Economically Speaking, 2022 Was Surprisingly Normal: Tyler Cowen (1)

This year has turned out to be a very good one for classical and traditional approaches to economics. Exotic doctrines have performed poorly, while standard predictions — based on common sense and straightforward mechanisms of operation — have done well.

Start with macroeconomics. The big story of the year has been inflation, and the two biggest culprits are in line with standard theory: growth in the money supply and hikes in energy prices. Over a recent two-year period, the US Federal Reserve allowed the M2 money supply to rise by about 40%. It is no surprise that prices increased so much.

Not long ago, economists insisted that demand shortfalls were perpetual and that stimulus was almost never excessive. That extreme version of the Keynesian view has been laid to rest, while a version of Milton Friedman’s monetarism is ascendant once again.

A few years back, proponents of Modern Monetary Theory (MMT) were suggesting that the cure for higher price inflation was a tax hike. Fortunately, that idea didn’t go anywhere. Now the inflation debate is focused on the policies of the Fed, as it should be.

One of the most classical of economic lessons is that supply constraints truly matter. Along these lines, energy price hikes, most of all in Europe, showed that downturns and recessions can be brought on by old-fashioned scarcity. Sadly, this was the year that Nobel Laureate Edward C. Prescott passed away. Critics mocked Prescott for emphasizing the supply side as a force behind business cycles, but this year showed that Prescott was right. If not for the war in Ukraine and its associated energy supply disruptions, the global economy would be in much better shape.

A further lesson is that supply chains do untangle themselves. Photos of cargo ships waiting to be unloaded were once a regular feature of my news feed. The availability of foreign goods and services was spotty, and their prices could be high. Throughout 2022, most of those queues and logjams dissolved, as the market was allowed to operate. Once again, a very traditional approach to economics was vindicated.

The collapse of the FTX crypto exchange was another major story this year. Apart from whatever wrongdoings may have been committed by FTX leadership, the broader lesson is that superfluous institutions have a hard time being stable. The original vision of crypto was to disintermediate finance and allow access to what was supposed to be a low-cost means of conducting business. That dream has not yet been realized, but in the meantime it never quite made sense to re-create a new level of intermediation by putting a major exchange into the picture.

If it turns out that FTX suffered from some very “old school” problems in finance, namely misuse of depositor funds and inability to meet redemptions, then — welcome to the 19th century! The fall of FTX seems more about human errors and misbehaviors than about crypto per se.

A lot of what went wrong in the Russian and Chinese governments was an economic lesson as well. The Russian military establishment turned out to be rife with mismanagement and corruption, hardly a surprise for anyone who has studied the economics of autocratic bureaucracies.

Meanwhile, China’s attempt to manage Covid is not going well. Its Covid Zero policy, which it is now rapidly abandoning, required near-complete control of the economy and personal movement, which proved to be extremely unpopular and unsustainable. That too is common sense, and it is a miracle that the policy lasted as long as it did. The failures of Covid Zero reflect a longstanding recognition that centrally planning a fundamentally decentralized system isn’t possible for very long.

Elsewhere on the global stage, two of the more successful economies have been Poland and India, both with above-average growth rates. Both are building off a lot of entrepreneurial energy and fundamental reforms from the 1990s. Two of the biggest losers are Ethiopia and Nigeria, the former seeing a renewed civil war and the latter experiencing more violence and disorder. Those are tragic developments from a purely human standpoint, and they also mean that the prevailing order of wealthy countries is not likely to be overturned anytime soon.

As for the UK: Economists predicted that a move away from free trade with the EU would hurt the British economy. And it has.

Some years induce us to question established theory, and to see new and unusual possibilities for the future. Not 2022. This is the year that orthodoxy took its revenge.

More From Bloomberg Opinion:

• The Biggest Threat to the US Economy Is … Policy Makers: Allison Schrager

• Stagflation Is Looming, Right? Wrong, Say Economists: Matthew Winkler

• Wall Street Is in Denial About the Economy: Gary Shilling

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(Updates 10th paragraph to include information about the easing of China’s Covid Zero policy.)

To contact the author of this story:
Tyler Cowen at tcowen2@bloomberg.net

To contact the editor responsible for this story:
Michael Newman at mnewman43@bloomberg.net

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