You have to be fairly wizened to recall a time when people talked about inflation as much as they have over the last few months. And, being fairly wizened myself, I remember that time. Whenever you went shopping, prices were up. People got in line for gas. Though not everyone had the vocabulary to describe it, the real wage was falling hard. Rising energy and food costs hit the poorer half of the income distribution harder than the richer one. People on public assistance lived with “empty cupboards,” as a 1980 New York Times headline put it. Another Times story reported that middle-class families were applying for food stamps.
Of course, it took some time to get to that point. Although there was a brief burst of inflation in the years after World War II, as people celebrated the end of wartime austerity by going on a spending spree, price increases remained contained, averaging well under 2% a year from the early 1950s through the mid-1960s. As the 1970s approached, however, the pressures of financing the Vietnam War without squeezing the civilian economy pushed prices higher — trends intensified by two rounds of opec oil price hikes. Inflation approached 6% a year at the turn of the decade, hit 11% in 1974, and peaked at over 13% in 1980. The story was replicated around the world. The average inflation rate in the g7 countries (Canada, France, Germany, Italy, Japan, the UK, and the United States) broke 15% in 1974 and came close to 14% in 1980.
In the United States, what seemed like a relentless rise finally came to an end when Paul Volcker, then chair of the Federal Reserve, drove interest rates into the high teens, creating what was then the deepest recession since the 1930s. Unemployment spiked, unions were busted, social spending was cut, and by 1986, inflation was back below 2%. The working class, restive throughout the 1970s, was rendered passive and scared, a long-term result of the anti-inflation fight — one explicitly celebrated by former Fed chair Alan Greenspan in the 1990s.
In 1997 congressional testimony, Greenspan mused on why inflation remained so low despite what looked like a hot economy. An important reason: “worker insecurity.” He noted that fear of layoffs rose between 1991 and 1996, despite a markedly better economy. Workers looked unusually reluctant to leave a job, and he noted that the “low level of work stoppages of recent years also attests to concern about job security” after 15 years of relentless corporate downsizing. Workers, fearing that technological change would render them obsolete, kept their heads down. To Greenspan, these were all good things, and he kept interest rates lower than he might have because of them.
Inflation stayed low for decades, averaging less than 2.7% from 1983 through 2019.
But starting in the spring of 2021, inflation began picking up and has continued to accelerate. The annual rate broke 5% in May, 6% in October, and, at the latest reading, in May 2022, was 8.6%, in a neighborhood last seen in 1982. There were inflation spikes in 1990 and 2008, but they burned off quickly. This one may burn off, too, and there are signs it’s slowing. But it may not — and it should be read as a warning for the longer term. A crucial part of the story, inflation in assets like stocks and crypto, is something the bourgeois media doesn’t talk about as much as the regular consumer kind. After years of loose money, the Federal Reserve and other central banks around the world have raised interest rates to fight inflation. Even after those hikes, interest rates are very low by historical standards, and they will remain historically low if rates are pushed higher. But these small moves have spooked financial markets — speculative assets of all sorts have taken substantial hits. At the less elite level, the University of Michigan’s consumer sentiment index fell to an all-time low since it began in 1952. Is the underlying structure of the us economy so feeble that it can’t tolerate 3% interest rates? Is what would have been described as a monetary “snugging” in earlier times about to drive us into a panic and a slump?
A Problem That Can’t Be Ignored
Democrats’ first reaction to the price surge was evasive, dismissing it as unimportant or transitory. Many socialist analysts responded similarly. As inflation has persisted and even accelerated, this argument has gotten harder to make, but it hasn’t disappeared entirely. It is real and it’s important for as long as it lasts — however long that might be, and maybe longer.
In an article for New York magazine last September, when the consumer price index (CPI) was up 5.4% for the year, progressive historian Rick Perlstein argued that complaints about inflation in the 1970s were a moral panic more than an economic reality. He acknowledged that some people might have had to stretch to pay the bills, but “Union workers did have those COLAs,” cost-of-living adjustments, that insulated them against inflation. (In the late 1970s, just under a quarter of workers were unionized.) The main reason for alarm over inflation, Perlstein claims, is that “the social transformations of the 1960s worked their way into the mainstream.” There’s something to the idea that people associate inflation with social tension, though it’s not easy to say which is cause and which is effect — nevertheless, the average worker’s real hourly wage fell almost 10% between 1973 and 1979.
