The clash of two Chicago school ideas

The Economist magazine quotes me on the important topic of whether we are going to see a spike in inflation or not, but at the same time also illustrates what market montarism really is about:

In the aggregate, though, investors seem unconvinced. The inflation expectations which can be derived from prices in financial markets have recently picked up a little thanks to the good news on vaccines and the prospects for a rebound in the world economy. But they still suggest that investors think next year’s inflation is more likely to be below the 2% central banks target than above it (see chart 3).

Lars Christensen, a Danish economist, points out that this means there is a “clash” between the two best-known economic theories associated with the Chicago school. Milton Friedman said sustained growth in the money supply leads to inflation; Eugene Fama argued that market prices fully reflect all available information. “If you believe that we are going to have inflation now…the efficient-markets hypothesis would have to be wrong,” Mr Christensen argues.

Source: The Economist

I discussed the same topic at a recent presentation at Buckingham University. You can watch that presentation here.


Covid-policies should focus on ‘health fundamentals’

The number of Covid-deaths per capita is converging towards a level which essentially is determined by what I have called ‘health fundamentals’ – or simply X*.

Europe and the US have different health fundamentals – Europe is ‘older’ and the US is more obese. Over all I would actually expect more deaths in the US mostly because of obesity, but it is clear that Europe is caching up fast now – X (actually mortality) is moving fast towards X*. Despite new restrictions being put in place everywhere.


The effect of these restrictions (as well as voluntary behviourial changes) might be to ‘postpone’ the ‘convergence’ towards what health fundamentals ‘dictate’, but not for long.

It is comparable to what economists call the vertical Phillips curve. We can use monetary and fiscal policy and other policy measures to push unemployment below the ‘natural’ rate of unemployment which is given by the structures in the labour market – for example – unemployment benefits, unionisation rates, taxes, minimum wages etc. but we can not maintain unemployment below this level for long and sooner or later unemployment will return to its natural level. Furthermore, we know there are strong negative side effects (accelerating inflation) from doing that.

It is the same with covid-deaths. We can artificially maintain mortality rates lower than what is given by health fundamentals for a short period, but at a high cost socially and economically and sooner or later mortality will return to what is given by health fundamentals.

The policy recommendation therefore should be to forget about these restrictions all together and instead focus on health fundamentals. Improving health fundamentals of course includes treatment including vaccines and for example vitamin D supplement, but also protecting the groups most at risk – e.g. the elderly and the obese. Furthermore, we also have to remember that X* is strongly seasonal in nature.

Finally, in the same way we in economic policy should focus on improving labour market structures and to the extent we want to ‘lean-against-the-wind’ with certain restrictions it should be rule-based and transparent restrictions with a proven evidence based track record (there are very few examples of that). Ideally the easing and tightening of restrictions should be decided in a transparent way by an independent ‘health council’ of experts rather than by politicians, but again most importantly we should focus on X* rather than on X.

Recovery and inflation scenarios in the USA for 2021

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