the outcomes, the bad things that they are imagining, are not actually the result of market activity, but something else. So they're misdiagnosing the cause? Or is it that basically this is more of a markets are good for other reasons, kind of, even if they lead to results that you don't like?


That's a huge question. I would say there's a couple of big errors. But I mean, one of the things that the national conservatives do is they've kind of adopted broadly the progressive economic history of the last kind of 50, 60 years, where actually they say we are living in a radical kind of free market experiment. And libertarians have dominated economic policy making in Washington through the Republican Party for too long. And I just think that's a fundamental misconception of what's happened politically over that period of time. Whatever we think about the balance of trade policy protectionism against free trade, the United States has always had extensive trade protectionism across numerous industries. It became more free over time. But certainly we haven’t adopted unilateral free trade in the sense of the UK in the 19th century or smaller economies like Hong Kong and Singapore have in the more recent future. The US has quite an extensive welfare state, has a big entitlement state for seniors, has pretty high levels of occupational licensing across different states.

So the first fundamental misconception, I think, is that we have lived through this kind of radical anarcho-capitalist experiment, and therefore any ill that we can attribute to current economic outcomes must be as a result of the pursuit of free markets. So I think that's the first error. I think more broadly, though, I mean, as soon as you move away from a sense in which, and it doesn't have to even be a kind of radical libertarian conception of the economy, but as soon as you move away from a situation in which you're saying beyond the government intervening in a certain limited number of areas, say provision of public goods, trying to overcome certain types of market failures and externalities and all of those things that economists kind of talk about, as soon as you try and go beyond that and say no, theres a broader objective value that were trying to hit some national interest or common good that lends itself to the political, the politically elected leader of that movement being the kind of manifestation of the people in some sense.

And so inevitably, I think this type of thinking about the economy leads to a situation where that person, there's a kind of cult of personality, a kind of cultishness develops around it. So that person is seen as kind of being above the general political fray. And that leads itself to, I mean, there's some inevitable conclusions that kind of stem from it, which I would argue have kind of harmful consequences.

One is inevitably, you do get a high degree of industrial policy and protectionism, and that's because, you know, if market outcomes are regarded as inherently undesirable, then it makes sense to use the power of government in that sense, through this elected representative of the national interest to try and divert resources to overcome them.

The allocation of capital quite quickly gets seen as unjust. And so there’s usually quite a big pushback against the role of the financial sector in the economy, which we’ve seen both on the progressive left and increasingly on the national conservative right as well.

And also, you kind of move away from the sense that the role of the state, as far as it does intervene in economic policy, should be neutral between different industries or companies to instead start treating businesses of kind of the lapdogs of government. They get rewards if they fulfill the ambitions of the state, as represented by this elected leader, and they get the newspaper to the nose through kind of various forms of punishment if they fail to get you to that destination.

And I'm more of a consequentialist, Aaron. So I think even aside from any inherent desirability about a liberal market economy in the broadest sense of the term, I think that all of those interventions have been shown to be pretty destructive in terms of economic efficiency, so making us poorer, but also leading to extensive cronyism throughout the economy, which kind of tends to feed on itself and seems to be self replicating.


A lot of this seems to be motivated by perceptions of the economy. So there was the ongoing conversation of the economic indicators are all generally look pretty good. Inflation's declining, the stock market's doing well, the economy's growing, wages are rising, et cetera, et cetera, et cetera. And yet people are down on the economy, pessimistic, say things are worse than they used to be, and so on.

And we can point to, we can say, no, look, I can show you the statistics, and actually things are getting better, but it feels different for a lot of people. And I often wonder how much of this is that this country is very large. It's very diverse. It's very diverse economically. Different sectors are present, different kind of economic sectors are present in different parts of the country. Some have done very well, some have not. And so how do you, someone who say, lives in that rural western Pennsylvania town where there used to be the sawmill, or there used to be the foundry, or there used to be the manufacturing site? And that's left for a variety of reasons. Their town has become extremely poor. The best and brightest are leaving for where the jobs are. The real estate market has collapsed. They objectively are suffering economically, and we're saying, but the market is good.