Now, with inflation at 8.3%, Bloomberg opinion columnist Noah Smith recalled Perlstein’s argument: “Maybe some of the anger about inflation is just displaced anger about social change, as Rick Perlstein has hypothesized.” Recently, Perlstein told me he still holds his September view.
But I have to ask: Have any of these people gone grocery shopping in the last year?
More sophisticated evaders argue that inflation is confined to a few product lines: goods, up 12.9% for the 12 months ending in April 2022, rather than services, up just 5.4% (still the highest in over 30 years); energy, up 30.2%, led by gasoline, up 43.6%; used cars, up 22.7%. Used car prices, which have decelerated in recent months, were on a tear because a shortage of semiconductors is dragging down new car production, increasing demand for the previously owned variety. Food prices are up 9.4% — barely under double digits, but the biggest yearly rise since 1981.
There are several problems with this “narrowly confined” claim. One is that food and energy are essential items, accounting for about 20% of the average household’s spending, and rather hard to cut back on. Another is that so-called core inflation, which excludes food and energy because their prices can be volatile and may obscure underlying trends, was 6.1% for the year ending in April, a rate unseen since 1982. And yet another is that price indexes put out by the Federal Reserve banks of Cleveland and New York, which strip out extreme price changes of just the sort that the “narrowly confined” partisans are pointing to, are rising as well. Inflation is real.
Where’s it coming from? Some liberal and left pundits are attributing inflation to monopolistic price gouging. As Robert Reich, Bill Clinton’s labor secretary, wrote recently:
If markets were competitive, companies would keep their prices down in order to prevent competitors from grabbing away customers. But they’re raising prices even as they rake in record profits. How can this be? They have so much market power they can raise prices with impunity. Viewed this way, the underlying problem isn’t inflation per se. It’s lack of competition. Corporations are using the excuse of inflation to raise prices and make fatter profits.
The problem with this explanation is that market concentration hasn’t changed from 2019, when inflation was well under 2%. If corporations could raise prices with “impunity,” why didn’t they then? And what exactly is this “inflation” that they’re using as an excuse? A preexisting specter roaming about all on its own? Besides, “record profits” are very routine. us corporations have made record profits in over 40% of the quarters since 1947, excluding recessions. This isn’t a serious explanation.
Josh Bivens, research director of the Economic Policy Institute, made a more sophisticated version of the profits argument than Reich, contending that profits’ contribution to rising corporate costs has been high relative to historical averages, and labor costs low. This is true, but it’s also not unusual behavior for the first six quarters after the end of a recession. And it doesn’t explain why firms didn’t spend the previous 40 years boosting profits by raising prices. Again, what is this preexisting inflation that firms are taking advantage of?
Inflation is complicated, but there’s a simple thing you can say about the current version: immense amounts of purchasing power were injected into an economy that was stretched to the limit. Pandemic support payments amounted to over a trillion dollars — crucial support that kept scores of millions from destitution, but it came as COVID-19 was wreaking havoc on production. The pandemic took millions of workers off the job, and precautions shut down factories and ports. That threw global supply chains — a phrase that has sadly moved from the business press into daily conversation over the last year — into chaos, rendering it difficult to buy goods like cars and appliances, which are assembled from components produced all over the world.
Readers of the monthly reports of the Institute for Supply Management’s survey of purchasing managers have been treated to two years of complaints about the impossibility of acquiring basic industrial supplies. Some highlights: “Business is robust, but logistics and supply cannot keep up.” “The current electronics/semiconductor shortage is having tremendous impacts on lead times and pricing. Additionally, there appears to be a general inflation of prices across most, if not all, supply lines.” “Lots of work on the floor, but I am worried about getting the materials to support.” “In 35 years of purchasing, I’ve never seen everything like these extended lead times and rising prices.”
There was no cushion from inventories, thanks to the fashion for keeping only the smallest stocks on hand, to minimize the costs of idle capital. Add to that years of corporate underinvestment — much better to shower the shareholders with cash than invest in productive equipment — as well as neglect of public infrastructure, and you get the price chaos we’re living in.
Aside from the surge in buying power, the pandemic brought enormous changes in consumption patterns. Since people were stuck at home, spending on services (restaurants, travel, gyms) contracted, and spending on goods expanded — all at a time when goods production and distribution were suffering from the disruptions listed in the previous paragraph. (Service spending has recovered slightly.) And shortages only encourage panic buying, of everything from paper towels to giant freezers. Add to this Russia’s invasion of Ukraine, which turned up the heat on prices, already plenty hot. The war’s economic effects have been concentrated in food and energy, as Ukraine, a major grain exporter, was shut out of world markets, along with Russian oil, thanks to sanctions. This made a bad situation worse, especially for poorer countries, where food price increases are life-threatening. The Food and Agriculture Organization’s food price index was up almost 30% last year and is up 26% so far this year.
