No, not you, dear readers
Cory Doctorow throws shade on “ghouls like Lawrence Summers” for offering bad advice on inflation. Doctorow has a little help from Nobel-winning economist Joseph Stiglitz and spins a tastier tale than I could. Would you believe the fairy tale spun by inflation hawks?
First, the fairy tale:
Here’s the inflation story you’re expected to believe (advance warning: this story is entirely false): America gave the poors too much money during the lockdown and now the economy is awash in free money, which made those poors so rich that now they’re refusing to work, which means the economy isn’t making anything anymore. With all that extra money and all those missing workers, prices are skyrocketing.
To hear ghouls like Lawrence Summers tell it, there is only one answer to this. We have to immiserate the poors: jack up interest rates, kick off a recession, destroy millions of jobs, until the poors are stripped of their underserved fortunes, and, humbled, they return to their labors:
As noted: this is bullshit. Countries all over the world experienced inflation during and after the lockdowns, irrespective of whether they handed out relief money to keep people from starving to death while their workplaces were shuttered. America has slightly higher inflation than some other OECD countries, but the causes have nothing to do with overly generous relief packages.
“The Causes of and Responses to Today’s Inflation,” a Roosevelt Institute paper by Nobel-winning economist Joseph Stiglitz and macroeconomist Regmi Ira, debunks this false inflation narrative, revealing it as a sham aimed at destroying workers’ lives, offering a far more plausible explanation for inflation:
Stiglitz and macroeconomist Regmi Ira compare interest rate hikes to remedy inflation to medieval bloodletting. Practitioners did “more of the same when their therapy failed until the patient either had a miraculous recovery (for which the bloodletters took credit) or died (which was more likely).”
Doctorow summarizes:
Let’s start with the case against bloodletting. Inflation hawks warn us of the wage price spiral, which is when inflation goes up and powerful workers bargain for higher wages, which drives up costs, and thus prices, and thus wages. This is the fairy-tale version of what happened in the 1970s and it’s entirely true except for the fact that it was OPEC’s embargo driving up oil prices that caused inflation, a fact that makes it entirely false, but oh well.
Still, let’s be generous to bed-wetting, seventies-haunted inflation hawks and pretend that we’re worried about a wage-price spiral. Good news! There isn’t one. Wage growth peaked in June at 4.8% and by October it had declined to 4.2%, making real wages 2.3% lower than they were in Oct 2021.
How is it that America’s all-powerful workforce was willing to take a paycut rather than demanding wages that keep pace with inflation? “Weak unions, globalization, and changes in the structure of the economy.”
Plus, workers are not demanding more because they don’t expect inflation to worsen, unlike the hawks. Inflation is not being driven by “greedy workers and free money and too much demand.” (But you knew that.) The items going up the most are those that generate the most profit. Meaning, there’s more room for price-gouging.
Those additional profits also aren’t producing multiplier effects, though: the biggest price-gougers are spending their profits on stock buybacks and dividends, meaning that they’re funneling that money to rich people, who then stash it offshore. A billion dollar stock buyback doesn’t result in a billion loaves of bread being bought at the corner bakery.
The five root causes of today’s US inflation are:
I. energy and food price-spikes;
II. changes in the kinds of goods we want;
III. supply interruptions (mostly for cars);
IV. higher rents (resulting from work-from-home moves);
V. market power (AKA price-gouging).
None of these can be fixed by jacking interest rates or forcing workers into unemployment.
I’d reiterate the tendency of policymakers to a) have more concern for financial markets than for the real “makers” (the working class), and b) to hold the dystopian, if not Dickensian, view (’tis the season) that the purpose of people is to serve the economy.
Doctorow and the report offer more detail, naturally, but we’ll skip to the end here where the authors advise that raising interest rates above their abnormal lows of the last decade and a half is better for workers. Rates that are too low “distort capital markets,110 induce
innovation to save labor,111 and enhance wealth inequality.” Yes, a “but” is coming:
Inducing a potentially unnecessary, large economic downturn and accompanying increase in unemployment is not what the country needs. It only adds to the suffering of people who are already struggling. Together, these concerns strengthen the argument for a measured monetary response to inflation—combined with fiscal policy and other more targeted measures.
The good news is that all the recent indicators point to inflation moderating on its own. There is now increasing evidence that supply side problems are at last being resolved. Key prices like energy and food show strong mean reversion—they’re returning to more normal levels—and that will be disinflationary.118 Hopefully, this will induce the Fed to exercise even more caution in its policy of monetary tightening.
“The best we can hope for,” Doctorow adds acerbically, “is that the Fed won’t get stuck in loop where the interest rates will continue rising until morale improves.”
Again, not my area. But we can hope Scranton Joe has advisers around him who believe the economy exists to serve working people and not the other way around.
Happy Hollandaise everyone! If you’d like to throw a little something in the old Christmas stocking, you can do so here or at the address on the left sidebar.