What do you say to someone in that position for whom the market has, I mean, from their perspective, not been good?


I think it's undoubtedly the case that a dynamic economy creates, in the near term, losers as well as winners. And I think it's certainly the case that as you have high degrees of automation, not to mention kind of ever changing wage flows, the economic geography of a country is going to change. And by the way, this conversation isn't just happening in the US. We have exactly the same types of conversation about the balance of economic outcomes in the north and south of England, where I'm from in the UK. And it's just a fact of life that economic geography does change, and that's not just because of government policy. I think the first error is to presume that that's a deliberative decision by the state to intervene or not. A lot of this stuff is driven by broader economic forces, such as changing demands that we have as consumers as we get richer, and the integration of more and more buyers and sellers into the market through a globalized economy.

What I would say, though, is that on average, there have been significant gains in living standards. Yes, that's of cold comfort to somebody in one of those struggling towns. But I think, as far as possible, we need to remove barriers to both adjustment and need to remove barriers to mobility, so that as far as possible, people suffering in those neighborhoods have access to more opportunities than perhaps they do at the moment. A big problem across the United States at the moment is the fact that in some of the most productive areas of the country, there are incredibly high housing costs, driven in part by local government zoning and land use regulations. If we had a situation where we had much more rational rules around development, and it was easier to move to places with more opportunity, we wouldn't get as many people stuck in areas of the country in which there was very little prospect of significant well paying jobs and the ability to lead fuller productive lives in the economic sense of the term. I think also the centralization of more and more power in Washington is not good for regeneration, whether that be urban or rural. Regeneration to the extent in which government is going to be involved in the economy, it makes much more sense to have power devolved and remain at the kind of local, community and state level because elected officials, regulators in those states, have much more of a tangible stake in making sure that policy improves to improve the regeneration of their area.

Now, I don't think we should be in a position where we presume that that's going to answer every question, but I think if we took those two kind of first steps, made sure that power remained a local elephant level, that people with the knowledge to deal with issues in that area had the power to do so, and removed government barriers like housing, like occupational licensing, that prevent people from moving to opportunity, that would at least mitigate some of the kind of harmful pain that we've seen.


How genuine is the belief in economic populism versus cynical and rhetorical? And what I mean by that is there are certainly people who don't have a deep understanding of economics, don't understand the economic history, can't do the comparative policy analysis, to say, you know, the last time we put a ceiling on prices, we instituted wage and price controls, it didn't turn out very well because people's memories are short or they weren't alive at that time, or whatever it happens to be.

But then there's a lot of people who are pushing these kinds of policies. You mentioned the national conservatives, a lot of the leading lights of the national conservative movement are very smart people who are very highly educated. They have to know. It's not like they are unaware of the arguments that you just gave. And so I often, when I'm watching this play out, wonder how much of this is genuine belief in we want to help people, and this is the way to do it, versus this is kind of a cynical way that we can get, as you said, that one response to the populism is we invest our futures in this one guy who's going to seize the power, aggregate control to himself, circumvent existing institutional limits on what he can get away with, because he is now like our avatar and he holds our future in his hands and he speaks for us. We identify with them. And one of the odd things about Trumpism is identifying with this guy, who's maybe not a billionaire, we don't actually know how much money he has, but a very wealthy real estate developer from the coastal elite city. And as a representative of the folk, it's an odd dynamic, but a lot of this feels to be a mix of ignorance and cynicism.

But how you respond to it successfully hinges a lot on which of those it is.


Yeah, I think that's a great point. I had a really interesting conversation on this with Jason Furman. He used to be the chair of President Obama’s Council of Economic Advisors. And he said, historically, you have progressives on one side and traditional conservatives on the other. He said at a speech here at Cato that the traditional progressive mistake on economics was that they got the direction of things wrong. And the traditional conservative mistake was they got the magnitudes wrong. And what he meant by that is progressives have long had a theory that all good things must go together. So if we're going to act to subsidize certain green technologies to try to overcome climate change, that won't just be good for the environment, but it will also be good for creating jobs, and it will be good for the dynamism of the economy.

