Co-blogger Scott Sumner wrote a post recently titled “Protectionism is Not Inflationary.” I disagree. Thus the title of this post.

We both learned from the great Milton Friedman–Scott as one of his students, me indirectly as a student of two Friedman students, Ben Klein and Mike Darby, and from reading Milton’s work and occasionally talking to him and corresponding with him.

One of the most valuable things Milton did was revive the quantity theory. It has its problems, but one virtue that remains is reminding us of the relationship MV = Py, where M is the money supply, V is the velocity of money, P is the price level, and y is real output (real GDP, in the current vernacular.)

Protectionism makes y, real GDP, lower than otherwise. Scott and I agree on that. With an unchanged M and unchanged V, P is higher than otherwise. Therefore an increase in protectionism causes an increase in P. We normally refer to an increase in P, the price level, as inflation.

Scott doesn’t dispute that. What he argues is that the current Federal Reserve Board will offset any increase by adjusting monetary policy, M, keeping the inflation rate at or around 2%.

He may well be right, but that doesn’t mean that protectionism is not inflationary. Protectionism IS inflationary AND the Fed can offset this inflation.

But what about Milton Friedman’s famous line, “Inflation is always and everywhere a monetary phenomenon.” You can regard that statement as tautological because inflation, by definition, is a reduction in the value of money. But Milton meant much more than that: he meant that every inflation we could point to was caused by an increase in the money supply. He was probably right, but that’s an empirical statement, not a statement of necessity. He would not have disputed that a little change in inflation could be due to a change in the growth of real output; what he was saying was that every episode of inflation involved an increase in the money supply, not that there weren’t other factors that made inflation, say, 2.2% instead of 2.0%.

One person who commented on Scott’s post, Maurizio, put it well:

If you have protectionism and all other variables stays [sic] the same (and therefore the Fed does not do any offset), protectionism is inflationary. If you assume the Fed does the offset, then you are changing two variables at once.