Washington Insider: Judd Gregg on Inflation, or the Lack of It

Judd Gregg is a former Republican governor and three-term senator from New Hampshire who served as chairman and ranking member of the Senate Budget Committee and as ranking member of the Senate Appropriations Foreign Operations subcommittee. In all those jobs, he has become well known for his views on monetary policy. So, it is especially interesting that he wrote this week for Roll Call a cautionary note on dealing with inflation as the administration moves to name new Fed leadership.Gregg begins by noting that for those “who lived through the double-digit inflation of the late 1970s and early 1980s, inflation is something to be genuinely feared.” And, for those who lived through the stagflation of the early 1990s, inflation is something to be genuinely concerned about. He believes that nothing wipes out wealth faster or reduces the standard of living of a culture more dramatically than an economy caught up in runaway inflation.He argues that the root cause of inflation “is often the failure of the government to curb the way it controls its money supply.” And, he thinks that a printing press that makes money can be a dangerous and destructive thing when put in the hands of people who govern.This is why, in 1913, Congress separated “the people who govern from those who print our money” by forming the Federal Reserve. The Fed’s primary goal from its earliest days was to “suffocate inflationary forces and protect the value of the dollar.” Later, it was also given the charge of pushing for full employment.More recently, Gregg says, during the 2008 financial meltdown, the Fed took the extraordinary, unprecedented tack of printing enormous sums of money. Those new dollars, which took the Fed balance sheet from approximately $850 billion to over $4 trillion, were used to flood the economy. The intention was to stabilize the financial system by injecting huge amounts of liquidity into it.It worked, he says.The banking system of America, and especially Main Street, did not fail. What could have been a Depression ended up being a serious but economically survivable recession. We now face the issue of what to do with all these extra dollars that have been printed and that are theoretically slogging around the country.Then the article notes that classic “economic theory says that since between $3 trillion and $4 trillion were printed, those dollars should create great inflationary pressure as conditions improve.” He asserts that we should be on the verge of an upward inflationary spiral, but “where is it?” We are essentially at full employment, at least using all the traditional yardsticks—and, we have a stock market that is at historic highs and continues to climb. And, the rate of inflation does not seem to be moving up in parallel.In fact, “except for early signs of a movement in labor costs, inflation does not seem to be an issue,”In addition, Gregg says, the Fed has signaled that it wants to begin to take some of its dollars out of the economy. “Doing so should help control inflation. But there is a problem: There really does not seem to be any inflation to control,” he says.Something else is going on here, he says and concludes that this is a period of disruption across the economy, as well as in our culture. Radical transformations are underway, and “they affect everything from computing to communication to calling a cab.”And, he thinks that the disruption also has affected the drivers of inflation so the initial printing of exceptional sums of money did not drive inflation “because the colossal contraction generated by the financial meltdown absorbed it.” This means that “the waters we are in are uncharted,” he says.This means especially, he says, if the Fed wants to handle its balance sheet in a manner that allows the economy to deal with all the new dollars, it needs economic growth.In that case, “all these dollars do not need to be removed from the economy.” They need to be absorbed by the economy in a non-inflationary fashion. This can occur through an expansion, driven by this unique period of disruption.He recognizes that historically, an economy at full employment “that has excess dollars” is a recipe for uncontrolled inflation. But “history is being re-written by the unpredictable forces of disruption,” he says, and argues that for the foreseeable future, we seem to have moved into a “totally different economy, one that is full of technological forces that appear to be countercyclical to inflation.”He concedes that inflation may “rear its unwanted head again and that the Fed needs to be sensitive to that possibility.” But it should also take into account that the forces of disruption may take precedence over historic norms.He suggests that growth without inflation is possible for the foreseeable future. This means that “the Fed should wait a bit before it pushes down too hard on the pedal of historic economic theory. It is dealing with a very different time.”Well, we will see. There seems to be a lot of support for policies that undergird growth, but at the same time, these are deeply involved with politics. Gregg’s view is certainly timely and likely will receive considerable attention as the administration tax-reform proposals emerge, Washington Insider believes.