The Ruling Class Isn’t Worried About Inflation

With the passage today of the $2 trillion stimulus bill, deficit-phobia appears to be waning in Washington. But it’s not because lawmakers have been won over to redistributive policies — it’s because they think the working class is too weak to set off inflation.

President Joe Biden at the White House in Washington, DC, 2021. (Mandel Ngan / AFP via Getty Images)

Say what you will about him, but Barack Obama was consistent. On the campaign trail in 2008, he was already firing up crowds with the promise that “we will all need to tighten our belts.” Upon taking office, he reminded everyone, “Americans are making hard choices in their budgets, and we’ve got to tighten our belts in Washington as well.” Even when, in his 2015 budget request, he belatedly adopted the rhetoric of anti-austerity, he still promised that everything would be “fully paid for.”

By comparison, Joe Biden sounds like Keynes himself. “The biggest risk,” he has said, “is not going too big, it’s if we go too small.” The stimulus bill passed today is equivalent to around 9 percent of GDP, more than one and a half times more than the Obama stimulus.

Can the change be explained by new ideas? Perhaps the austerity was a sincere but mistaken belief. But the Biden shift does not really depend on new ideas per se. Back in 2009, Council of Economic Advisers chair Christina Romer recommended bigger stimulus and fought to get Obama to stop publicly calling for Washington to “tighten its belt.” Different ideas were right there in the White House, and if the president hadn’t been busy discussing Edmund Burke with David Brooks he might have heard them.

We need to explain why the old ideas have more purchase now. Perhaps the real story is material, not ideal. But capitalists have the same interests now as they did in 2008: they need the government to backstop the economy (including business profits), but not in a way that disrupts labor relations or threatens the centrality of private investment. The former concern generates support for stimulus, while the latter generates opposition. Given this ambivalence, it is hard to explain fiscal politics as a simple matter of class power, and even if it weren’t, it is not obvious that any significant shifts in class power have occurred since 2008.

Barack Obama meets with regulators, US Secretary of the Treasury Timothy Geithner, and US Federal Reserve Chairman Ben Bernanke at the White House in Washington, DC, 2009.
(Aude Guerrucci-Pool / Getty Images)


Somewhere between ideas and interests, a political learning process seems to have taken place. Between 2011 and 2020, more thoughtful Democrats made three observations. First, the inflation that many still feared would follow from deficit spending or low interest rates did not appear. In fact, the Fed found itself unable to meet its very modest inflation targets. Second, rather than winning votes, the Democrats’ commitment to austerity seemed to cost it elections, including in 2016. Finally, Trump and Mitch McConnell offered their own “stimulus” of tax cuts and military spending. Despite “adding economic fuel at a moment when unemployment is at a 16-year low and wages are beginning to rise,” the program was met with apparent political and economic success. At long last, Democrats began to consider that austerity might be neither prudent nor popular.

Why did it take so long? Bill Clinton responded to the Reagan deficits by balancing the budget, only to see George W. Bush create new deficits even larger than the one Clinton had inherited. Why didn’t Democrats learn from Bush the lesson they eventually learned from Trump? Obama ran as a deficit hawk, accusing Bush of taking out “a credit card from the Bank of China in the name of our children” and leaving “our children with a debt that they cannot repay.” The financial crisis turned him into a foxhole Keynesian. But as soon as credit markets stabilized, Obama turned again to deficit reduction, creating a presidential commission to recommend entitlement cuts when unemployment remained near 10 percent.

Obama now claims he was a “full Keynesian” held back only by the votes of Senate conservatives. But the record shows otherwise. As the New Yorker reported: “When, in 2009, he was presented with the windfall pot of thirty-five billion dollars that he could spend on one of his campaign priorities or use for deficit reduction, Obama wrote, ‘I would opt for deficit reduction, but it doesn’t sound like we would get any credit for it.’” Far from being politically constrained, the president proactively sought out third rails to touch, as when he advocated cuts to veterans’ benefits even after being informed by his staff that this form of spending was a political winner.

