Economist John Cochrane argues government spending caused high inflation. : The Indicator from Planet Money Welcome to the macroeconomic bar fight. Today, fists are being thrown over the causes of high inflation. But off to the corner stands John Cochrane, an economist with a core explanation for rising prices: government borrowing and spending.

Check out some of our earlier episodes on inflation:
- Why some economists last year were concerned about low interest rates and high government borrowing and spending
- Why the term 'transitory' inflation was banned by the Federal Reserve Bank of Atlanta as consumers spent and spent in 2021
- How the war in Ukraine raises prices around the world, including food prices, and a look at grain exports stuck in the country
- Whether corporate greed is to blame for inflation

A macroeconomist walks into a bar fight

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Price inflation numbers are out today. The Consumer Price Index, the CPI, grew at 8.6% over the last year. This is a high rate that has disappointed a lot of people who were hoping that the high inflation in the U.S. had peaked.


And over the last year, we have heard a lot of explanations for why the high inflation is happening. Like, I'm sure, Wailin, by now, we can both just rattle off a few off the top of our heads. So why don't you go fast?

WONG: Oh. Oh, boy - pop quiz - I'm ready. OK, pandemic supply chain disruptions.

WOODS: Low interest rates.

WONG: War in Ukraine.

WOODS: Workers being sick.

WONG: Yes. Anything else? What else is there?

WOODS: Lockdowns in China.

WONG: Corporate greed.

WOODS: Thank you for being game to do my pop quiz, Wailin. I appreciate it. Now, one economist thinks that all of these reasons are just a distraction. He pins basically all the blame on one thing - government borrowing and spending. This is THE INDICATOR FROM PLANET MONEY. I'm Darian Woods.

WONG: And I'm Wailin Wong. Today on the show, the $5 trillion question - was the inflation pickle we found ourselves in caused by the government's pandemic spending? We'll talk to someone who wants to make the case that, yeah, it largely is.

WOODS: It's a fiery hot take and by no means settled, but we want to hear this out after the break.


WONG: John Cochrane is a senior fellow at the free market-oriented think tank, the Hoover Institution, and John has also been running a blog for over 10 years called "The Grumpy Economist."

JOHN COCHRANE: I'm not really a grumpy person. But I was reading the op-eds one morning, and Paul Krugman had written some particularly outrageous thing. And I spilled my coffee, and my children dubbed me the grumpy economist, so I thought that would stick.

WOODS: And to explain where John Cochrane's views fits among economists, he asked us to picture a rowdy scene.

COCHRANE: Mainstream economics is like a bar fight, so there's a lot of difference. But broad consensus - inflation ultimately comes from monetary and fiscal policies.

WONG: Monetary policies means stuff that the central bank, the Federal Reserve, does - primarily by changing interest rates. And fiscal policies means the amount that the government borrows and spends. And so most economists agree that most of the time, both monetary and fiscal policies are the main drivers of ongoing inflation, but they might argue over which is more important. A lot of economists emphasize the power of monetary policy - the power of the central bank.

WOODS: In the metaphorical bar fight of macro economists, where were you standing?

COCHRANE: I'm standing in - off in a corner. I specialize in what I call the fiscal theory of the price level.

WOODS: The fiscal theory of the price level - this means that John Cochrane thinks that inflation is largely caused by government borrowing and spending. So he's standing in the same bar as the mainstream economists who are arguing about which is more important - monetary or fiscal policy. But he's definitely to one extreme. He's emphasizing fiscal policy and, specifically at the moment, the three COVID stimulus and relief packages that totaled around $5 trillion.

COCHRANE: It's just a difference of emphasis relative to other people.

WOODS: So you think the Federal Reserve, the central bank, is maybe less powerful than some others would say?

COCHRANE: Yes, that's right. So our current inflation, I think, has a very clear source. The government spent up about $5 trillion and sent that as checks to people. Now, many of those people really needed the checks, but a lot of people didn't. They overdid it, and that causes inflation.

WOODS: So if we dial the clock back to around the time of the relief packages and the stimulus packages from the government - there were three main packages - what were your feelings and comments at the time?

COCHRANE: This is a massive waste of money.

WOODS: Even ones where I saw, you know, people lining up throughout my block for donated food?