You saw that in the pandemic to a certain extent, when a lot of progressives who were the most ardent defenders of full blown lockdowns thought this wouldn't just be good in terms of eradicating the virus, would actually be positive for the economy in the medium term as well. Now, traditionally, conservatives have tended to kind of be on the right side of economics, as it were, and been willing to kind of acknowledge trade offs, but sometimes get the magnitudes of things wrong. So they'd say lower marginal tax rates would be good for growth. Well, yes, but perhaps that doesn't mean lower in every marginal tax rate will always have huge growth benefits such that more revenues will actually come in than before, that we're always on the side of the Laffer curve where we can generate more revenue from cutting taxes. But I think we've seen a change, and I think we've seen a change with the national conservatives. And I do think it's a bit more cynical. Essentially, my story of what's happened since 2016 is that a lot of traditional Republicans were surprised by the strength of Donald Trump's victory and then Donald Trump as leader of the Republican Party.

And there’s a certain cohort of them who kind of got together and tried to put the meat on the bones of a kind of policy agenda that took a lot of Trump’s economic kind of rhetoric and turned it into a filled out agenda. Now, Trump himself, interestingly enough, in his first term, of course, was extremely protectionist on trade and restrictionist, at least rhetorically, on immigration as well in certain policy areas. And he has that kind of anti-foreigner bias across his policy platform. But in terms of domestic economics, perhaps not for the pro market reasons that I would advocate, but hes pretty hostile to tax, hes pretty hostile to new regulation, particularly on industries that are related to heavy manufacturing and construction, oil and gas exploration.

So if you put aside the reasoning behind those, behind those kind of approaches, actually, on domestic economics, in many respects, he was actually quite liberalizing, or at least didn’t extend and expand the regulatory state in the way that perhaps a Hillary Clinton presidency might have done. Now, the national conservatives, I think, took Trump's agenda and took it to the next level and said, well, actually, if this anti-trade and anti-immigration stuff is popular, maybe it's because there's this working class coalition out there that's also kind of in favor of essentially progressive economics, but they align with us on cultural issues. So we really need to shift our economics to being more pro worker in many respects, what's perceived to be pro worker, that doesn't just mean protectionism and restrictions on immigration, but it also means being pro organized labor, advocating, putting workers on boards, being more willing to use the regulatory state, and being more willing to use extensive industrial policy to tilt the deck towards industries that we think should be a bigger part of the economy. So I guess I agree with you that I think when you see left wing populism, it tends to be more earnestly held, as it were. But I think a big part of the story in the growth of national conservative populism is actually a more cynical take that politically, there's a working class coalition out there that would be willing to vote for this type of agenda.


I think that's right. I would just say by working class coalition, they mean only certain members of the working class because they don't tend to include the immigrant working class, the urban black working class, and so on in that. And I think that speaks to when you talk about Trump as at least domestically, not as economically anti-liberal as we might have anticipated. That's my worry for a second term, is we have really seen a rise in kind of culture war regulatory attempts. So using the power of the state to punish corporations that say woke things or sell, I'm using woke in quotes because it's just kind of a pejorative for any, any cultural angle that I think is too permissive or I don't like or is, you know, it doesn't have a really fixed meaning, but in general, kind of representing leftist perspectives on culture.

And the courts have been striking those down. So the Stop Woke Act in Florida was just knocked down. But also, you know, we need to pass regulation to stop private organizations from having DEI programs or talking about diversity, which from a libertarian perspective, even if you think those programs don't work very well or might have costs that are not anticipated, telling private organizations how they should run their businesses seems problematic. That seems to me to be where a lot of the really domestic economic illiberalism is right now is not. And we're going to jack up taxes, but instead we're going to use the state to, to punish businesses that don't take our side in the culture war.


Yeah, I don't think we should beat around the bush. I think there are extensive, even within the Biden administration, there are extensive use of ESG and DEI stuff across the federal government right now. And I think a conservative administration coming in would be well within their rights to rescind or repeal some of those executive orders and regulatory agency actions. That's part of the democratic process. But I think where you're right, Aaron, is that there's a tendency at the moment to try and downplay the idea that our ideal state of the world would be kind of state neutrality and allow companies to engage in the types of policies and freedom of association and freedom of speech that they're willing to, and actually say no.

