May 26, 2022

511: The Zombie Economics of Inflation and Unemployment (w/ Prof. Alex Salter)

How do bad economic ideas get so rapidly accepted and embraced?

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Today's guest (Prof. Alex Salter) recently joined Phil Magness and wrote an article for The Hill outlining how bad economic ideas can have a frustratingly long shelf life. Amid surging consumer and producer prices, the apparent tradeoff between inflation and unemployment has become a hot topic.


There’s just one problem: the tradeoff doesn’t exist.


Economists have known this for 40 years. Policymakers and commentators asserting otherwise should get with the program.


"In policymaking circles - public economics commentators - (those sorts of positions), there persists this myth that there's a steady and exploitable trade-off between unemployment and inflation.


The idea is you can quote-unquote, "run the economy hot", in which case you're gonna get low unemployment, but you have to put up with high inflation.


Or if you want to try and bring down inflation, you have to put up with not-so-good labor markets, and higher unemployment.


In brief, this view is bogus. There's nothing to it.


There is absolutely no reason why you can't have strong labor markets, and low and stable inflation. You can even have strong labor markets with no inflation."


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Brian Nichols  0:03  
focusing on winning arguments. We're teaching the basic fundamentals of sales and marketing and how we can use them to win in the world of politics teaching you how to meet people where they're at on the issues they care about. Welcome to The Brian Nichols Show. Well, Happy New Year, you're on The Brian Nichols Show. Thank you for joining us. For another fun filled episode, we are going to be digging into zombie economics yesterday on the economics of inflation and unemployment. But before we get there want to give a special shout out to today's sponsor and that is the expat money Summit. 2022 you can head over to the Brian Nichols forward slash expat and you can sign up for your free tickets for our awesome virtual summit November 7 through November 11. Five days 30 expert speakers watch for a week reap the benefits for generations join our good friend McHale Thorpe and yes, 30 expert speakers November 7 through 11th. One more time, Brian Nichols Forward slash expat folks returning to the program today. Yeah, I talked about it. We're digging into those zombie economics of inflation and unemployment returning to the program, the professor himself, Alex Salter, welcome back to The Brian Nichols Show.

Alex Salter  1:20  
Brian, it's great to be back. Thank you,

Brian Nichols  1:23  
Alex, it's great to have you back. My friend. Thank you for joining us. And thank you, obviously, for helping talk some sense into the chaos that we see in the world today, especially as it pertains to our economics, our monetary policy, people are seeing on the news, and now they're seeing it in real life. They're seeing it the gas pump, they're seeing it the grocery store, inflation cost of living, it's hitting hard. But before we get there, Alex, let's reintroduce yourself to The Brian Nichols Show audience who are you? And why are we looking to you to explain what's going on in this world of inflation?

Alex Salter  1:53  
You know, that's never really been made clear to me. Just kidding. I'm an economics professor at Texas Tech University guns up Go Red Raiders. And money in macroeconomics is one of my specialties. I wrote my dissertation on monetary policy. My first book is about monetary policy. It's called money in the rule of law and my co authors spend a fair amount of time critiquing Federal Reserve policy. So if you're a skeptic that our economic technocrats, in fact, are as good at their job as they claim to be. I encourage you to check out my book, I think you like what you see.

Brian Nichols  2:26  
Alex, you recently wrote an article over at the hill, you co authored this with Philip Magnus and you talked about this zombie economics of inflation and unemployment and to set the preface I want to read a bit from this. You said the illusion of a permanent and controllable trade off between a strong dollar and a strong labor market persists in various centers of elite opinion Lisa Cook, one of President Biden's nominees to the Federal Reserve Board of Governors confidently asserted the importance of quote the trade offs between inflation and unemployment for monetary policy. The New York Times recently promoted similar worries that the current focus on taming inflation could come at the cost of unemployment. In a separate times column, the one and only Paul Krugman has picked up a huge surge of employment or I'm sorry, a huge surge of unemployment as the hefty price tag of reining in our last major an inflationary crisis, some 40 years ago, and other media outlets routinely depict tight money as certain pathways to skyrocketing unemployment when some of the most important forms in the world host some of the most elementary economic errors in the world say that 10 times fast Watson, something has gone very, very wrong. Alex all three has indeed gone very wrong outline for us what has gone wrong?