COCHRANE: Parts - it was - yes. Parts of this was very important. And I agree that parts - so the government - in a big shock like that, the government has a proper role, which is essentially insurance. But we left insurance behind trillions and trillions of dollars ago, you know. Why does a retired government employee with a government pension and Social Security, owns their own house - why do they need an extra check? No. I'm sure they'd love an extra check. We'd all love an extra check. But I'm sorry, money doesn't grow on trees.

WOODS: And this is why he's called the Grumpy Economist, not the magnanimous economist.

WONG: But, you know, John says that it's not that government spending per se is inflationary. What matters for inflation is how the three major coronavirus spending bills are paid for. And they were paid for by the government borrowing, going further into debt.

COCHRANE: Governments can borrow and print an enormous amount of money if they have a clear plan that they're going to pay back the borrowed money and soak up the money when the time comes. The fact that there wasn't a clear plan for paying it back really is one of the key reasons why we're seeing inflation now.

WOODS: A plan like raising taxes - raising taxes can suppress inflation. Households would have less money to spend on kitchen renovations and dinners out, meaning businesses can't raise prices as much. And that hasn't happened.

WONG: OK, so it's fairly settled that fiscal policy, i.e., government borrowing, at least contributed to the high inflation we're seeing now. But what about monetary policy, the Fed keeping interest rates low? Isn't that contributing to inflation?

COCHRANE: Now, here, I want to represent the bar fight correctly because I was just at this bar fight. It was very polite. But we had a conference here at the Hoover Institution, and we talked about exactly this issue. So is the Fed's slowness to react - does that year of letting inflation go and keeping interest rates at zero - is that by itself an additional stimulus? And one end of the bar fight said absolutely yes. That is just going to zoom the inflation and make it worse.

WONG: But John doesn't agree that the Fed is to blame.

COCHRANE: We spent years with interest rates stuck at zero, and inflation went nowhere. And Japan spent 30 years with interest rates stuck at zero, and inflation went nowhere. A theory that says if interest rates stick at zero no matter what, inflation spirals out of control is directly contradicted by years of evidence. So it's not as crazy as it sounds.

WOODS: It's not as crazy as it sounds. I love the disclaimer. And to be clear, John agrees that the Fed could have raised interest rates earlier. Maybe in the middle of 2021, it could have slowed the economy and nipped inflation. But that doesn't mean that the Fed caused inflation.

WONG: OK, so what about, you know, the stuff we talked about in the lightning round at the beginning - the pandemic itself and also the war in Ukraine? You know, are the supply shocks not meaning it's harder for manufacturers to make stuff and restaurants to find staff? Is this not driving up inflation?

WOODS: Yeah. And so here, John defines what should happen in a supply shock. Things are harder to make, so we're all poorer. We can't produce as much. So prices will go up, but wages won't. With higher prices, this is the way that the market is essentially rationing limited goods. But he's saying in the real world at the moment, that is not what's happening. Wages - yeah, it's true, they haven't fully kept up with high inflation, but they are going up by a lot - around 5% over the last year, more than normal. So John thinks that we are seeing something closer to a classic inflationary spiral - prices of stuff going up and wages following suit. And those boosted wages and the boosted prices are both driven by all those stimulus packages.

WONG: So John is worried, but of course he would be.

COCHRANE: I'm kind of the guy who's been holding that world is ending sign for the last 10 years.

WOODS: Uh-huh. So if people knew, ah, John Cochrane, he's going to be, you know, saying spend less, he's going to be warning about these impending doom.

COCHRANE: I was worried about that in 2008.

WOODS: Right, right, right.

COCHRANE: And I was wrong. You know, there's that old story about the hypochondriac who put on his tombstone when he dies at 95, see, I told you I was sick.

WONG: So John downplays the role of the Fed in supply shocks and driving up inflation. But a lot of economists would disagree. They'll hash it out at the next bar fight.


WOODS: And next week, we will hear from somebody who does pin more blame on the Fed for not raising interest rates faster. Stay tuned.


WONG: This episode was produced by Jess Kung with engineering from Robert Rodriguez. It was fact-checked by Catherine Yang (ph). Viet Le is our senior producer and edited this episode. Kate Concannon edits the show. And THE INDICATOR is a production of NPR.


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