16 Nobel Prize Winning Economists get Macro Policy Wrong

Nobel Prize winning economist Joseph Stiglitz authored a letter claiming that if the Republicans win this Fall, their policies will reignite inflation. Stiglitz got 15 of his fellow Nobel Prize winning economists to sign on to this as an open letter.

"While each of us has different views on the particulars of various economic policies, we all agree that Joe Biden's economic agenda is vastly superior to Donald Trump's…There is rightly a worry that Donald Trump will reignite this inflation, with his fiscally irresponsible budgets"

There are two problems with this open letter. First, it contradicts the reasoning behind the $1.9 trillion American Rescue Plan. Stiglitz and 16 of his compatriots supported American Rescue Plan at a time when the economy was already recovering rapidly, near the peak of a cycle. This was too much stimulus far too late in the economic cycle, even if the demand side theory is true.

If the next American president were to implement a fiscal stimulus program about nine to twelve months from now, he would likely be doing so “at the right time”. There are recent signs that the US economy is slowing. The economy may well slip into a recession within a years’ time. If this turns out to be true, a new fiscal stimulus could theoretically counter this economic downturn. That is, Stiglitz and his friends supported a badly timed policy advanced by Democrats, and are now opposing what would be a better timed policy by Republicans.

Second, the Demand Side economic theory that justifies monetary and fiscal stimulus policies is disproven. Demand Side Economists try to use a theoretical model of a “Phillips Curve” to predict effects of monetary stimulus on unemployment rates. All economists recognize that the Phillips Curve relation is at best temporary. Attempts to use the Phillips Curve to manage unemployment breakdown the Phillips Curve itself. Economists don't even try to define a fiscal equivalent to the Phillips Curve because we know that no such relation exists. Fiscal stimulus tends to kill export jobs and reduce private domestic investment in what economists call crowding out effects.

There is some evidence that tax cuts, favored by Republicans, stimulate the economy. However, this is likely a supply side effect. Spending increases, favored by Democrats, have little or no effect on aggregate demand and employment¹.

Monetary stimulus increases inflation by putting more money into circulation. Fiscal stimulus could, theoretically speaking, cause inflation by increasing the rate of money circulation. However, the main effect of fiscal “stimulus” is to divert spending from the private sector to the public sector, without raising total spending. And if fiscal stimulus were to succeed, that would mean that faster money circulation would finance the exchange of more work and more real goods- this is not inflationary.

There are legitimate concerns with the policy priorities the Republican candidate in this years’ election. Additional tax cuts would make an already large federal deficit even larger. Spending cuts should be prioritized next year, but this is politically difficult on both sides of the aisle. Recent remarks by Donald Trump regarding Federal Reserve independence are disturbing, but there is virtually no chance that he would actually obtain greater power over the Fed.

The sad reality in all of this is that every one of the 16 Nobel laureates who signed on to the Stiglitz letter yesterday know exactly all of what I just went over in this article. They know that they are wrong, there are likely just trying to provide some material to help somebody win a certain debate tomorrow.

1. The idea that fiscal stimulus could have a small effect on total demand and unemployment does not imply that this effect is consistent or predictable.