Then there are the trillions of dollars the Federal Reserve has pumped into the financial system by buying bonds — most of them us Treasury securities, but also mortgage-backed bonds. (Federal Reserve credit consists of assets purchased on the financial markets, mostly Treasury bonds, using money created out of thin air.) The latest round, a policy known as quantitative easing (QE), builds on several earlier ones: an infusion of over $1 trillion in 2008, during the financial crisis, supplemented with reinforcements in 2010 and 2012, which amounted to another $2 trillion, as the Fed sought to counter signs the post-crisis recovery was losing steam.
When the Fed tried to retreat from QE in 2013 — dubbed in Fed-speak a “taper” — markets threw what came to be called a “taper tantrum,” and the Fed reconsidered. It shed some assets from 2017 to 2019, but once the pandemic hit, it bought like crazy: $2.4 trillion in the second quarter of 2020 and another $2.1 trillion since. This furious pumping made sense in the early pandemic months, when there was a real danger the financial system would seize up and we’d see a rerun of the 2008 crisis against a backdrop of mass sickness and death. But that moment is long past.
It’s hard to prove that all that cash stimulated the real economy, but it has fueled a kind of inflation the better sorts don’t like to talk about: asset inflation. Until the Fed started talking tough late last year and acting tough in early 2022, we’d been living through one of the greatest bubbles of all time. Most earlier bubbles centered on one thing: stocks in the 1920s and 1990s, houses in the early 2000s. This one is operating on multiple fronts: stocks, start-ups (first “unicorns” and now “decacorns”), crypto, NFTs, houses, and collectibles ranging from art to sneakers.
Houses, one of life’s essentials, are being priced out of reach because of a speculative mania — though it should be noted that those who already own housing and are seeing its value rise are a powerful constituency for keeping the game going. Since the beginning of the pandemic, house prices are up 34%, a pace three times the one logged during the heart of the great housing bubble in 2002–6. Increases are being driven by what looks to be a mix of upper-income buyers at the high end and big institutional investors like private equity funds buying properties to rent to those further down the affluence ladder. Unlike the mid-2000s bubble, which offered subprime loans to poorer people, this one is almost exclusively an affair of the upper crust.
The relentless rise in prices, which has come with record increases in construction costs (higher than the inflationary 1970s or the mid-2000s bubble for the ages), has cooled demand some, but prices are still extraordinarily high.
Those rising prices are showing up in rents, too. Since December 2019, the CPI shows rents up about 8%, with two-thirds of that coming over the last year. But the CPI is designed to reflect rent changes slowly, since people typically have leases and don’t move every year. Zillow’s rent index displays monthly changes on their site, which reflects what people looking for housing face now. It’s up 20% since the pandemic began, most of it over the last year. Although the Zillow index has cooled slightly, work by the San Francisco Federal Reserve Bank shows that it’s likely to feed into the CPI measures of rent for the next couple years — and real-world costs, as leases expire and tenants are confronted with sharp rent increases.
While it’s not digging into people’s pockets the way housing inflation is, the rest of the speculative menagerie is a massive waste of capital and human attention — and could put the broad financial system at risk of crisis. As John Maynard Keynes put it in The General Theory of Employment, Interest, and Money, the best thing ever written on speculative markets:
The social object of skilled investment should be to defeat the dark forces of time and ignorance which envelop our future. The actual, private object of the most skilled investment to-day is “to beat the gun,” as the Americans so well express it, to outwit the crowd, and to pass the bad, or depreciating, half-crown to the other fellow.
No doubt the Fed’s largesse has been greatly amplified by borrowing, by everyone from hedge funds to civilians who’ve just opened a Robinhood account. These things never end well. As the Fed starts withdrawing some of those trillions it injected, the financial markets could react very unhappily. Curiously, because the Fed’s easy money has been so kind to Wall Street, there’s almost no constituency for monetary tightening in finance, unlike in earlier days, when finance led the fight against inflation. The bond vigilantes have hung up their guns. But the speculative insanity really needs to be tamed. It’s a rare bubble that doesn’t inflict a lot of casualties when it bursts. Since this one was allowed to inflate for so long, the damage could be greater. The collapse of cryptocurrency values prompted suicide talk on Reddit, but those consequences were small compared to what else is out there.
