Art Marmorstein: What, me worry about Glooper economics?

In 1949, economist Bill Phillips came up with an ingenious device popularly dubbed the Phillips machine that he himself called MONIAC, the Monetary National Income Analogue Computer.

Water flowing through a complex arrangement of tubes, tanks, pumps, valves and taps allowed Phillips not only to model the British economy, but to predict with surprising accuracy what overall effects different inputs might have. Turn one valve, and you’ll see what increased or decreased tax rates are likely to do. Turn another, and you’ll see what increasing or decreasing the money supply is likely to do.

In his endlessly amusing novel "Making Money," British fantasy novelist Terry Pratchett imagines a Phillips machine brought to perfection. Mad scientist Hubert Turvy invents what he calls the Glooper, a hydraulics-based analytical tool so accurate that it magically becomes one with the real economy. Any change to the real economy is perfectly reflected in the Glooper, while any change to the Glooper will immediately change the real economy.

There’s a magical moment when Turvy realizes what incredible power he has. With one sweep of his hand, he could send the whole country’s economy crashing down. He raises his hand, gives a maniacal laugh — and decides to leave well enough alone.

Moving away from free market economics toward a command economy means creating a Glooper-like system. An ever-more-complex system of economic valves and tubes gives politicians and regulators the tools they need to override the natural flow of economic forces and replace it with something theoretically more desirable.

With their control of fiscal policy (taxes and spending), Congress and the executive branch seem to be the ones in control of the Glooper. But, as important as fiscal policy is, monetary policy (control of the money supply) is far more important. Fed Reserve Chairman Jerome "Jay" Powell is in some ways the most powerful man on earth. With a stroke of a pen, a few computer clicks and the approval of his fellow reserve board members, Powell can send the American and world economies soaring or, should he make a mistake, into a disastrous tailspin.

The Fed, of course, would rather do neither. Steady growth with minimal ups and downs and inflation rates at around 2% is the goal.

But, beginning with the worldwide economic crisis of 2007 and continuing through the “Great Recession” and the COVID-19 shutdowns, the Fed abandoned it’s easy-on-the-throttle approach for “quantitative easing” with huge increases in the money supply intended to stimulate a sluggish economy.

Quantitative easing involved the largest transfer of wealth to the rich in the history of the world. It also led massive inflation, though not what the Fed considers inflation. Soaring asset prices (including record stock prices) are OK by the Fed as long as the Consumer Price Index holds fairly steady.

But as sure as water flows downhill, it was inevitable that inflated asset prices would lead to inflation everywhere else in the economy no matter how many valves, tubes and tanks stood in the way.

And now that inflation is everywhere, the Fed has a new problem. Can inflation be reined in without crashing the economy?

The Fed is cautiously turning up the interest rate knob, knowing full well too big an increase might lead to disaster.

The Fed is also resorting to exotic money supply adjustments like reverse repurchase agreements. Reverse repos have taken $2 trillion in cash back out of the economy, money sitting in a Fed holding tank. Not a bad idea to have a rainy day fund. There’s almost certainly a storm ahead.

Jay Powell’s first term as Fed chairman recently expired, but President Joe Biden nominated him to a second term, and last month the Senate voted overwhelmingly to keep Powell in charge for another four years.

Biden has vowed to respect the Fed’s independence. Inflation? That’s the Fed’s baby, and I’ll leave the board alone to do its job.

At least for now, then, Jay Powell and his six fellow board members have the go-ahead to adjust the Glooper anyway they like.

Bwahaha.

Art Marmorstein, Aberdeen, is a professor of history at Northern State University.

This article originally appeared on Aberdeen News: Art Marmorstein column Glooper economics: What, me worry?