Nobel Laureates' Letter is Partisanship not Economics

Ahead of tonight’s Presidential debate, sixteen Nobel Prize-winning economists have written a letter in support of President Joe Biden. It contains some rather strange claims about inflation.

They write:

…

While each of us has different views on the particulars of various economic policies, we all agree that Joe Biden's economic agenda is vastly superior to Donald Trump's. In his first four years as President, Joe Biden signed into law major investments in the U.S. economy, including in infrastructure, domestic manufacturing, and climate. Together, these investments are likely to increase productivity and economic growth while lowering long-term inflationary pressures and facilitating the clean energy transition. 

During Joe Biden's presidency we have also seen a remarkably strong and equitable labor market recovery — enabled by his pandemic stimulus. An additional four years of Joe Biden's presidency would allow him to continue supporting an inclusive U.S. economic recovery. 

Many Americans are concerned about inflation, which has come down remarkably fast. There is rightly a worry that Donald Trump will reignite this inflation, with his fiscally irresponsible budgets. Nonpartisan researchers, including at Evercore, Allianz, Oxford Economics, and the Peterson Institute, predict that if Donald Trump successfully enacts his agenda, it will increase inflation. 

….

Signed, 

George A. Akerlof (2001) 

Sir Angus Deaton (2015) 

Claudia Goldin (2023)

Sir Oliver Hart (2016) 

Eric S. Maskin (2007) 

Daniel L. McFadden (2000) 

Paul R. Milgrom (2020) 

Roger B. Myerson (2007) 

Edmund S. Phelps (2006) 

Paul M. Romer (2018) 

Alvin E. Roth (2012) 

William F. Sharpe (1990) 

Robert J. Shiller (2013) 

Christopher A. Sims (2011) 

Joseph E. Stiglitz (2001) 

Robert B. Wilson (2020)

A lot of these economists, we suspect, support Biden for reasons other than his record on inflation. Yet because their expertise is in economics, they likely feel they must address this issue. Unfortunately, the partisan way they’ve gone about evaluating the candidates on inflation risks sullying economists’ reputation for providing worthwhile apolitical analysis.

To be clear: the letter implies that large fiscal deficits in a future under President Trump would risk higher inflation. Yet it also claims that President Biden’s actual high deficits were nothing but positive, helping secure a strong labor market recovery and supposedly increasing the economy’s productive capacity, so lowering long-term inflationary pressure.

Got that? Donald Trump’s potential deficits: bad, unproductive, inflationary. Biden’s actual deficits: good, productive, disinflationary.

You don’t have to be savvy with verbal reasoning to read between the lines of what’s not said about the Biden deficits. By talking about their positive short-term effects on labor demand and their supposed long-run disinflationary effects, what’s missing is what the short-term impact on the price level has been. Per the model of the economy the signatories clearly subscribe to, where fiscal stimulus fuels aggregate demand and strengthens the jobs recovery, those large deficits under Biden would also push up the price level, worsening inflation. Failing to mention this exposes the Nobels as hyper-partisan.

Now, as it happens, we don’t subscribe to the simplistic view that the recent inflation was driven solely by fiscal policy. The impact of fiscal policy on inflation overwhelmingly depends on how the extra borrowing is financed. For fiscal policy to boost the price level ultimately requires monetary financing of deficits or at least monetary accommodation from the Federal Reserve. The latter is precisely what we saw. Coupled with temporary supply-shocks, the strong growth in total spending on final goods and services that resulted from this expansionary policy raised the U.S. price level far beyond its 2 percent average inflation target.

The key point is, if your model of the economy implies stimulative effects of fiscal policy, you can’t give Biden credit for the strength of the labor market recovery, but also imply that high inflation had nothing to do with all that borrowing. These economists are working back from justifying a vote for Biden and so excluding inconvenient implications of their own analysis.

What would a more economically-robust assessment of the two candidates on inflation look like? We think it would criticize both candidates’ records and plans, albeit on slightly different grounds.

Joe Biden…

• added unnecessary macroeconomic fuel to the fire through his $1.9 trillion American Rescue Plan in early 2021, despite the vast monetary and fiscal stimulus delivered beforehand;

• propagated false narratives that inflation was being exclusively driven by external events like oil price shocks, and could be ameliorated through the wildly-misnamed Inflation Reduction Act – a host of new green energy subsidies;

• supported and signed into law a raft of industrial policy through the CHIPS Act and Inflation Reduction Act. We expect this substitution of government resource allocation for market resource allocation will weaken long-run productivity growth somewhat and so make the Fed’s job of keeping inflation under control marginally more difficult;

• deflected blame for inflation away from Washington DC by repeating quack leftist theories about how profit-seeking corporations were really causing inflation (greedflation, shrinkflation, monopoly power, junk fees, etc). This risks increasing public demands for destructive policies such as price controls;

• shows little interest in defusing the federal government’s long-term debt timebomb driven by old-age entitlement spending, one result of which could be “fiscal dominance” – in effect, the Federal Reserve stepping in to hold down government borrowing costs or else directly financing government activity, thus fueling inflation.

Donald Trump…

• plans aggressive increases in tariffs on Chinese goods and a new tariff on all imports from countries not covered by U.S. free-trade agreements. While these won’t strictly increase inflation–as a sustained rise in the general price level–the negative supply-shock would likely lead to a sharp jump in the price level, unless the Fed squeezes total spending in the economy to fully offset this price boost;

• like Biden, showed no interest in defusing the federal government’s long-term debt timebomb in office and has no plans to reform old-age entitlement spending, which ultimately risks fiscal dominance and higher inflation.

• is reportedly toying with eroding the Federal Reserve’s independence, perhaps even giving the President a role in setting interest rates. We are baffled that this wasn’t mentioned in the Nobels’ letter: full politicization here could have disastrous consequences, as Argentina and Turkey show. Both countries lost institutional faith in their central banks and have been ravaged by hyperinflation. Both countries now face severe austerity measures to bring inflation under control. Lest we forget the importance of independent central banking, the Turkish central bank recently set its interest rate at 50 percent–nearly ten times its US counterpart.

In summary, both candidates have poor records and policies that could impact inflation negatively, albeit through different economic channels. Economists might even evaluate them and conclude that Trump’s agenda is more risky. Yet implying that Trump threatens inflation without acknowledging what’s happened since 2021? As the President might say, “Come on, man!”