If we have a conservative in government, they should be willing to use the power of the state as far as possible to inculcate conservative values. And that includes through the regulation of corporate speech and restrictions on corporate freedom of association. And we've seen that across a number of different areas. So there was obviously the DeSantis versus Disney battle in Florida, where there was a clear change in policy or attempted change in policy in reaction to kind of corporate speech, which the governor disliked.

We've seen it with certain conservative institutions like the Heritage Foundation, where because they're upset about content moderation policies from various technology companies, they've advocated basically just harrying these companies using antitrust laws, even if there's potentially no consumer harm there, as a way of trying to kind of chill and pressure those companies into changing what types of speech and what types of speakers they allow on their platforms. And I agree with you. I think this is incredibly dangerous. And one of the reasons it's incredibly dangerous is because if business, even aside from the restrictions on liberties that might come with it, if businesses are always trying to second guess what will please politicians, it means they're putting much less focus on fulfilling the wants and needs of customers. And that's corrupting in the kind of true sense of the word, what the whole purpose of business should be about. So, yeah, I'm incredibly worried that national conservatives in power would be willing to do that. And indeed, there's a division within the kind of broader new right, as it were, because I like to put, I think national conservatives are really kind of one part of the new right MAGa, which is very related to it. The true Trump kind of acolytes within there as well. And then you have the kind of catholic integralists who are kind of different set of people with slightly different goals.

But within this kind of broad new right grouping, you do have some people still saying, well, we really need to strip bear the administrative state. And if you look at Heritage's 2025 agenda, there's a lot of that stuff still in there. But the more national conservative members of this coalition, like Senator JD Vance, have come out a few times now and said, well, you know, rather than trying to abolish the administrative state or cut it down to size, would it not be better to kind of use it towards our own ends to do what Josh Hammer described as reward friends and punish enemies?

And so the extent to which the national conservatives are, well, I think certainly the national conservatives are ascendant in that debate at the moment within the new right. And I do fear that that might be a kind of consequence in a second Trump turn.


A dynamic that seems to play out in a lot of this is an interaction between what we might call enemies and intent.

And this shows up, I think, among the right wing populists that we've been talking about, but also among the left wing populists, which is this idea that there are bad actors, people I don't like, people who want to hurt me or at least harm me in order to advance their own interests. So kind of a callous disregard for my needs and wants and views, and that anything bad that I identify in the economy is the result of intentional actions by those people. And so to give a left wing example of it, housing prices have just been going up and up to the point where lots of people are priced out of a lot of the places that they might want to live. And that is because certain actors, certain commercial real estate investors that you can name and you can point to, are buying up houses in order to raise prices. Right? Like, it's, these guys are doing something that seems shady and is the cause of it. Or on the right, it is. My town is not as economically vibrant as it used to be. And rather than that, just being effective, the things that you just discussed earlier of shifting the dynamism of the market, shifting the nature of supply chains, consumer interests, technology, et cetera. It's because China is trying to take our jobs to immiserate us, or these immigrants are coming and stealing from me.

And it's always this intentional, someone is trying to hurt me. It's these guys. And that's what's playing out in the market. And it put me in mind of, you have a book coming out on prices, and prices seem to play this role for everyone, that if prices go up, it's not because of the changes that we talked about, it's because someone suddenly got greedy. And so it's moralizing it.

Why do we see so much of that kind of thinking and what do we do about it? Again, because it seems like we're stuck in this position of it's easier to like if something bad is happening, you want to blame someone for it. Whereas our position, our market position is maybe this is just kind of a confluence of events that is an emergent process and will be solved through an emergent process, but there's not really anyone to blame. But that's not as appealing of a story to tell.


No, I think you're certainly right. And essentially, a lot of people judge the outcomes of markets, which are an emergent process, as if they have been determined by a social planner. And inevitably that social planner gets characterized by state power. And so changes to state policy are looked to as solutions to these issues. And we've kind of seen this, as you kind of alluded to with the recent inflation, for example, where in essence theres a big theory going around called greedflation.