A Working-Class Concern
So why does inflation matter? To many on the Left, it’s a concern of the rich, who find their financial assets losing real value; the working class is either unharmed or made better off in a period of rising prices. That’s just not true. People are telling pollsters that inflation is hurting — and it’s a major reason for Joe Biden’s miserable poll numbers, despite strong employment gains. For the year ending in April, average real wages are down over 2% (meaning wage increases have lagged inflation by about 2 percentage points); in 2018 and 2019, real wages were rising by about 1%.
Inflation is marring some initially decent-seeming news. Lately, according to the Federal Reserve Bank of Atlanta’s stats, wage gains at the bottom have outstripped those at the top. For the year ending in April, their data show, the average hourly wage of the lowest-paid quarter of the income distribution (the first quartiles) was up 6.4%, compared with 3.5% for the top tier. Both gains, sadly, are lagging inflation, as the graph below shows: the poorest by 1.8 percentage points, the richest by 4.7. While it’s nice to see the low-paid doing better than the high-paid, it’s a lot less nice to see strong nominal wage gains eaten up by price increases.
Average Hourly Earning
Over the long term, the higher the rate of inflation, the lower the rate of real wage gains. Between January 1973 and April 1995, the real value of the average hourly wage declined by almost 20%. Over two-thirds of that loss occurred in the high-inflation years, 1973 to 1982, when the CPI gained almost 9% a year, and over half during the very highest inflation years of 1978 to 1982, when prices rose over 10% a year. There’s a strong relationship between inflation and real wages: the higher the rate of inflation, the worse the wage performance.
There’s a good reason people don’t like inflation. The last thing they need to hear from elites is that they’re wrong in feeling that way. It’s not surprising coming from liberals, but socialists shouldn’t sing backup.
In 1997, economist Robert Shiller reported on surveys he’d supervised of popular opinion on inflation in the United States, Germany, and Brazil. Germany was chosen for being notoriously inflation-averse and Brazil for having had recent experience of hyperinflation — an average inflation rate of 1,628% between 1989 and 1994. In 1997, us inflation had been under 5% for fourteen of the last fifteen years and under 3% for five consecutive years. In other words, it was a period of low and stable inflation; the double-digit inflation of the late 1970s and 1980s was long gone. But people still worried about it.
Shiller’s survey had multiple choice questions but also left room for open-ended comments. The drift of the comments was a sense that inflation meant prices rose faster than incomes, which may not fit an economist’s definition but fits personal experience of inflation quite well. Respondents also expressed anxiety about inflation leading to impoverishment and social turmoil. Some thought inflation was related to income polarization, the rich getting ahead of everyone else and poverty increasing. Even if these perceptions aren’t always accurately expressed, they’re about real and important things. Polarization isn’t really about inflation, but it’s about something, even if people don’t have the right vocabulary for it. There was little mention of inflation lowering the real value of debt, which is the reason creditors normally hate it and many progressives welcome it. But most people seem not to be aware of it — with good reason. The real value of debt is a quantity that’s stretched out over years, with much less immediate impact than paying the monthly bills. Using Federal Reserve estimates of how much households spend on debt service shows that the effect of rising prices on spending is many times that of the real reduction in the value of debt. And if prices are rising faster than income, households could well be pressed into fresh borrowing to make ends meet.
There’s been nothing quite like Shiller’s survey since 1997, but popular antipathy toward inflation hasn’t abated. “Asked to rate the severity of seven issues affecting the economy recently, about 8 in 10 say the rising cost of food and other everyday items (80%), the disruption in the nation’s supply chain (79%), and the rising cost of housing (77%) are major problems for the nation’s economy,” CNN found in a December 2021 poll. In April, Gallup reported the largest share of respondents naming inflation as the top economic problem, at the highest levels since 1984. Pew Research Center said inflation was at the top of “Americans’ list of biggest problems” in May 2022.
