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Tags: economics

Defying the Laws of Economics

a chart showing various laws of economics

Ben Stein's DREEMZ By Tuesday, 25 May 2021 10:35 AM EDT Current | Bio | Archive

Long ago and far away, I was an economics student at Columbia.

My teacher was a fine gentleman named C. Lowell Harriss. By coincidence, he had gone to graduate school at the University of Chicago in economics with my parents, Herbert and Mildred Stein, also economists.

Professor Harriss started the semester by writing on the blackboard MV=PT. That, it turned out, was “Fisher’s Law” of economic policy.

Named for a great genius of economics Irving Fisher, who was a full professor of economics at Yale in the 1920s, it stated that M (the stock of money in the economy) multiplied by V (the velocity of money or the rate at which money changes hands), or the level of prosperity, equals prices (a rough measurement of inflation or deflation) multiplied by transactions, which is also basically the level of prosperity or lack thereof, in the economy.

Professor Fisher was a stupendous genius. He did make some mistakes. He famously said — just weeks before a large crash in the stock market which was followed shortly by the Great Depression, the worst economic downturn of modern times — that the economy had entered a “permanent” high plateau of prosperity.

He had bet his savings on it and when the market collapsed, he was about to lose his home in New Haven, Connecticut, when the trustees of Yale stepped in to save him and paid his mortgage. (His descendant, also named Fisher, is an investment advisor of some note.)

While Dr. Fisher made some seriously wrong prognostications, “Fisher’s Law” is still considered one of the great summations of macroeconomics. Your servant has made mention of Fisher’s Law before and it merits attention right now.

When the COVID-19 disaster struck, the Federal Reserve responded to a large drop in velocity by ramping up the supply of money very considerably. This was a standard Keynesian method of salvation and also proceeded from Fisher’s Law.

In fact, the stock of money had been growing rapidly for some period before COVID-19 as the nation and the world enjoyed prosperity. But for reasons that were never quite clear and are still not clear, there was only modest inflation.

In fact, there was concern about deflation, a condition in which prices generally fall. Deflation sounds great but actually drastically complicates planning and investment.

Japan, an immense industrial power, has gone through prolonged deflation for years now and the effects have been bad in terms of slow growth.

For a number of years, events seemed to defy the “laws” of economics. The growth of money supply and prosperity should have led to inflation. It didn’t happen. Then came COVID-19 and events became even stranger.

With a pandemic, and compulsory shutdown of significant parts of the economy, such as entertainment, dining, and travel, we should have gotten deflation. The Federal Reserve and the Treasury during President Donald Trump’s administration addressed the crisis perfectly. They pumped money into the economy at a frantic rate. They allowed immense federal deficits, and there was no deflation.

Now, with the apparent easing of the pandemic in the industrial world, and a new administration with new economic leadership, the “laws” of economics (especially Fisher’s Law) are becoming enforced.

We have a super-recovery in employment. We have a government willing to run unlimited deficits. We now have helicopters dumping bundles of hundred-dollar bills all over the landscape as we pay some Americans a living wage merely to exist.

We have not just an expansionary fiscal and monetary policy, but what I might call a “... super-expansionary policy.” We have not seen a policy as expansionist and stimulative as this since World War II.

And now the laws of economics are reasserting themselves. A gigantic dose of stimulus and — boom — the economy is bounding back and so is inflation. Be prepared, America.

The law is the law and it can vanish for a while, maybe because of the drop of velocity caused by the pandemic, maybe for reasons we will figure out later. But ...  and this is a big but, inflation can rarely be delayed forever.

It’s winking at us and it’s coming. Or maybe not. Economics is an art, not a science. And law is a moving target everywhere and in every time.

Ben Stein is a writer, an actor, and a lawyer who served as a speechwriter in the Nixon administration as the Watergate scandal unfolded. He began his unlikely road to stardom when director John Hughes as the numbingly dull economics teacher in the urban comedy, "Ferris Bueller's Day Off." Read more more reports from Ben Stein — Click Here Now.

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For a number of years, events seemed to defy the “laws” of economics. The growth of money supply and prosperity should have led to inflation. It didn’t happen. Then came COVID-19 and events became even stranger.
Tuesday, 25 May 2021 10:35 AM
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