Economists Reply: How’s This for Proof on Money Supply and Inflation?

We used the tried-and-true quantity theory of money and M2 to predict the year-over-year inflation rate.

Letter to The WSJ. 

"Dan Thornton, a former St. Louis Federal Reserve official, claims that there is no empirical evidence linking changes in the money supply to changes in inflation (Letters, July 22). He then takes us to task for claiming that there is (“The Fed Ignored the Money Supply, and a Recession Is Coming,” op-ed, July 8, and Letters, July 19), and demands that we provide proof of such a connection.

Exhibit A is our op-ed “Too Much Money Portends High Inflation,” which appeared on these pages a year ago (July 21, 2021). In it, we admonished Federal Reserve Chairman Jerome Powell for being in denial about the linkage between money (M2) and inflation. We then used the tried-and-true quantity theory of money and M2 to predict that the year-over-year inflation rate in the U.S. would surge to “at least 6% and possibly as high as 9%.” We hit the bull’s-eye. There’s the evidence.

Prof. Steve Hanke and John Greenwood

Johns Hopkins University

Baltimore and London"

Three New Books Challenge Preconceived Notions of Race

Far-left activists, scholars and journalists dominate the debate with views most black Americans reject.

By Jason L. Riley of The WSJ. Excerpts:

"A majority of blacks tell pollsters that they support school choice and voter ID requirements and that they oppose racial preferences."

"One of today’s most prominent activist organizations, Black Lives Matter, has advocated defunding the police, while polling has shown that upward of 80% of blacks want the level of policing in their communities to remain the same or to increase."

"“Black leaders have turned to group identity rather than individual identity and American principles of assimilation. The result has been cultural stagnation for some black communities.”"

"Brown University economics professor Glenn Loury challenges the left’s notion that racism mainly explains this cultural underdevelopment. “The ‘structural racism’ argument seldom goes into cause and effect,” he writes. “We are all just supposed to know that it’s the fault of something called ‘structural racism,’ abetted by an environment of ‘white supremacy’ that purportedly characterizes our society. Any racial disparity, then, can be totally explained by the imputation of ‘structural racism.’ ”"

"In “Agency,” Ian Rowe of the American Enterprise Institute argues that the path out of poverty is not more government wealth redistribution but more focus on family structure and the so-called success sequence: graduate from high school, find a job, get married and then have kids, in that order."

"Rafael Mangual has just authored “Criminal (In)justice,”"

"The book’s discussion of the popular belief that poverty is a “root cause” of crime is instructive. Mr. Mangual reports that New York City homicides fell from more than 2,220 to fewer than 300 between 1990 and 2018, a period during which the city’s poverty rate increased slightly. Even during the 2007-09 Great Recession, which hit New York especially hard, crime continued to decline. Between 2006 and 2009, the jobless rate for black men, who are most of the city’s murder victims and perpetrators, nearly doubled, yet homicides and other violent crimes fell significantly."

Big Hospitals Provide Skimpy Charity Care—Despite Billions in Tax Breaks

Nonprofit medical institutions get federal benefits in exchange for providing support to their communities but often lag behind their for-profit peers

By Anna Wilde Mathews, Tom McGinty and Melanie Evans of The WSJ. Excerpts:

"Nonprofit hospitals get billions of dollars in tax breaks in exchange for providing support to their communities. A Wall Street Journal analysis shows they are often not particularly generous.

These charitable organizations, which comprise the majority of hospitals in the U.S., wrote off in aggregate 2.3% of their patient revenue on financial aid for patients’ medical bills. Their for-profit competitors, a category including publicly traded giants such as HCA Healthcare Inc., wrote off 3.4%, the Journal found in an analysis of the most-recent annual reports hospitals file with the federal government.

Among nonprofits with the smallest shares of patient revenue going toward charity care—well under 1%—were high-profile institutions including the biggest hospitals of California’s Stanford Medicine and Louisiana’s Ochsner Health systems. At Avera Health, a major hospital system in South Dakota, charity care was roughly half of 1% of patient revenue across all its 18 hospitals."