Alex Salter  3:42  
Oh, gee, is how long do we have 20 minutes, we got about 20 minutes, you know, we're gonna do. Okay, so we'll fix all of macroeconomics in 20 minutes. That sounds good. And policymaking circles, public economics commentators, those sorts of positions there persist this myth that there's a steady and exploitable trade off between unemployment and inflation. The idea is you can quote unquote, run the economy hot in which case you're gonna get low unemployment, but you have to put up with high inflation. Or if you want to try and bring down inflation, you have to put up with not so good labor markets, higher unemployment. In brief, this view is bogus. There's nothing to it. There is absolutely no reason why you can't have strong labor markets, and low and stable inflation. You can even have strong labor markets with no inflation. Look, we can have 4% or less unemployment with 0% inflation, we can have 4% unemployment with 10% inflation, money and specifically, the rate at which we're running the printing presses really doesn't matter in terms of the fundamental economic health of the nation. And the long run. It's about living standards. It's about how good our workforce is, how many machines we have, whether our laws and institutions are conducive to commerce and how many green pieces of paper we have running around the economy doesn't really affect that. So we really Need to put this idea of a exploitable and permanent trade off between unpaid unemployment and inflation to bed? It's long past time we move on from this, frankly, Dark Age macroeconomics.

Brian Nichols  5:11  
Well then I guess one has to ask the question then Alex, where on earth did this old notion this? As you mentioned, does zombie notion really come from? Because it sounds like it is, in fact, pretty resoundingly busted debunked economics. Where did it come from? And why is it still prevalent in economic conversations today?

Alex Salter  5:34  
It started with this idea in economics that we call the Phillips Curve. There was an economist in the middle part of the 20th century, when old school Keynesianism was in his heyday, right, it was the new hot thing in academic macroeconomics, an economist named Phillips discovered a strong negative correlation between, on the one hand a measure of unemployment, and on the other hand, a measure of wage growth, which was a proxy for inflation, and all markets since what's going on in labor markets, at that time, pretty well predicted what was going on to final prices of goods and services more generally. From that to economists who are actually quite legendary in the field of money and macro, Paul Samuelson and Bob solo came up with this idea of a permanent again, and exploitable from the purposes of policy, trade off between inflation and unemployment, this idea was central bankers, fiscal policymakers could sort of pull this lever and move us along this stable trade off between inflation and unemployment run the economy a little bit hotter, that would be good for lowering unemployment. But raising inflation run the economy a little bit cooler, you'd get a slower dollar depreciation, but you'd have to put up with some a little more turmoil in labor markets. And to make a very long story short, they are observing what we now call an economics a spurious correlation. There is no permanent trade off between these kinds of variables. Because once the public figures out that policymakers are trying to game the economic system, they change their expectations, right? Once everybody figures out that the central bank is going to try and run the printing presses to get unemployment lower, everybody just bakes in higher anticipated inflation into their contracts into their wage bids into their long term financial investments. And ultimately, you get no corresponding increase in real economic activity. You can fool people once. But once you try and permanently exploit that trade off, people are going to realize they're gonna get wise to the game. And any trade off is going to be ultimately illusory in the short run. And in fact, if you've even managed to create a decrease in unemployment, because you've created quote, unquote, surprise, inflation, that's only because you surprised people, right? The central bank promised to conduct monetary policy commensurate with say, 2% inflation, but then it ran the printing presses way hotter. And so what created 5% inflation? Yeah, in the short run, you might get a small boost economic activity, but that's only because the central bank, frankly lied to people, and said, Hey, we're gonna do X. And in fact, they did something very different than x. So yeah, if you give people a misleading picture of your intentions, it turns out you can fool them. But that only works in the short run, people eventually get wise

