Today, John Cochrane employs an oceanic metaphor to explain what inflation is—and isn’t; Raghuram Rajan offers a word of caution to the Federal Reserve regarding market expectations; and Eric Hanushek spells out the significant economic costs of declining student achievement over the last decade.
Freedom Frequency
In a new episode of The Grumpy Economist Weekly Rant, Senior Fellow John H. Cochrane explains what really drives inflation. Greed, monopolies, and supply shocks only affect relative prices—the cost of one item versus another—which are like waves on the ocean. Inflation, however, is like the overall ocean level, determined by government fiscal and monetary policy. As Cochrane explains, pandemic spending and trillions in post-pandemic stimulus lifted the ocean, pushing all prices upward, not just individual waves. To understand inflation, you have to watch the whole ocean, not just the waves on the surface. Cochrane stresses that the level of the ocean reflects the choices governments make about money, debt, and spending, shaping the economic environment for everyone. Watch or read more here.
Answering Challenges to Advanced Economies
In an opinion column at The Financial Times, Senior Fellow Raghuram Rajan examines the complex monetary policy challenges currently facing the Federal Reserve. Rajan argues that the Fed’s reduction of its balance sheet “has been an important contributor to liquidity,” but carries the risk that market participants believe “the Fed will always come to the rescue” in the event of an asset price downturn. To get “the genie back in the bottle,” Rajan concludes, “the Fed must dial down expectations, perhaps by gently shifting its messaging, that it will unconditionally and indefinitely support markets.” Read more here. [Subscription required]
Reforming K–12 Education
Senior Fellow Eric Hanushek argues at the opinion page of The Washington Post that declines in student achievement predating the COVID pandemic will weigh on the economic prospects of a generation of students. “When accounting for the impact of higher achievement historically on salaries, the lifetime earnings of today’s average student will be an estimated 8 percent lower than that of students in 2013,” Hanushek says, based on his research. Hanushek estimates that projected education-related negative impact on US economic growth “is over 15 times the total economic costs of the 2008 recession.” Hanushek closes the column with a call for fundamental change in education policy, emphasizing that current trends threaten “America’s position in world leadership.” Read more here.
Energy and the Environment
In an essay posted at his Blade of Perseus site, Senior Fellow Victor Davis Hanson analyzes why the dominant narratives around climate change have shifted in recent years. Hanson sees reality finally catching up to a “near-religious” set of beliefs positing an imminent climate catastrophe, as “left-wing tech billionaires” grow increasingly concerned about “too little man-made kilowattage” amid rising AI energy demand. Hanson also points out that the “West finally realizes that a cynical China has been playing it for years by funding green propaganda abroad,” while China itself builds “two to three coal and nuclear generation plants per month.” Considered alongside the war in Ukraine, Hanson suggests geopolitical realities have caused a reckoning on climate doom-and-gloom, and a renewed interest in an “all of the above” energy strategy in the US and Europe. Read more here.
Organizational Governance and Leadership
A new report from Hoover’s Governance of Organizations Working Group by David Larcker, Amit Seru, Brian Tayan, and Stephen Miles relates findings from a recent survey examining where corporate directors turn to for professional advice. The authors find that corporate directors regularly tap into an informal network (also known as a “kitchen cabinet”) of trusted advisors to inform their thinking on leadership, oversight, investor relations, and boardroom matters. In contrast, the use of professional coaches is less common, and typically occurs when a corporate leader takes on a director role for the first time. The report notes that directors use their kitchen cabinets to improve corporate outcomes and to leverage their experience, expertise, and personal referrals to benefit management and governance. Read more here.
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