The Neoliberal View of Inflation Is Convenient for Capitalists — But It’s Wrong

Neoliberals say that inflation is directly caused by high social spending and good wages, and that working-class people must sacrifice these to bring prices down. But there are other causes of inflation, and solutions to it that don’t pit us against ourselves.

Sen. Rick Scott (R-FL) speaks on inflation at a Senate Republican policy luncheon. (Kevin Dietsch / Getty Images)

When asked about his opposition to the amount of spending in the Build Back Better Act, Senator Joe Manchin cites the dangers of inflation and the harm that rising prices have already inflicted on his constituents in West Virginia. For supporters of social spending, this is politically tricky rhetoric to counter: Manchin’s concerns reflect those of average working-class people confronted with increased costs for staple commodities like gas, bread, and milk.

Defining inflation is easy. Inflation is when prices go up. But explaining what causes inflation is incredibly hard. The gulf between the simplicity of its definition and the complexity of its causes is what allows neoliberals like Manchin to pin inflation on government spending — in essence, using the specter of higher consumer prices to enforce austerity and protect accumulated wealth at the working class’s expense.

The basic idea put forward by neoliberals is that working-class people get scraps from their employers or the government for their own good, and that demanding anything more will just end up hurting them in the long run. In other words, the money tree of capitalism must be refreshed from time to time with the blood of workers and the poor.

It makes sense if you believe that people exist to serve the needs of the market. But a more humanistic view of the economy reveals potential solutions to the problem of runaway inflation — at least in the long term — that don’t depend on mass immiseration.

Stagflation and the Volcker Shock

If you ask the average person with a passing familiarity with economics, they will tell you that inflation happens when there are too many dollars chasing too few goods. The laws of supply and demand dictate that when this happens prices must rise to accommodate the increased demand.

The current accelerating rate of inflation is being attributed by some — including President Joe Biden himself — to the pandemic stimulus. Not only has it put more money in people’s pockets than they would normally have, but it’s forced many employers to raise wages to entice a less desperate labor force to come back to work.

There is a certain logic, then, to the argument put forward by Manchin and others that social spending (along with low interest rates and rising wages) is causing inflation. However, it’s also true that this framing is exclusively focused on demand, and therefore so incomplete as to be inaccurate.

The origins of this one-sidedness can be found in the stagflation crisis of the 1970s and ’80s. At the same time that neoliberalism was shifting the financial burden of sustaining society from the state and corporations to disempowered and isolated individuals, the economic discourse was shifting the blame for rising prices from the suppliers to the demanders.

The stagflation crisis fundamentally changed the popular conception of economics. The school of Keynesian economics that had held sway since the Great Depression postulated that inflation was primarily a consequence of a juiced economy with low unemployment. But when a sudden rise in oil prices jump-started an inflationary spiral in the early ’70s that continued despite rising unemployment, it was an unexpected state of affairs, and no one was sure what to do about it.

President Richard Nixon tried to deal with inflation by instituting price and wage controls. This had an immediate ameliorating effect on the public’s worry about rising costs, but politically it was hard to maintain such a planned economy in peacetime. Nixon’s price and wage controls didn’t last long, with firms lobbying that restricting prices hurt their ability to produce and unions upset at the fact Nixon maintained a firmer hand with wages than he did prices.

It was at this moment that two crucial figures arose. Milton Friedman rejected the Keynesian cost-push model for inflation and postulated that inflation was solely a factor of excess growth in the money supply. In other words, the sole factor driving inflation was the relative ease with which people and businesses could borrow, and insufficient incentives to save.

Paul Volcker, who was named Fed chair by President Jimmy Carter in 1979, used Friedman’s monetary theories to justify his policy of drastically raising interest rates. The result was back-to-back economic recessions, leading to reduced demand and ultimately the end of runaway inflation. This became known as the Volcker shock.

Today most of the conversation around the Volcker shock frames it as an unfortunate necessity, with some passing mention of the regrettable human cost — but what else could have been done? However, human cost should be a much more prominent part of the conversation, especially since we are still making payments on that “unfortunate necessity” to this day.

