In March 2020, as the COVID-19 pandemic gripped the world, former Federal Reserve Board member Kevin Warsh advocated for the Fed to inject liquidity into the American economy, which was reeling from government-imposed lockdowns. Warsh’s proposal, published in the Wall Street Journal, focused on mitigating the economic fallout of these lockdowns rather than addressing their root cause. This approach, while seemingly well-intentioned, overlooked the fundamental economic principle that disrupting the intricate web of global production and trade inevitably leads to higher prices. The lockdowns, by their very nature, fractured this global cooperation, leading to supply chain disruptions and shortages that fueled price increases for years to come.
Warsh’s omission of the fundamental connection between reduced economic activity and rising prices is puzzling, especially given his subsequent critiques of government spending. His advocacy for government intervention in 2020, which contributed to the very policies he later criticized, creates a contradiction in his narrative. The trillions of dollars in government spending enacted under the Trump administration, partly fueled by Warsh’s own recommendations, enabled the continuation of economically damaging lockdowns. This spending, while intended to alleviate economic hardship, ultimately exacerbated the very problem it sought to solve by prolonging the disruptions to global supply chains and production.
Warsh’s more recent arguments attempt to link “inflation” to excessive government spending and “money printing” by the Federal Reserve. However, this framing misrepresents the underlying economic realities. Government spending, inherently limited by its taxing power, merely redistributes existing resources rather than creating new ones. The idea that government spending, in and of itself, causes inflation ignores the fundamental principle that government expenditure is ultimately drawn from the private sector. This isn’t “inflation,” but rather a shift in resource allocation, with the government directing resources away from private sector activities.
Similarly, the notion of the Fed “printing too much money” causing inflation overlooks the sophisticated nature of financial markets. If the prospect of excessive money creation were genuinely a threat, market forces would preemptively drive up Treasury yields, reflecting the anticipated devaluation of the currency. The absence of such a reaction suggests that the market does not perceive “money printing” as a significant inflationary risk. The true driver of higher prices, as previously noted, lies in the supply-side disruptions caused by the lockdowns, a policy actively supported by Warsh’s initial recommendations.
Warsh further contends that the Fed has the power to ensure low and stable prices through wise monetary policy. This assertion, however, grants the Fed an unrealistic level of control over a complex global economic system. Prices are not determined solely by monetary policy but are a product of countless interactions within the global marketplace. The Fed can influence these interactions, but it cannot dictate them. Attributing the rise in prices to the Fed ignores the fundamental role of supply-side disruptions, specifically the lockdowns, in driving up costs.
The crux of the issue lies in the conflation of rising prices with inflation. While Warsh correctly argues that the Fed cannot “pin inflation on Trump,” he overlooks the valid criticism that the Trump administration’s policies, including the massive spending packages supported by Warsh himself, enabled the continuation of lockdowns. These lockdowns, by severely disrupting global production and trade, were the primary driver of the subsequent price increases. While the term “inflation” is often used loosely, the price increases experienced in the wake of the lockdowns were not a result of monetary expansion but rather a consequence of constrained supply. The focus should be on the policy decisions that led to these supply constraints, rather than misattributing the resulting price increases to monetary factors. The lockdowns, facilitated by government spending advocated by Warsh, were the real culprit behind the economic turmoil and rising prices.