During the summer of 2011, Obama sought a bipartisan “grand bargain” on deficit reduction but found himself constrained by Republicans who care more about keeping taxes low than balancing the budget. When Republicans sought leverage by refusing to raise the debt ceiling, Bill Clinton told the press he would “without hesitation” use the fourteenth amendment to raise the ceiling unilaterally. Instantly, Obama took the constitutional option off the table and continued to seek bipartisan support for entitlement cuts. As late as 2016, he was still proud that “we ended up getting a grand bargain.”

There may be no way to explain Obama’s lag in recognition except by looking at his individual intellectual background — for example, the fetish for civil debate with right-wingers he developed at Harvard Law. But however the lag is explained, we should remember that the zombie ideas themselves emerged from social conflict.

Take the fear underlying much deficit-phobia: the inflation of the 1970s, which provides the contrast to every current discussion about how things have changed. The causes of inflation are complex and imperfectly understood, but in the 1970s, rising prices were widely and correctly perceived to reflect distributional struggles. Fed chair Paul Volcker, who remains universally admired among mainstream economists and politicians like Obama, plainly stated that weakening labor unions was an indispensable piece of the 1980s disinflation.

If policymakers have now come to believe that there is more room for stimulus, it is in large part because they believe workers lack the power to make meaningful economic demands. As Janet Yellen reassured her Fed colleagues in 1996, “Real wage aspirations appear modest, and the bargaining power of workers is surprisingly low.” At the time, Yellen was “sympathetic to the view that the world has changed [since the 1970s]” but warned that she “would not want to carry such reasoning too far … the risk of an increase in inflation has definitely risen, and I would characterize the economy as operating in an inflationary danger zone.”

Treasury secretary nominee Janet Yellen speaks during an event to name President-elect Joe Biden’s economic team in Wilmington, Delaware, 2020. (Alex Wong / Getty Images)

Between 1996 and 2021, Yellen has evidently become more comfortable with the idea that “the world has changed,” full stop. But it would take a heroic effort to describe this as a story about good ideas replacing bad ones: clearly it is also a story about the gradual recognition that the balance of class forces now allows more room for maneuver than previously believed. No doubt it is hard for any of us to escape old ways of thinking, but in this case the protracted learning process also suggests a bias (despite all evidence, wages might still get out of control) that is hardly innocent of class implications.

In addition to a new attitude from the Democratic Party, there is also evidence that the business community is more supportive of fiscal expansion than they were in 2008. Historically, business attitudes on this question have fluctuated, as Michał Kalecki predicted at the dawn of the Keynesian revolution. Often, the trickiest question has been to identify large-scale forms of government spending that do not compete with private business. This is why military spending and tax cuts, as opposed to public investment, have traditionally played such a large role in US fiscal policy.

The pandemic has created a new outlet for government spending which organized business — including its more conservative wing — not only accepts but welcomes. In addition to the immediate health imperatives, business also perceives longer-term opportunities for public sponsorship of private investment. It is too soon to tell how far these will develop, but along with increasing public-private action around climate change, they cannot be ruled out as forms that can accommodate large infusions of government money without threatening existing patterns of power and resources.

Consistently, working-class self-activity has been much harder to accept than new economic ideas. Many of the businessmen most supportive of New Deal reflation were horrified by the wave of sit-down strikes after 1936. In 1977, General Electric CEO Reginald Jones pushed Jimmy Carter to expand the size of his stimulus program while simultaneously working through the Business Roundtable to kill pro-labor legislation. Warren Buffett’s frequent hand-wringing about inequality — “There’s class warfare, all right. But it’s my class, the rich class, that’s making war, and we’re winning” — did not stop him from vocally opposing the Employee Free Choice Act in 2009.

In the last year, we have seen that $600/week additional unemployment benefits and the $15 minimum wage remain outside the acceptable limits. Neither the business community’s chumminess with Biden, nor its new rhetoric about stakeholders over shareholders, has led it to support the PRO Act. It is here, rather than in deficit discourse, that we can expect to first see the limits of the new corporate liberalism.