"In return for not paying taxes, nonprofit hospitals are supposed to provide community benefits. The clearest form is free or discounted care for poor patients who otherwise couldn’t afford it"

"Federal law requires nonprofit hospitals to have policies to assist such patients. But federal guidelines allow them broad freedom to write and implement those policies and don’t require hospitals to meet any specific targets for financial-assistance totals.

The value of nonprofit hospitals’ subsidy from avoiding taxes is more than $60 billion a year"

"The Journal used federal filings to examine charity-care spending by state and found that in states that haven’t expanded Medicaid—where the need for charity care may be greater—nonprofits’ rates were lower in aggregate than the for-profit hospitals’."

"Many nonprofit hospitals set restrictive policies that may deny financial aid to patients who can’t afford their care, sending some bills to collection agencies. Some won’t forgive bills even if a patient’s income is barely above the poverty level or require patients to tap retirement savings. Other nonprofits reject needy patients based on nonfinancial factors, such as immigration status, or whether they have insurance, even if limited coverage leaves them with large bills."

Central-bank policies may themselves contribute to the negative productivity, employment or output trends

See ‘21st Century Monetary Policy’ Review: Rosy Memories of the Fed:Former Federal Reserve chairman Ben S. Bernanke looks back over the central bank’s worth with satisfaction. by Joseph C. Sternberg of The WSJ. Excerpts:

"In a mercy to the lay reader, Mr. Bernanke sets out his argument mainly via historical narrative, rather than a string of data tables and equations. Some of this will be familiar to readers of “The Courage to Act,” Mr. Bernanke’s 2015 memoir. “21st Century Monetary Policy” has fewer personal anecdotes, but also some telling differences. Observers have noted, for instance, a shift in Mr. Bernanke’s interpretation of the legal limits on the Fed’s activities during the global financial crisis. He no longer insists that the law would have prohibited a bailout of Lehman Brothers, but instead suggests that it was a bad idea on the policy merits.

Mr. Bernanke also seems to have shifted his explanation of how policies such as QE are supposed to work. In 2015 he focused on QE’s suppression of longer-term interest rates as the main mechanism by which it would influence the economy. (Despite the massive expansion of bank reserves that QE creates, it might surprise you to learn that the Fed does not believe the expanded reserves actually have much direct effect on bank lending.) To this long-term-rate effect Mr. Bernanke now adds a more ephemeral “signaling” channel. The Fed’s massive asset purchases, he believes, are an indication to investors that the central bank is committed to low rates, thus deterring them from making contrary bets that might push market rates higher.

That this evolution in Mr. Bernanke’s views doesn’t on its face undermine his credibility could be explained by the fact that there’s still quite a lot that economists don’t understand about these policies and how they work—as Mr. Bernanke acknowledges. But it might also be a clue that something is awry in the economics behind Mr. Bernanke’s new approach to monetary policy. Or that his enthusiasm for the Fed’s new tools could be a tad premature.

It turns out to be the latter. A glaring omission from Mr. Bernanke’s book is any sense that central-bank policies may themselves contribute to the negative productivity, employment or output trends to which—as Mr. Bernanke and so many others believe—a central bank merely reacts.

Economists now are studying a wide range of plausible mechanisms by which this can happen. To cite three: Loose monetary policy can sustain unproductive “zombie” companies that divert human and capital resources away from more-productive firms. Complex interactions between monetary policy, bond markets and banks can favor larger firms capable of issuing bonds while squeezing smaller firms dependent on bank lending, although small firms tend to be engines of productivity growth. Low interest rates combined with flaws in the tax code allow companies to pursue sugar-rush profit hits by rejiggering their balance sheets toward debt and away from equity, rather than investing in longer-term innovation and growth. And on and on."

"the Affordable Care Act, or ObamaCare—doesn’t warrant a single mention"

"He observes that minority unemployment improved considerably since the QE era, and suggests that this and other important measures indicate that these monetary policies work. But that’s hard to credit when those improvements arrived relatively late in the cycle and he omits any discussion of other possible causes, such as the 2017 Tax Cuts and Jobs Act or Trump-era deregulation."

In Marilyn Mosby’s Baltimore, Repeat Criminals Go Free to Kill

A majority of the city’s murders since 2015 were committed by suspects who should have been in prison.