And the way that this has been brought about is people have looked at changes in prices over time, compared it to changes in company profits and changes in wages and changes in returns to other inputs, and have essentially said, if profits and prices are going up at the same time, that means higher profit margins are causing price hikes.

It doesn’t leave any room for the fact that there might be a third factor, say a 40% increase in the money supply in a short period of time that is actually driving up total spending, driving up prices, and driving up profits at the same time. When I was writing this forthcoming book, actually, I noticed that this is a broader issue when it comes to supply and demand, in that a lot of people just seem to see it as completely illegitimate for businesses to ever raise prices as a result of increased consumer demand as opposed to supply constraints and an increase in businesses costs. So I think this is one good example of that intentionality that you're talking about people shoot the price messenger and then they want the government to come in, or at least they want the government to come in and hold a gun to the price's head and force it to tell a comforting lie about the truth of what's going on in the market. Now, what can we do about it? Well, I mean, there is some evidence that the extent to which people have economic education kind of improves their thinking on these issues on the margin. But clearly scaling that up across the whole population is incredibly difficult. So I don't think that's a tangible way of dealing with it.

I mean, I don't have a full answer, to be honest with you. But I think as an economist, what I always try to do is rather than engage in that sort of conversation, I try and flip it around and indicate or highlight what existing policies are actually on the books that actually raise prices higher than they would need to be if we had freer markets. So if Im talking about housing policy, for example, I’ll say, sure, at the moment you’re paying landlords very high prices. But why is that? Could it be because there are severe restrictions on the ability to build more homes in the area, which in essence gives the landlord higher cash returns than they would otherwise be able to obtain with larger numbers of properties?

Is it because there are severe restrictions at the moment on what buildings have to look like or what they have to contain or what size they have to be or how many car parking spaces they have to have? So I think it kind of behooves us as libertarians that when we're talking about any of these different issues, we shouldn't kind of just dismiss the concerns about high priced goods out of hand. I think we should be looking to turn the conversation and say, okay, not every market outcome will lead to a situation in which everybody can live a fulfilled life in the way that they would like to. But are there any existing policy barriers at the moment that exacerbate this problem or make it far worse than it needs to be?


Let me ask about the inflation, because that has been the central economic issue of the last couple of years, and it's one that seems to be impacting perceptions of Biden versus Trump. It certainly is the one that has hurt the most people's pocketbooks, I guess.

What is going on there? Because if I put on, like, if I'm thinking about this from the perspective of someone who is, say, more a fan of the greedflation argument than you are, I might say, look, inflation is up in places where there wasn't large economic stimulus spending. So where the money monetary supply did not increase dramatically, we still see inflation, profits are substantially up. And just because you can turn a bigger profit doesn't mean that it's the right thing to do.

Martin Shkreli, the guy who bought the diabetes medicine and then jacked up the prices, we could say there seems to be something sketchy or immoral about taking advantage of people who need your product.

And so these seem to add up to there is an interest that's being fulfilled, right? Like the people who are raising prices are doing it out of their own volition versus they're not being compelled by, there's not a gun to their head saying you have to raise prices. There's not like my business will collapse if I don't raise prices. If I want to keep paying my workers, I have to do it. Although that could happen if costs are going up. But that story seems at least more potentially appealing than just the naive version of greedflation, which is for whatever reason, suddenly everybody decided to be more greedy than they were before. And then when prices go down, it's because for whatever reason, suddenly everybody was like, okay, we were greedy enough for a while. It's time to dial it back a little bit.