Brian Nichols  8:09  
Bango. We talked about this in sales all the time. Because once trust is eroded than the true authentic relationship, it's dead. I mean, it's DOA, literally. So let's go back to this Phillips Curve. Right. And we, you talked about this, I guess the question I have is how, how on earth is it still accepted today? Because shortly thereafter, and you and Phillip Magnus mentioned this in your article there over on the hill, then it was pretty resoundingly rejected by pretty noted economic thinkers, namely, amongst them, Milton Friedman. I mean, we all have heard of Milton Friedman, and have really fought back and it did fight back and squish this idea. And to your point, it was showing before your eyes, you couldn't not see it, and we talked about it in sales. Once you see it, you can't unsee it. So I guess I asked it, is it just that people have bought into the myth almost, and now they are almost married to the the narrative? Or what is it that causes people to still be tied to this very, very old, outdated and frankly, backwards way of thinking?

Alex Salter  9:12  
Great question. So I blame two kinds of people. First, I blame economic and financial journalists, because frankly, they don't have the training and the expertise to know better. And second, I blame economists who have become public intellectuals, but really have no frankly no background and macroeconomics and monetary policy. So Paul Krugman is a perfect example of this. Paul Krugman is a trained economist. He won the Nobel Prize for his work on international trade, which is quite good and respectable. Since then, he set himself up as an authority on business cycles and macroeconomic stabilization policy and frankly, he doesn't have any scholarly chops on this. There's no clear evidence this he specialized in it, that he's put in the work to learn the literature. It's just not something that's a mainstream idea anymore. If you talk to the economists who actually specialize in monetary economics and macroeconomics, and you bring up the Phillips curve as if it's a serious idea, they laugh at you, right? They sort of hide their, you know, hide their face and their elbow and snicker a little bit, because it's a very Gousha idea, there's really nothing to it. That's not at the cutting edge. It's not a serious idea. And really, the only people who think as a serious idea are people who don't know any better.

Brian Nichols  10:26  
So let's go to if I can get my mouse to work here, there we go. If we can go towards today, we're seeing the conversation continued today. And one of the things we're seeing is some folks like Elizabeth Warren out there who are firmly promoting these very old, outdated ways of thinking. So let's talk about combating this, this just outdated way of not only thinking but also back to the point, this backwards way of thinking, what's your argument when you're seeing Elizabeth Warren out there leading the charge and really fighting her fight from more of the progressive side of things, but using this as the the crux of her argument? Really? What are you finding as the best way to almost kryptonite her to her argument there?

Alex Salter  11:11  
I'll be honest, I don't pay very much attention to the good senator from Massachusetts. Her latest thing is that corporate greed is causing inflation. And of course, that's nonsense, because you would need to suddenly, suppose the corporations have all of a sudden gotten more greedy, because you need a change in greed to explain a change and inflation. I'm an economist, I think that corporate greed in terms of profit seeking is pretty much constant. So you can't explain a change in a variable like inflation, with a constant unchanging variable, like corporate greed. So the notion that this is just profiteering or anything like that is just stark raving nonsense. Really, we should stop paying attention to politicians, both right wing and left wing when they talk about this stuff, because politicians don't have any incentive or any interest in coming up with a nuanced and economically rigorous explanation for what's going on. They're trying to get reelected. They're trying to build electoral coalitions, which basically means riling up the bass and maybe persuading a couple of people in the middle. That's not at all the same thing as truth seeking, they're engaged in a very different project, we can debate the merits of that project. But ultimately, when it comes to serious economic issues, I don't take Elizabeth Warren very seriously. And for that matter, I don't take someone like Ted Cruz very seriously. You don't need to listen to them, you can ignore the politicians, I promise your life gets a whole lot better.

