Money Isn’t Everything

Vulgar monetarism is making a comeback, and that’s a problem

WONK ALERT: TODAY’S PRIMER WILL BE (EVEN?) MORE ECONOMISTIC THAN USUAL. YOU HAVE BEEN WARNED

This week’s primer will be a bit self-indulgent. In the weeks ahead I expect to be writing about demography, immigration, Social Security, health care costs, energy and more. But this week I’ll engage in one of my running pastimes, chasing down zombie economic ideas — ideas that should have been killed by evidence, but keep shambling along, eating people’s brains.

Specifically, I want to focus on a case of bad economic theory that I have been seeing a lot lately: The revival of “vulgar monetarism” — the idea that inflation is entirely a matter of the money supply.

Here's an example of what I mean. In December Scott Bessent, now the Treasury secretary, dismissed the idea that the Trump tariffs would be inflationary:

Tariffs can’t be inflationary, because if the price of one thing goes up, unless you give people more money, then they have less money to spend on the other thing, so there is no inflation. … Inflation comes through either increasing the money supply or increasing the government spending, and that’s what happened under Biden.

This is all wrong, and the wrongness matters. It matters for understanding the impact of tariffs. It also matters for how we interpret the inflation spike of 2021-23, which is central to Bessent and Trump’s attack on the Fed’s independence.

According to Bessent’s logic, the Covid-induced supply-chain disruptions— remember all those freighters steaming back and forth, because they couldn’t land their cargo? — weren’t the source of the 2021-23 inflation spike. Instead, he claims, all the blame rests on the Federal Reserve for printing too much money. This Bessent claims, in his ongoing smear campaign against the Fed, is a pretext for destroying away the Fed’s independence.

So let’s go zombie hunting. Beyond the paywall I will discuss the following:

1. The monetary explanation of inflation – when it’s right and when it’s wrong

2. The source of Biden-era inflation

3. What are sticky prices and why they matter in understanding inflation

4. Tariffs and inflation