Well, there's a lot in that question. Haron so first of all, I think one of the complexities with this inflation in particular is that there was a demand component and a supply component at the same time. So I think that as a result of reverberations from the war in Ukraine and difficulties pertaining to the pandemic, it was almost inevitably going to be the case that you were going to see a spike of inflation anyway, irrespective of government policy, because of restrictions on the amount that the economy could produce in terms of goods and services, because of those supply constraints. Now let's put that to one side. On top of that, we did see this extraordinary increase in the money supply coupled with extensive fiscal stimulus through the american rescue plan in 2021 when lots of economists were warning that this was a huge stimulus relative to how far the economy was below its potential. To the extent that you can measure that. And if you look at trends in total spending in the economy, they went way above the pre crisis trend, even accounting for what happened in the pandemic. So I think all economists agree now that while there might have been a supply component in the short term that would have pushed up prices for a while, you can only really explain the inflation that we've seen by taking into consideration this big demand component as well.

Now, in terms of what that means for kind of the greedfallation stuff, I had this exact question kind of put to me by Jim Himes on a committee in Congress where he said, well, in essence, companies don't have to put their prices up, do they? So they are doing it voluntarily. And so as a result of that, we could attribute this to kind of greedflation. And although this discussion takes place as if firms can kind of just set their prices whatever they like, when in reality theyre kind of disciplined by two different forces, theyre disciplined by what their competitors are able to charge and how many competitors there are and whether theres entry to the sector, but also at the same time, what consumers are willing and able to pay. So if you're trying to explain the inflation that we've seen through these kind of greed theories, the best form of which is essentially to say there was these supply shocks from the Ukraine war and the pandemic, and people were aware of those. And so what businesses did was they used the fog of all of that going on to raise prices higher than they otherwise needed to, and that's contributed to inflation. That doesn't explain how consumers are able to pay these prices.

You could imagine a world in which a few companies jacked up their prices to try to make a quick buck. But if they're in goods which are kind of essential to consumers, and consumers are continuing to buy them, the consumers then have less money left over to spend on other goods and services. So there's a price depressing effect in those sectors. The only way that you can really explain and inflation, which is a general rise in prices, eventually all prices across the economy, is by acknowledging that there was this big increase in the overall supply of money relative to production in the economy, and that facilitated high levels of total spending, which in the short term pushed up profits because certain prices were going up much more quickly than wages were, when wages tend to be stickier. So I think this is the crucial point, really. Inflation as a macroeconomic phenomenon is an increase in the general level of all prices in the economy. Now, in the short term, certain product prices go up before wage costs. And so as a result, you can get periods in which certain firms make big profits.

But in the longer term, firms are not charities. And eventually those wages and other costs will be increasing because of the general inflation as well. And so you can’t really have a situation where wages are going up kind of 20% across the board, but we expect to still pay the prices that we paid in 2019.

So what I would say is that greedflation, or at least kind of profit led inflation, which some people have described, it is a kind of observed consequence of the disruptive effects of inflation, rather than being the cause of inflation itself. To really get to the heart of that, you have to look at the macroeconomic dynamics, which is simply that there was too much money and money moving around too quickly, chasing goods and services production that was impaired by several supply shocks at the time.


Does this mean that the answer to it, if you're talking to someone who is saying, I've seen prices go up and I don't feel like I'm able to afford as much as I could before, and particularly for things that I can't just substitute away from, if Netflix jacks up their prices, I can just watch the limited selection on Amazon prime. But if the price of the food I need to feed my family goes up, I don't want my family to eat less than we were before.

Is the answer to that just it'll settle out that the wages will eventually catch up or the be more evenly, the increase in spending power will be more evenly distributed than it feels like it is now, or because again, that doesn't sound to the person who is struggling to buy as much food as they want for their family. That doesn't sound as promising as Joe Biden saying, I'm going to punish the companies that are putting fewer potato chips in the bags than they were before, or Donald Trump saying I'm going to cut off trade to China so that your wages will increase.


Yeah, it's a good point. I mean, if we kind of given some harsh truths here, the harsh truth is that through the pandemic, most families, the majority of families, really built up and improved their balance sheets because there was extensive fiscal stimulus and relief at the same time as people's disposable spending plummeted as a result of lockdown and many people were still obtaining the same wages. So household balance sheets actually improved pretty dramatically. I mean, that's one of the reasons that total spending in the economy has been so robust, is that balance sheets had improved pretty dramatically. But people are loss of us. And so then when we got the situation where prices were going up, people do notice that the prices of kind of essentials as a share of their total budgets, grocery items as a share of total spending have gone up in the last few years. People notice that and they dont like the squeeze that that has on their ability to spend on other things they would like to pursue.