Brian Nichols  12:31  
Also, Ted Cruz, I'm still not convinced that he might be Kevin from the office, we're not entirely certain that was never officially discussed and debunked there back in 2016. So we gotta pay attention to that. But what we're going to do is next, Alex, we're going to go ahead and discuss specifically how we can go ahead and actually solve the problems that we see here today. But before we go there, wanted to go ahead and remind folks if they haven't had the chance to head over to the Brian Nichols Sign up for our morning sales huddle once per week, usually around Friday or so I am in your inbox. With my weekly sales tip, the same type of tips I would use with my sales teams to help lead them to their success hitting their quota, and helping lead to company wide success. I can do the same for you. So head over the Brian Nichols Sign up today. And oh, by the way, I'll send over a free copy of my ebook, four easy steps you can implement now to sell liberty to friends and family as well. So Alex, back to the question at hand. What's the answer here? Right? What if we gave you Alex Salter, the magic wand and you won't have to listen to Elizabeth Warren and all the other progressive floozies and er tech to the Texas he has like Ted Cruz out there in Canada. From Texas. I

Alex Salter  13:47  
resent that remark.

Brian Nichols  13:48  
Okay, I'm from upstate New York, which is basically like the South but in Northern New York. So I kind of feel like I'm part of you. So I apologize. Okay. I'm

Alex Salter  13:59  
actually a los Angeleno originally so I'm like a fake Texan. So

Brian Nichols  14:02  
you're, you're everywhere. So your your, um, as our friend, Steve Harrison would call you, you're in anywhere versus maybe a somewhere, which is okay, you can be anywhere. But anyways, going back to the question, right. What is the answer, we give you the magic wand? What would you recommend as the remedy to the problem we're seeing here with the rapid unemployment and inflation. Well, unemployment

Alex Salter  14:21  
is not too bad right now. Right? That's true. 3.6%, which is actually very low by historical standards. So right now, the labor

Brian Nichols  14:29  
type preface that is it. It's more of a question to myself. Is that really the real number because we've seen the folks who aren't even looking for work. They've, I think that number has jumped up exponentially, right? Whereas that's not counted towards unemployment.

Alex Salter  14:42  
It's about a percentage point higher than it was before the COVID crisis and Zahra jumped in and stayed there. That's big in terms of labor force participation in terms of jumps, right you compare it to historical jumps or changes in the labor force participation rate, right, the people who are looking for a job and are in the labor The market in the first place. But in an absolute sense, I don't think it's large enough to obscure the fact that right now labor markets are actually doing okay. I'm much more concerned about inflation than I am about labor markets. And the solution to inflation is simple. You ultimately have to get control over central bank policy, Federal Reserve policy, if you want to bring down inflation, shrink the balance sheet, at minimum, make sure it's not growing as fast as it was after COVID hit, get the Federal Reserve to not only stop buying new assets, but get it to not purchase new assets, right? When the various debt instruments that it has on its books mature, don't have them buy more, shrink the balance sheet, get the liquidity out of the system. And for goodness sake, get the central bank to commit to an actual policy rule that binds its hands. Right, everybody made a big Ado about how the Feds switch to an average inflation target back in August 2020. The idea was we're not going to shoot for 2% inflation every single year, we're going to shoot for 2% inflation, on average over the very long term. Now, there are actually some good arguments on paper why you would want that kind of a regime targeting inflation on average, instead of just trying to hit 2% every single year. The problem is those arguments are only persuasive or beneficial. If you assume that central bankers are omniscient and perfectly benevolent, they aren't right. They're just ordinary people, very well trained people, but ordinary people like you and me, right, they have less than perfect information. And they face less than perfect incentives, you really don't want to give discretionary central bankers any more power over the economy than you can give them at minimum, right. And so I'm actually a strong advocate of completely constraining what the Fed can do with a strict rule that it cannot interpret its way out of or wiggle out of basically, given them a goal and hold them accountable if they achieve it. Right now, what we need is to actually get that liquidity out of the system. And we need to I would actually argue that we need to get back to conducting monetary policy to the way that we used to do it even before the 2008 financial crisis, basically get out of this system with the Federal Reserve changing the amount of interest that it pays to depository institutions for holding their bank accounts at the Fed basically, keeping liquidity tight up there, get back to what's called the corridor system for monetary policy, where you have more market interest rates that are actually determinative and capital allocation. Because right now, what you have is a giant balance sheet, the Federal Reserve owns about 9 trillion and assets, it is affecting capital allocation, it is going to become politicized. If it continues, we're quickly running out of time to get control over the central bank. And that's not going to be good for anybody.

