It’ll get worse before it doesn’t get better


I went on another trip recently and, once again, had the fortune to spend it with “libertarians”.

The libertarian attitude towards issues like policing, trans rights, and abortion should be close, if not identical, to that of the left. However, I found myself instead having a sort of meta-debate: not that much of American policing is brutal and ineffectual, or that trans people should be allowed to live how they want to — which is the essence of libertarianism, I had thought? — but instead that Democrats are politically foolish for agreeing with these stances. (Meanwhile I wondered, what would the ideology that got 1.2% of the vote in the last election know about political strategy?)

Libertarianism, it seems, has transmuted into anti-leftism, or a strange centrist contrarianism. In fact, one of my traveling partners admitted that he was sympathetic to the left a decade or two ago when “the right was in power” but now that the situation had flipped, he viewed “woke” ideology as the greater peril.

One topic that came up, mostly because I can’t help myself, is that the rent is too damn high. One libertarian had an interesting theory to explain why this had happened: women. Or, more specifically, the rapid rise of women in the workforce had increased household earnings, allowing households to afford more, and, via the well-known laws of supply and demand, this had led to a correspondingly rapid rise in home prices and rents.

Needless to say, I find this absurd — how does it explain, for example, the regional variations in home prices and rent increases?; or, now that this dynamic has largely stopped, why haven’t rents also leveled off? — but no matter. This type of argument is part of a broader class that I will call “no free lunch”. You might have seen it in American politics and economics without recognizing it as such. Here are some examples:

I hope the Administration does not contribute to inflation macro economically by offering unreasonably generous student loan relief or micro economically by encouraging college tuition increases.

Every dollar spent on student loan relief is a dollar that could have gone to support those who don’t get the opportunity to go to college.

Student loan debt relief is spending that raises demand and increases inflation. It consumes resources that could be better used helping those who did not, for whatever reason, have the chance to attend college. It will also tend to be inflationary by raising tuitions.

Larry Summers, Twitter, August 2022

How could an administration loaded with savvy political and economic hands have gotten this critical issue so wrong?

They can’t say they weren’t warned — notably by Larry Summers, a former Treasury secretary and my former boss in the Obama administration, and less notably by many others, including me. We worried that shoveling an unprecedented amount of spending into an economy already on the road to recovery would mean too much money chasing too few goods.

The original sin was the $1.9 trillion American Rescue Plan, passed in March. The bill — almost completely unfunded — sought to counter the effects of the Covid pandemic by focusing on demand-side stimulus rather than on investment. That has contributed materially to today’s inflation levels.

Steven Rattner, NYT, “I Warned the Democrats About Inflation”, November 2021

Pouring roughly half trillion dollars of gasoline on the inflationary fire that is already burning is reckless. Doing it while going well beyond one campaign promise ($10K of student loan relief) and breaking another (all proposals paid for) is even worse.

Jason Furman, Twitter, August 2022

A big near-term decline in wages is unlikely because labor markets are now tight. The unemployment rate is near its lows, job offers are plentiful, and the cost of living is giving people reason to ask for more. Thus, the degree and duration of the tightening must be strong enough and long-lasting enough to bring credit growth down by enough (roughly by half) for long enough—to bring spending down by enough for long enough—to weaken labor markets by enough—to bring wages down by enough—that NGDP growth falls by enough and stays there—to bring inflation down to 2.5%.

Bob Prince (Bridgewater), “An Update from our CIOs: Transitioning to Stagflation”, July 2022

Reducing inflation is likely to require a sustained period of below-trend growth. Moreover, there will very likely be some softening of labor market conditions. While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses. These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain.

The labor market is particularly strong, but it is clearly out of balance, with demand for workers substantially exceeding the supply of available workers.

Jerome Powell (Federal Reserve), “Monetary Policy and Price Stability”, August 2022

The “No Free Lunch” axiom states that “If one individual or group gets something at no cost, somebody else ends up paying for it. If there appears to be no direct cost to any single individual, there is a social cost.”

The social cost of women entering the economy and achieving some modicum of financial independence is to make housing more expensive. The social cost of wiping away some, but not all, of student debt is inflation (and god forbid we had wiped it all away). The social cost of accelerating an economic recovery instead of waiting 10 years like last time is also inflation. The social cost of having a strong labor market, one in which employers are forced to compete for employees, is also, you guessed it, inflation. (I wonder if there’s a social cost of having a weak labor market? Probably not.)

And, since there’s no free lunch, there is an associated social cost of undoing inflation too. Households and businesses will suffer “some pain”. Economic growth will be “below-trend”. The labor market will have to be “weakened…by enough — to bring wages down by enough” to calm inflation expectations.

You can already envision, I’m sure, how this type of reasoning extends well beyond inflation. In fact, it is so elastic as to encompass almost anything related to economics. Giving people loans or grants to afford college only makes college less affordable. Giving renters vouchers (or even worse, instituting rent control) dis-equilibrates the housing market and only harms those it intends to help. Fighting inflation by combating monopoly power also reduces efficiency. Increasing the purchasing power of women, as we saw, has unintended knock-on effects. (Wouldn’t it be better if they were at home?) The child tax credit harms children, government spending distorts the economy, rapid wage growth hurts workers, low unemployment is bad.

(In fact, a perceptive reader might notice echoes of Albert Hirschmann’s famous “Perversity, Futility, and Jeopardy” theses of reactionary thought. “According to the perversity thesis, any purposive action to improve some feature of the political, social, or economic order only serves to exacerbate the condition one wishes to remedy”. Perversity, futility, and jeopardy apply not just to economics but to all of politics. Do you believe that when Democrats support unpopular policies, that’s bad, but when they support popular policies, that might also be unintentionally bad? If so, you might have a career as a New York Times columnist, or at least as a Twitter satirist.)

If good things are actually bad, then might bad things actually be…good? Naturally. What if, instead of giving people money, we took it away? (Rattner writes, “The White House needs to inject some real fiscal discipline into its thinking. Given the importance of Mr. Biden’s spending initiatives, the right move would be to add significant revenue sources. Yes, that means tax increases.”) What if, instead of wage growth falling somewhat behind price growth, we made it fall far behind? What if, instead of workers having an abundance of jobs to choose from, they had none? What if, instead of a growing stock market and a strong economy, we had a cratering stock market and a recession? Admittedly all of those possibilities sound worse than the status quo, but, by the magic of free lunches (or the lack thereof), they are better. After all, if ordinary people get something at no cost, then that is bad for society. So, as a corollary, if ordinary people are the cost, then that is good. What could be simpler?


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