But I think in the kind of medium term wed expect this inflationary shock to pass through into all prices, wages and costs through the economy.

So to that extent, it does level out. And I think as a result of having a couple of years where wages for many people weren’t tracking inflation. Well, now see a couple of years where you see quite robust real wage growth, or at least unless theres another kind of nasty shock. So to a certain extent, it does level out. But that doesnt obviously, again, thats obviously cold comfort to people who are kind of struggling given prices have already gone up.


Now, as I noted at the beginning, we are recording this the day after Super Tuesday. The nominees are more or less set. We're now kind of heading into the thick of the presidential campaign in a way that we were, people like you and me and other weirdos who follow politics were paying attention to all of this stuff prior to now, but most Americans were not. And so now we're heading into the time when Americans start paying attention to the campaign. And it looks like it's going to be a summer and fall of not much in the way of pro market rhetoric coming out of either side. There'll be a lot of blaming of market forces for the problems that their particular constituencies are facing.

And whoever wins is unlikely to be that imagined libertarian dominance of Washington economic policy, which is, I've heard that, too. And it's often funny is if you've spent much of your career as a libertarian in Washington, DC, it doesn't feel like you're the one in charge of the economic conversation.

Do you see any opportunities? Are there areas you see where, given this environment, free marketers can potentially make progress or issues that we should be focused on in our rhetoric? Or just like how do you, as someone whose job is to advocate for free markets, view the way you will plan to talk about them over the coming six months or a year or four years?


That’s a great question.

I agree with you that I think the kind of near term outlook for us is relatively poor, but I think there are potential seeds of improvement in the longer term. So I do think within the conservative movement, as it were, there has been a at least the start of an intellectual pushback against the ascendancy of national conservatives and the number of us senators who actually call themselves national conservatives. I think you're still only three now. That might change in an election year, of course. But there are people within the conservative movement trying to push back on these intellectual trends. There's a group called Freedom conservatives who on economic policy, we probably agree with about 80% of what they say, who are trying to create this energy to push back and hold any potential future Trump administration to account.

And I think on the progressive side, there's some really interesting intellectual trends in that. You have a movement that describes themselves as supply side progressives who are recognizing that to achieve a lot of social and economic aims that they want to achieve, whether that be decarbonisation or greater opportunities for disadvantaged people, that there's actually a lot of state policies that exist at the moment that are barriers to achieving that, whether it be kind of permitting an environmental review that's actually paradoxically holding up the rollout of green energy projects right the way through to local zoning, land use, and occupational licensing policies which restrict labor force participation for people from traditionally disadvantaged communities. So I actually see quite a few opportunities to work with and speak about electoral issues, where we can kind of work with allies on certain issues that perhaps are people that we disagree with on 60 to 70% of other issues and politics, there's no final victories. So I see kind of my role as trying to be a bit of an honest broker over this next six months. If I think that there are certain suggestions being put forward that are economically sensible and would enhance the potential of the US economy, then ill write about them and cheer them on.

But I don’t think what anybody should do, and what I see certain libertarians in danger of doing is just throwing their weight into one camp or the other and treating it as a kind of, if we're against this person, we have to be firmly in the camp of the other team. And to a certain extent, I think the lesson of what's happened in the past seven or eight years is that libertarians are at their best when they retain their degree of radicalism and retain their degree of distance from day to day politics. I think we can certainly, we can certainly go to the hill and talk about issues where we have common goals. And despite the fact that we might be disillusioned and disenchanted by the broad national picture, there are still some politicians who are trying to do good things and things that we would agree with.

But I just don't think in this environment it makes any sense for us to try and be associated and seen as being on a particular side. And so I'll continue to try and call the balls as I see them, rather than play electoral politics, which definitely not a comparative advantage of mine to get involved in.

Produced by Landry Ayres. Podcast art by Sergio R. M. Duarte. Music by Kevin MacLeod.

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