Brian Nichols  17:41  
I was gonna say, if only if only man, we're going to find this a book that talks about your money, and the rule of law. Is there a book out there, Alex that talks about this in detail?

Alex Salter  17:53  
I'm pretty sure that I would have heard about it if it were out there. So I'm gonna say no, but someone should read that book. I bet it would be pretty good.

Brian Nichols  17:59  
Well, if there's somebody was you and they were to write that book, well, that book look like

Alex Salter  18:03  
hypothetically, it would be titled money on the rule of law, generality and predictability and monetary institutions, it would hypothetically be published by Cambridge University Press. And in theory, you could buy it on Amazon. Or you could just go to my website and find it there too.

Brian Nichols  18:17  
Well, what's that website

Alex Salter  18:19 It's one of the first links on my homepage. The book has its own website where you can find endorsements from other prominent economists that will take you to Amazon where you can purchase it. You can also purchase it directly from Cambridge University Press, if you had so if you had the desire to do so, usually, I plug it on social media too. But I recently got off all social media, got rid of Twitter, got rid of LinkedIn, and Facebook and all that. I was just spending too much time on it. So it was time for it to go.

Brian Nichols  18:49  
It's it's good to decompress. Sometimes people actually are surprised to learn that I'm actually not on social media as much as they think a lot of the stuff I have posted is just like automated posts and like scheduled posts, I'm rarely I don't have the time to be on social media. So a lot of the smart one. All you got to try to be able to leverage it, I guess, for the industry I'm in in the world of sales, but also what we're doing here. So yeah, it's it's an unfortunate reality. I think we're seeing a lot of the technology that's advancing here, especially with the advent of web three, it's gonna make a lot of the problems we're seeing maybe change a little bit because the incentive structures are gonna change behind the scenes. But those conversations, we're having those a lot of fun tech, folks, we'll save those for another day. But with that being said, obviously, folks, this is a conversation that we've been having here with Alex and it's important for us to continue having we've heard in many a time the importance of us focusing on monetary policy and Alex actually, he's presenting a real tangible solution to solving that problem. And it starts with Yes, addressing the problem at the root cause and that is at the source in this case. It is addressing the problems with the Fed because I'm sorry, you can't really base any any rules on some discretion on a political Windows NT, that doesn't really yield a positive way for society to move forward for anything to really move forward. We're seeing this in the economy right now. So many businesses, I mean, Alex, my day job for the world of sales, I'm hearing it time. And again, number one, inflation has been hitting businesses. So hard. I had one company I was talking to they do metal, like for for cars for retailers, for cars. And one of the issues they've had is because the markups that they've had to endure, has dropped their sales by like 120%. And like this is this is just the beginning of what we're seeing with companies across the board who are now it I mean, you can only inflate the bubble arbitrarily and artificially, to say at least so much. And now we're at the point where I think it's ready to pop. So let's, I don't mean a doom and gloom, everybody, but like, what should we be prepared for? And I know this is, this is the question I think, is more so because we have a lot of business owners, entrepreneurs who listen to the program. And I know for a fact that they're trying to plan they're trying to prepare. And obviously, this is no financial advice, folks, this is more just us trying to spit ball, what's the best plan of action based on what we think's going to happen? From a more high level perspective? Right. So Alex, what would you say? Is the best plan a course of action, I guess, for business owners or entrepreneurs? And also, what do you expect to be the ultimate outcome of the current trajectory? If things continue the way they're going?