Higher interest rates decimated domestic productive capacity. Many firms closed, unable to pay back debts or invest in new productive projects. The manufacturing sector was hit hardest. When we talk about the deindustrialization and economic depression of places like Flint, Michigan, Youngstown, Ohio, and central Pennsylvania, this is where it began. Rates of suicide and alcoholism skyrocketed. Homeless shelters overflowed. As customary in America, black workers suffered disproportionately, with the African American unemployment rate hitting 21.2 percent in 1983.

The effects of the Volcker shock were not confined to America’s borders. Developing countries in the Global South found themselves unable to pay back loans issued by American banks. With the income of their exports diminished by trade deals and the expanding global economy, many countries found themselves in unexpected financial crises. The result was the International Monetary Fund intervening to bail out these countries at the cost of putting them in permanent debt to Western OECD nations. Austerity was forced upon these countries, and national programs meant to provide education and social services were cut, thus severely hampering any effort to combat poverty.

On a human scale, the Volcker shock was a disaster. But since it was effective in ending the inflationary spiral without doing lasting damage to Wall Street profits, it was quickly embraced as the only serious way to deal with runaway inflation. Milton Friedman and others created the concept of a non-accelerating inflation rate of unemployment, or NAIRU, meaning that a certain level of unemployment must always be maintained as a bulwark against inflationary rising wages. Anytime unemployment fell below this number, he postulated, inflation would necessarily explode.

The neoliberal perspective put people as consumers in conflict with themselves as workers or beneficiaries of government programs. As consumers, Americans demand low prices and consistent costs, which means workers’ salaries must be kept as low as the market will allow and government spending on productive economic development and social infrastructure must be deficit neutral.

The problem is that the consumer and the worker or benefits recipient are the same person. Thus the popular economic framework that emerged from the era of the stagflation crisis and the Volcker shock — that is, the moment when neoliberalism shifted from theory to practice — set ordinary people against themselves, letting capitalists off the hook.

Where This Line Meets That Line

What came out of the response to the stagflation crisis was a political depoliticization of economic policy. In other words, the conversation around economic policy became less a debate over how best to improve people’s lives than an ostensibly objective accounting of mathematical facts. The imperative of alleviating human misery was trumped by the need to preserve the value of the dollar. This way, politicians can claim that they don’t really want to protect the interests of the rich by keeping workers precarious — it’s just that the math says there’s no other way.

Today some are arguing for another Volcker shock–style tightening of monetary policy from the Fed. Despite hinting Tuesday that the Fed could accelerate its withdrawal of support to financial markets, chair Jerome Powell has shown zero interest in such a move, insisting that rising prices are “transitory.” There has been a fair amount of criticism directed his way for that position. But it remains unlikely that the Fed will turn off the tap of cheap credit with so many firms finding themselves so indebted and relying on the ability to borrow cheaply to stay in business.

Capitalism, if nothing else, is remarkably capable of adapting to the crises that it creates. In the ’80s, the masters of capital were content to immiserate millions across the world to protect their wealth as well as a hierarchical system of production that sought an ever-increasing rate of profit. Now that neoliberal model is generating new contradictions. Inflation is rising, yet the preferred neoliberal answer — raising interest rates — would put many companies in serious financial difficulties.

One thing to do — though this is more a long-term solution than a short-term fix for rising inflation — would be to invest in increasing productive capacity in key sectors — not for the sake of exponentially growing profit but simply to be able to weather unexpected supply shocks. Investing in renewable energy is good not only for the planet but also stability in the price of energy. For goods we do import, revamping the port system and hiring more workers into better working conditions would minimize backlogs like we are seeing in Los Angeles and also alleviate some inflationary pressure.

Neoliberals are searching for the next way to offload the harm of a capitalist crisis onto the poor and working class. But centering human life and dignity in the equation when trying to solve this current inflation spiral is not only moral — it’s also sound economic policy. That is, if you believe the purpose of the economy is to serve people and not the other way around.