by Rod D. Martin
June 15, 2006

A friend writes:

Sadly, a lot of consumer-oriented folks are loving this, as it is suppressing fuel prices to some extent, and a collapse would bring us back to $1.00-1.50 gasoline. Unfortunately, people wouldn’t have jobs anymore, so the savings benefit from cheaper fuel would be a joke.

I’d like to see the economy cool (but not stop growing all together) without a recession. Blabbing to the news media every five minutes to show off a fed chairman’s new-found stardom is hardly the way to do it. Ben is screwing up badly.

The economy does not need to “cool”: that’s a Keynesian myth. The Fed needs to quit fighting a phantom inflation which has nothing to do with the value or stability of the dollar. To say that rising gas prices are “inflationary” is just about as sensible as saying that dropping computer prices are deflationary: neither has anything to do with inflation or deflation at all. If both of those products were constants — constant in demand, supply, quality, etc. — than sure. And if both existed completely within a U.S. market context, then sure. But neither is true. Falling computer prices reflect advancing technology and increasing supply in a global market; rising gas prices reflect contracting actual supply after Katrina and contracting relative supply due to rapidly expanding global (chiefly Asian) demand.

What they don’t reflect is inflation, which would mean that the increase in price is entirely the result of more dollars chasing the same (relative) amount of gas.

Prices move. Economies grow. This is exactly what can, should and does happen in any dynamic system; and trying to engineer a false “price stability” when the market price of a particular product should be rising or falling is the surest way to destroy all of the ecconomy’s healthy sectors (which is just another way of saying “put families out of work and ruin people’s lives”).

Keynesian foolishness has always tried to freeze the economy in place, not just in this way but on a conceptual level as well (hence the warning given to FDR in 1944 that as soon as everyone had a small house and one family car, the economy would shut down, because everyone would have “everything anyone could want” and would therefore stop working). It believes there is no future, no growth, no possibility of tremendous breakthroughs (much less the seemingly constant tremendous breakthroughs we see today): it is best expressed in the “reduced expectations” and “limits to growth” language of the Carter stagflation era. So it tries to manage what it sees as a finite pie, by balancing inflation and unemployment against one another as the “inevitable” trade-off of monetary policy; and if that were it’s only pernicious effect, the 1970s would have been a radically better time.

But what if you’re economy is booming, growing rapidly in real terms, and starts requiring more workers than the domestic market can provide?

The liberal economic model can’t account for this. So it starts trying to shut things down.

That’s what Ben Bernanke is doing right now, that and trying to prove he’s a big man who will be strong like his predecessor. And this is all a serious disappointment, because the whole idea of picking him was that he would be smarter than Greenspan, not a whole heck of a lot dumber.

I suspect the President is kicking himself, wishing he’d gone with Glenn Hubbard after all (see here: )

But what he should have done was name Art Laffer. Reagan should have too.