By Sean Kennedy. Mr. Kennedy is a visiting fellow at the Maryland Public Institute and author of the recent study “Baltimore’s Preventable Murders: The Role of Prior Convictions and Sentencing in Future Homicides.” Excerpts:

"Using a database of homicide defendants provided by the transparency nonprofit Baltimore Witness, I analyzed the criminal histories of 110 suspects charged with homicide in Baltimore between January 2019 and July 2020. My analysis indicates that the majority of the city’s murders didn’t have to happen.

Ninety of the defendants whose histories I examined had previously been convicted of an offense carrying a sentence of three or more years in prison. Most didn’t serve anywhere near that time. They were back on the street when the homicides they are charged with were committed, but they should have been behind bars.

More than half (77) of the 110 homicide defendants whose cases I examined were previously convicted of serious crimes under Ms. Mosby. At least 61 of those 77 were convicted of an offense whose eligible jail term, if served in full, would have made it impossible for them to commit their alleged homicides.

Ms. Mosby, who decries mass incarceration and decriminalized a slew of quality-of-life crimes by fiat in 2020, makes frequent use of a loophole in state sentencing rules to keep criminals out of prison. Under a “binding plea agreement,” Maryland prosecutors can deem a sentence “compliant” if it falls short of the guidelines range, or even the statutory mandatory minimum term. All that needs to happen is for the prosecutor and defense counsel to agree to the plea before taking it to the judge.

At that point, the judge retains veto power only. If the judge accepts the defendant’s guilty plea, the agreed-on sentence can’t be altered. By dropping charges that carry hefty prison sentences, prosecutors like Ms. Mosby can cut offenders loose without running afoul of the rules at all."

The Effect of Transfer Payments on the Labor Force Participation Rate

By Joshua Rutzick of CEI. 

"In the The Wall Street Journal last Thursday, James Piereson of the Manhattan Institute laid out the case for the relationship between a shrinking labor force participation rate and low levels of economic growth. Piereson explains that over the past six decades, the average annual GDP growth rate has fallen from 4.5 to just around 2 percent, a reduction of more than half. He also lays out the long-term reduction of the labor force participation rate:

The percentage of the adult population working or actively looking for work increased steadily from 59% in 1965 to 67% in the late 1990s, followed by a steady drop-off to 62% in 2022.

Piereson argues that the reduction in labor force participation can be explained by baby boomers aging out of the workforce, as well as reduced participation from men. He also describes how the calculation of the unemployment rate hides the problem the labor market is facing:

Today’s low unemployment rate obscures the substantial decline in workforce participation in recent years, as “dropouts” from the workforce aren’t included in the unemployment figures. If they were added, as some analysts think they should be, then the real unemployment rate wouldn’t be 3.6% but more like 9% or 10%.

Piereson concludes that there are no easy solutions to the problem, but that rising wages and an improved immigration system could draw more workers into the labor force.

While all that may be true, Piereson fails to mention one clear driver of the falling labor force participation rate: increased government transfer payments. As can be seen in the graphs below, there is a meaningful correlation between the total transfer payments from the government and the labor force participation rate.

As transfer payments have increased, the labor force participation rate has fallen. This relationship was clearly demonstrated in the COVID-19 pandemic, which saw huge increases in government payments to citizens. This logic bears out intuitively: When people are receiving payments for not working, why would they choose to work?

Economist Stephen Moore recently testified on this subject before Congress:

One of the worst mistakes in the Recovery Act was the supplemental unemployment benefits … with the supplemental UI [unemployment insurance], plus expanded food stamps, plus rental assistance, plus expanded Medicaid, and the evisceration of the Clinton-era work-for-welfare reforms, families with two unemployed parents and two kids could receive a tax-free income of $100,000 or more. … [S]tates which canceled the early UI benefits early had much lower unemployment rates. … University of Chicago economist Casey Mulligan and I published a paper last year showing that if we had reduced the payroll tax rather than increased unemployment benefits, we would have had 3 million more Americans working throughout 2020, 2021, and through the first half of 2022.

If policy makers want to increase the labor force participation rate, which in turn would drive economic growth, they should work to reduce transfer payments."