Bread, Circuses, and the Crumbling Pillars That Fight Inflation
When a Roman writer penned the adage “bread and circuses,” he warned emperors to make sure that peasants could afford to eat a panini and to watch a dancing bear. Such distractions would pacify the peasants, who would then accept lousy rulers. President Biden should be worried because the price of bread has jumped 22 percent, while a ticket to a modern-day circus, like an NBA basketball game, has climbed 37 percent.
“Bread and circus” is not just a cliché, though. The Romans shared real wisdom, well-suited for today’s central bankers and finance ministers. Bread is, of course, a staple and often reflects worldwide commodity prices. In 2007, hundreds of thousands of citizens from Mexico to Bangladesh to Italy rose up in protest when prices of loaves, tortillas, and pasta soared. But the price of a circus tells us something different. Circuses represent not just entertainment, distraction, and folly -- but also services.
Ignoring service sector inflation has ricocheted the Federal Reserve and the White House against the guardrails. A few days ago, the Institute of Supply Management reported that inflation in services hopped to the third highest level it had ever recorded. The New York Federal Reserve reported that renters expect a 10.1 percent hike over the next year, while parents expect college tuition to leap by 7.4%. Please note, the latter is not spurred by a supply-chain blockage. There are no container ships anchored off the coast filled with studio apartments and English professors.
Until last week Fed chairman Powell dismissed inflation as “transitory” goods shortages, while President Biden blamed supply-chain disruptions that he said were too confusing for American families to understand while seated at their dining tables. He also announced that “Milton Friedman isn’t running the show anymore.” He could also have thrown in the name of Paul Volcker, the 6-foot 7-inch Fed chairman who hoisted a giant stogie in front of Congressional committees while explaining why he needed to conquer the inflation that surged during the Jimmy Carter years.
I proudly confess that I was an inflation dove for a dozen years, until 2020. I defended Ben Bernanke, Janet Yellen, and Jerome Powell as they fought off the impact of the Great Recession of 2007. In the Wall Street Journal and elsewhere I explained why the gig economy helped contain inflation. But starting a year ago, the inflation-fighting pillars started crumbling. Perhaps it began with the rising star of Modern Monetary Theory (MMT), which is better thought of as “astrology as economics.” MMT theorists told government leaders that they could go on trillion-dollar spending sprees without damaging the standard of living, as long as inflation did not start rising. But now that inflation has jumped, shouldn’t MMT enthusiasts be the first ones arguing for restraint? Let me know if you hear from them.
Out of four inflation-fighting pillars, all but one looks shaky. First, a vigilant Fed. Put simply, the Fed has printed too much money, with the basic money supply (M2) catapulting twice as high as its prior growth path, an unprecedented experiment that’s shoved about $4 trillion extra dollars into bank accounts. In addition, $30 billion a week of bond-buying, including bonds of private companies (during 2020), overwhelms the credit system and distorts markets.
Second, deregulation and the gig economy battle inflation. About one-third of the U.S. workforce engage in gigging, as companies like Airbnb, Uber, and logistics start-up Curri inject new supply into housing, transportation, and building equipment. Unfortunately, state legislatures are cracking down and trying to classify giggers as employees. The state of California has squeezed truckers (at a time when the U.S. needs more deliveries!) and even curtailed freelance writers and artists. Likewise, New York City capped the profit margins on food deliverers like Doordash, which will limit competition and hurt city-dwellers standing in their tiny kitchens.
Third, world trade tends to tame inflation. President Biden has re-armed for the trade wars and skirmishes of his predecessor, and so imports of wood, natural gas, solar goods, and EV cars from Canada drive up the prices of homes, heating, and driving. Of course, the president might rightly use trade policy to dissuade Vladimir Putin from threatening Crimea or Xi Jinping from menacing Taiwan. But it’s hard to understand threats to our Canadian neighbors to the north, unless you really don’t like hockey and maple syrup.
The fourth inflation-fighting pillar, a firm dollar, is in good shape. But this is not proof of a wise U.S. economy policy; it’s a sign that other countries look just as hapless, or far worse, as in the case of Turkey.
Washington politics has sometimes been likened to a circus, filled with clownish acts. But when reckless spending drives up the price of bread and circuses for citizens thousands of miles outside the Capitol, it’s not a sign of laughs; it’s a warning of turmoil ahead.
[this article first appeared in the Wall Street Journal]