Harvard Professor Robert Barro is Paul M. Warburg Professor of Economics at Harvard. He is a prominent member of the economics profession. AEI has posted his December 4 Project Syndicate column “Big-state inflation.” In the column he addresses the attribution of responsibility for our current inflation to “supply chain” issues. Professor Barro does not entirely discount the contribution of these issues as a contributing factor. Focusing on the contribution of the Federal Reserve Board under Fed Chairman Jerome Powell, however, he writes:

Powell continues to insist that today’s high inflation is all about temporary bottlenecks and supply-chain problems stemming from the pandemic-induced recession and the subsequent uneven recovery. According to this view, the Fed is merely a passive agent, trying its best to provide enough liquidity so that the supply-side inflation does not disrupt financial markets and the overall economy.

Powell’s interpretation of current events reminds me of the German central bank’s view in 1923, when it was presiding over that country’s post-World War I hyperinflation. According to the Reichsbank, the inflation derived from goods shortages was attributable to foreigners, whose unreasonable reparations payments had caused a sharp depreciation of the German mark. In this scenario, the Reichsbank was a passive agent, trying as hard as possible to print currency to keep up with the rise in prices. As with Powell, the blame for inflation was put elsewhere – in this case on foreigners – rather than on the central bank’s own policies.

Of course, the Reichsbank’s account of the situation was not entirely wrong. Given that the German government and the central bank were relying on seigniorage revenue [defined here] to pay for reparations, it is true that the reparations payments caused the monetary expansion and the ensuing inflation. But the Reichsbank’s willingness to print money was still a central part of the story.

Similarly, Powell is not entirely wrong when he attributes inflation partly to supply disruptions. But the Fed’s willingness to accommodate this process via monetary expansion – rather than fighting inflation by raising interest rates and selling off assets – remains a crucial factor.

Barro has more, including good words for Jimmy Cater and Bill Clinton. Whole thing — all of it worth reading — here.

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