“At this point, a couple more interest rate increases are necessary to stabilize growth at a sustainable pace and stabilize the labor market so it doesn’t overheat.” Those are the words of former Federal Reserve Chairman Janet Yellen. Interviewed at a recent investor conference in Washington, D.C., Ms. Yellen’s rather explicit point was that economic growth has to be restrained so that inflation can remain in check. And central bankers wonder why they’re so unpopular.
While the Fed’s ability to regulate the price of credit through its funds rate is well overstated, it’s passing strange that influential people would make putting people out of work a policy goal. Yet that’s exactly what the retired central banker is proposing.
Ms. Yellen’s reasoning is that surging growth leads to rising prices as demand outstrips supply. And then as economic growth normally correlates with falling unemployment, she plainly fears that booming economic activity will lead to an inflationary spiral due to labor shortages, and ultimately shortages involving capacity.
The bad news is that Ms. Yellen’s definition of inflation is the accepted one inside the Fed. The good news is that Ms. Yellen’s suggestion that her former colleagues must essentially burn the village in order to save it doesn’t stand up to economic reality.
Seemingly forgotten by Ms. Yellen is that demand can never outstrip supply. That is so simply because no one can demand goods and services without supplying them first. Rising economic growth that results in surging demand is a tautological sign of surging supply that enables the demand. These things balance. Say’s Law is real.
As for the notion that the U.S. economy could “overheat” as unemployment plummets and capacity utilization soars, Ms. Yellen and her former colleagues needn’t worry. The U.S. economy is hardly an impregnable island of economic activity. In truth, it’s a booming part of a global whole that becomes more dynamic by the day. Simply put, American companies increasingly rely on the world’s workers and the world’s manufacturing capacity in their production of goods and services.
Examples abound, but one of our favorites involves one of the most “American” of U.S. companies, Harley-Davidson. While the much venerated brand is headquartered in Milwaukee, the highly unique motorcycles it manufactures are the certain result of global cooperation. Though Harley can claim its “Hogs” are Made In the U.S.A., it sources the parts for its brake clutches from Italian company Brembo, its engine pistons are manufactured in Austria, its electrical components and wiring harnesses are made in Japan, Mexico and China, and then its wheels are manufactured in Australia.
The globalized nature of Harley-Davidson’s production is a certain indicator that even if the supply of labor and capacity in the U.S. were static, it wouldn’t have any kind of discernible pricing impact. Harley-Davidson, much like Apple, Nike, Boeing and seemingly every American company is not limited by labor and capacity within these 50 states.
Taking the labor-shortage narrative further, readers might consider the impact of technology on their daily lives. While central bankers are focused on what they deem a limited supply of American labor, few of us deal with live human beings anymore when we’re buying plane tickets, movie tickets or purchasing gasoline. That so many businesses have so thoroughly automated their operations is a gentle reminder to economists and central bankers that market actors do a great job when it comes to working around any presumed labor shortages.
Which brings us to the most crucial truth about economic growth: It springs from investment. That it’s an effect of investment should calm economists who correlate booms with rising prices. The correlation is backward. The investment that powers growth is all about falling prices.
Indeed, the more that corporations and their employees are matched with capital, the more goods and services that they can produce at lower and lower prices. Just as farmers were rendered exponentially more productive more than 100 years ago by the proliferation of tractors and fertilizers, the computers, robots and internet connectivity that capital-intensive businesses arm workers with today render them increasingly capable of producing abundant products of all stripes at ever lower costs. As the savings and investment that power growth accumulate, our individual productivity soars in concert with lower prices.
We see the above truth all around us. As Andy Kessler wrote on these pages several years ago, when Xerox released the first laser printer back in the early 1980s, it retailed for $17,000. Today, a much more capable printer can be had on Amazon for under $100. When Motorola brought to market a brick-sized mobile phone in 1983 that connected callers very poorly to very few callers, the cost of this most primitive of communication devices that could not fit in coat pockets was $3,995. Nowadays we fit much cheapersupercomputers into our pockets that enable global calling, among thousands of other functions. When an economy is growing, that’s the surest sign that prices of goods and services are declining thanks to copious investment.
So while the Fed’s ability to manage the cost and availability of credit is more theoretical than real, there’s no reason that central bankers should design policy around laying a wet blanket on the economy. Policies meant to subdue growth are cruel on their face, plus they defy basic economic logic. The Fed needn’t raise its funds rate now as much as the central bankers in its employ would do best by getting out of the way. Given the failures of central planning in the 20th century, it’s quite simply odd that central banks would even attempt to centrally plan credit access in the 21st. Particularly if the goal is to shrink economic output.
In a world defined by global cooperation in the creation of goods and services, there’s quite simply no such thing as too much economic growth causing economies to “overheat.” Central bankers are focused on what is a mirage wrapped in another mirage. As opposed to something that needs to occasionally be subdued, growth is inflation’s greatest enemy when we remember that the investment without which there is no growth is the only way to consistently bring down the price of everything.
• Adam Brandon is president of FreedomWorks. John Tamny is director of the Center for Economic Freedom at FreedomWorks, and the author of the 2016 book “Who Needs the Fed?” (Encounter).