Pretty interesting self reflection and admission of error by Art Laffer here. In an interview with Business Insider he discusses why he was wrong to predict high inflation and high interest rates in 2009:

“Usually when you find the model this far off, you’ve probably got something wrong with the model, not that the world has changed,” he said. “Inflation does not appear to be monetary base driven,” he said.

This is fantastic. I always talk about being wrong and learning from being wrong. There’s nothing wrong with being wrong at times. I get stuff wrong all the time. But one thing I am moderately good at is leaving my biases aside and trying to really discover why I was wrong so I can come to better conclusions in the future.

In this case, 2009 Laffer was probably using something resembling the money multiplier where the Fed would expand the balance sheet via reserve balances and the money supply would subsequently expand ($1 of reserves leads to $10 in loans or something like that). Of course, that never happened for the various reasons I’ve explained before.* It looks like Laffer doesn’t seem to totally understand this point (see his later comments in the article), but he seems to be on the right track. In this game, admitting your faults is often half the battle. Reworking your model based on updated understandings will lead to better outcomes in the future. So kudos to Art Laffer.

* The short version: banks don’t lend reserves. They lend first and find reserves later. So, in an environment where there was weak demand for loans, the reserve expansion was never going to result in an expansion of the broad money supply.

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