Economic Principles Continued to Lack for Governments in 2022

How do economic principles really affect the overall status or standing of a nation, one of which policymakers usually lack?

Remember when trendy intellectuals said that old-fashioned economic principles like supply, demand, pricing, and deficits were no longer valid? They assured us that the economy could be shaped mainly how policymakers desired, delivering a new world of wealth directed from on high. Then came the epidemic served as a litmus test for increased expenditure, money supply growth, and statist involvement. Ouch. After all, old-fashioned economic notions turned out to be rather current.

“Some years cause us to challenge established theory and perceive fresh and unique possibilities for the future,” writes Tyler Cowen, an economist at George Mason University. “Not 2022. This is the year that orthodoxy exacted its vengeance.”

Cowen goes over the year in detail, but the warning signs were there from the start for anyone paying attention. Stephanie Kelton, a proponent of Modern Monetary Theory, was profiled in The New York Times in February 2022. MMT “posits that if a government owns its own currency and needs money… it can just print it, as long as its economy has the ability to churn out the essential products and services,” according to reporter Jeanna Smialek. The piece was clearly intended to be a tribute to Kelton. However, despite trillions of dollars in “stimulus” expenditure under two presidents, recent developments called for some caution.

“The rate of inflation had risen to 7%. The federal government’s debt has risen to $30 trillion, up from around $10 trillion at the onset of the 2008 recession and $5 trillion in the mid-1990s” Smialek noted. “Some economists attribute today’s rapid price increases to large spending during the outbreak.”

From there, inflation rose, and not just in the United States. Countries that inundated the world with money discovered that, as projected, money was worth less.

“Approximately $16.9 trillion in fiscal measures have been announced globally to combat the epidemic, with substantially greater support in advanced economies,” the International Monetary Fund’s Ruchir Agarwal and Miles Kimball wrote in an analysis of rising inflation. “A group known as ‘Team Persistent’ warned that the substantial fiscal stimulus, paired with loose monetary conditions, would lead to high and persistent inflation… Across various countries, the evidence had changed in favor of Team Persistent.”

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“Not long ago, economists argued that demand deficits were indefinite and that stimulus was nearly never overwhelming,” Cowen continues. “That radical Keynesian position has been laid to rest, and a form of Milton Friedman’s monetarism is once again ascendant.”

Agarwal and Kimball also included Russia’s invasion of Ukraine, fluctuations in demand among customers sent home by lockdowns and social isolation, and labor interruptions contributing to higher pricing. “Lockdowns and mobility restrictions caused serious disruptions in numerous supply chains, resulting in short-term supply shortages,” they wrote.

After months of backed-up cargo, shuttered facilities, and empty shelves, this wasn’t a new realization.

“If left to their own devices, market economies tend to be fairly adept at getting food on supermarket shelves and fuel in gas stations,” British economist Philip Pilkington observed in 2021. “That final part is crucial: if left to their own devices. In market economies, heavy-handed intervention produces the same pathologies as in socialist systems, such as shortages and inflation. That was an unforeseen effect of the lockdown.”

Fortunately, George Mason’s Cowen adds, “Another thing to remember is that supply networks do disentangle themselves. Photos of cargo ships waiting to be unloaded used to appear frequently in my news feed. Foreign goods and services were scarce, and their costs may be exorbitant. As the market was permitted to run, most of the lines and logjams dissipated throughout 2022. Once again, a conservative approach to economics has been justified.”

While allowing the market’s magic to work mostly fixed the damage caused by government officials tampering with supply chains, traditional market solutions also served to offset some of the damage caused by another statist intervention. Prior to the epidemic, left-wing campaigners advocated for an increase in the minimum wage, raising the labor price floor. It had anticipated consequences for employers as well as entry-level and unskilled workers who were priced out of the market.

“In the aftermath of a $15 minimum wage raise adopted at the end of last year, New York City business owners are eliminating jobs, slashing hours, and hiking prices,” Reason’s Billy Binion wrote in 2019.

However, the social disturbances of recent years have wreaked havoc on work routines. “Labor supply participation remains below pre-pandemic levels in several countries,” write Agarwal and Kimball of the IMF. This means that labor prices have risen over the floor established by much minimum-wage legislation.

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“Wages have risen, particularly for low-wage workers, since the epidemic for various reasons, including significant labor shortages,” The Wall Street Journal’s Austen Hufford noted last week. “Through September, the lowest 10% of workers in each state earned hourly salaries that were one-third more than their state’s minimum wage.”

Inflation, of course, has a part, as the money with which workers are paid loses value. Some states correlate minimum salaries to inflation, but the majority do not, making minimum wages less meaningful as the dollar amounts denominated in them buy less. Unfortunately, when high inflation persists, this means a race between rising salaries and diminishing purchasing power, leaving far too many people impoverished.

“Consumer prices jumped 7.1 percent year on year in November,” Hufford adds. “After adjusted for inflation, average hourly earnings for all private employees fell 1.9 percent over the same period.”

When permitted to function, the market performs admirably and predictably. However, it cannot rapidly correct all of the distortions caused by massive economic principles involvement.

“Centrally planning a fundamentally decentralized system isn’t sustainable for long,” Tyler Cowen says of China’s disastrous Zero-COVID strategy.

That is an understanding that may readily be applied to all of the suffering caused by economic interventions in recent years. When free markets are allowed to function, they can eventually repair the damage done by government officials attempting to “improve” the voluntary interactions of millions of customers, sellers, employers, and workers. But we’d all be better off if politicians avoided the economic principles experiment altogether.

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