Alex Salter  21:29  
So much of it depends on what the central bank actually does? are they actually going to find the discipline necessary to shrink the balance sheet and normalize monetary policy? Or are they going to continue to pretend to do those things and talk a big game about oh, we understand the importance of inflation, but not really make any of the hard choices necessary to to get it under control. And ultimately, I think that the public conversation around this whole topic is fundamentally misguided. We're having this debate between two camps, you have the easy money camp, and you have the tight money camp, and we're just arguing between those camps. The point, though, is that both of the poles of that debate are artificially limited, you need to get out of that paradigm, or we're talking about whether we want tight money or easy money. What we want is rule bound money, we actually want something to be in place to more or less put monetary policy on autopilot. Because of monetary policy, we're on autopilot. If it had to follow a strict rule, the market would know what to expect, we would know what was going to happen to the purchasing power of the dollar, we will be able to put those expectations into the various contracts we write, whether in terms of our wage asks as workers or in terms of our capital investments as businesses, until and unless we get that we're going to continue this pernicious game where we're watching the Fed and the Fed is watching us and everybody's trying to fool each other. That's just a waste. There's nothing productive that comes out of that. But that's the way that we've done it for the past 3040 5060 70 years. And we're going to keep on doing it that way, unfortunately.

Brian Nichols  22:58  
Well, Alex, unfortunately, we have come to an end here of today's episode of The Brian Nichols Show, which means it's time for us to point people towards where they can continue the conversation with you. So if they want to go ahead and do that hit us with the plugs, social media. And also, you mentioned it before, let's give you a chance to mention it again, money and the rule of law, where can folks pick up their copy today?

Alex Salter  23:20  
wherever books are sold now, probably not wherever books are sold, but you can definitely find a copy at Amazon you can definitely get a copy directly from Cambridge University Press. We're very pleased I am my co authors that there's a relatively cheap paperback edition. So even though it's published by an Academic Press, it's not going to break your wallet, especially right now as various other price hikes are breaking your wallet. Again, you can find all of my writings at my website All of my popular articles are there my academic writings are there too. If you wanted to wade into those more power to you good luck to you. I'll be happy to talk to anybody about those over email. Yeah, drop me a line I'd be happy to hear from your from your listeners

Brian Nichols  24:08  
that's my fault. There we go. Yeah, it's my dad heading on mute because there's a dog barking upstairs and it was quite loud. But know with that being said, I know we will make sure we include all those links there in the show notes for you and make sure also folks if you do me a favor if you enjoyed the episode, please go ahead and give this episode a share. And let Alex know and please do go ahead and give his book a purchase money and the rule of law we actually dug into the topic of the book more in detail on a past episode, just go to the Brian Nichols where you can go ahead and search not only for Alex's episode but all 500 Plus episodes and oh by the way, did you see yesterday's episode we had Sarah burns, she's a professor over at Rochester Institute of Technology and we talked about Biden's foreign policy and its report card the good the bad and the man Yeah, there was a lot of men not gonna lie, or at least from from this side of the table but with that That being said folks thank you for joining us on today's episode with that being said it's Brian Nichols signing off you're on The Brian Nichols Show for Professor Alex Salter we'll see you tomorrow for listening to The Brian Nichols Show find more episodes at the Brian Nichols

Transcribed by

Alexander William SalterProfile Photo

Alexander William Salter

Georgie G. Snyder Associate Professor of Economics

I am the Georgie G. Snyder Associate Professor of Economics in the Rawls College of Business at Texas Tech University, the Comparative Economics Research Fellow at TTU's Free Market Institute, and an associate editor of the Journal of Private Enterprise. Additionally, I am a Sound Money Project senior fellow and a Young Voices senior contributor.

My first book, Money and the Rule of Law: Generality and Predictability in Monetary Institutions​, is published by Cambridge University Press (May 2021).