Studies at the household level find poorer people taking a bigger hit from inflation than richer ones. A large review by the National Academy of Sciences, recommending changes to the official CPI, finds that poorer households suffer higher rates of inflation than richer ones. Several recent studies say the same. In a 2020 paper based on checkout scanner data linked to household income and demographic data covering the years 2004–16, David Argente and Munseob Lee found that, in most years, poorer households saw faster price rises than richer ones. The authors cite similar work by others reaching similar conclusions. A more recent study of how inflation is experienced by households, by economists Michael Weber, Yuriy Gorodnichenko, and Olivier Coibion, also using scanner data, found that the first stage of the inflation spike in 2020 hit black households harder than white ones and poorer households harder than richer ones.
Data from the Census Bureau’s Household Pulse Survey, a pandemic innovation that frequently surveys people about their material, social, and physical well-being, shows a substantial rise in the share of households having trouble paying their bills. In May 2021, 26% said they were finding it somewhat or very difficult to do so. In June 2022, that was up to 39%. Most income classes, from the poorest to those making $100,000, saw increases of around 15 percentage points. Only those with income above $150,000 saw single-digit increases.
Weber et al. also surveyed households on their thoughts about inflation and discovered several surprising things. Economists generally see unemployment and inflation as inversely correlated — lower unemployment leads to higher inflation, and vice versa. But civilian households generally have the opposite view — higher inflation means higher unemployment down the road — an expectation that holds regardless of race, income, education, or geography. The paper also sheds light on the much-lamented paradox that people’s evaluation of the economy’s health is far gloomier than conventional indicators like GDP growth and unemployment would suggest.
It’s about inflation. As it rises, evaluations darken.
Inflation as a Symptom
What gives inflation some appeal on the Left is that anti-inflationary policies are typically attacks on wages and benefits. Coming out of World War II, policymakers came to believe they’d mastered the business cycle. Capitalist economies would always fluctuate, but the magnitude of the booms and busts could be managed. Expansions could be dampened so they didn’t turn into manias like the 1920s, and recessions could be softened so they didn’t turn into depressions. In practice, the economy would expand for a few years, inflation would rise and financial markets would get frisky, and then the Federal Reserve would raise interest rates and provoke a recession. The magnitudes of the fluctuations were much milder than they would be by later standards. The maximum unemployment rate in the 1950s, 7.5%, was barely higher than the 1980s average, 7.3%.
That formula stopped working well in the 1970s, as inflation trended upward. Arthur Burns, the chair of the Fed from 1970 to 1978, led interest rates higher in 1973 and 1974 but backed off; he thought the country couldn’t take sustained unemployment of 6% — though it got as high as 8.8% in June 1975. Throughout the 1970s, Burns excused spikes in oil and food prices as noisy anomalies, even as they boosted inflation. He persisted in seeing inflation as a result of special factors and not a more systemic problem.
Inflation and Real Wages
While a lot of analysts blame the 1970s’ inflation — unprecedented outside major wars — on sharp increases in the prices of oil and other major commodities, it was also propelled by worker-boss tensions. Unions, which represented over a quarter of the private sector workforce in the early 1970s, were able to force wage increases; strikes were frequent and wouldn’t begin disappearing until the early 1980s. Employers passed along the costs by raising prices, unions pushed for higher wages, and the process fed on itself. (Similar things were happening in Europe, where more robust welfare states, which would be cut back beginning in the 1980s, offered workers major support in the class war.) In political terms, you could read this as an unresolved class conflict, with neither side able to achieve a clear victory. As the economist James Tobin, a liberal Democrat, wrote in 1981:
[I]nflation is the symptom of deep-rooted social and economic contradiction and conflict. There is no real equilibrium path. The major economic groups are claiming pieces of pie that together exceed the whole pie. Inflation is the way that their claims, so far as they are expressed in nominal terms, are temporarily reconciled. But it will continue and indeed accelerate so long as the basic conflicts of real claims and real power continue.
With the Volcker Shock of the early 1980s, however, the employer class decisively won.
Today’s inflation is nothing like that. Despite some inspiring bits of union organizing at Amazon and Starbucks, the share of the private sector labor force belonging to unions is down by nearly three-quarters since 1979, and strikes are down by over 90%. Some sectors, notably restaurants, are seeing strong wage increases as employers desperately seek to lure reluctant workers back on the job, but this price spurt isn’t really of what economists call the wage-push sort. It’s about strong demand in the face of a broken supply side.
And there’s a dimension to today’s inflation that was largely missing from that of the 1970s: the asset inflation I discussed earlier. For rentiers, the long 1970s were the worst long decade in modern economic history; stocks lost 62% of their real value between 1968 and 1982. The greatest beneficiaries of the trillions of dollars of free Federal Reserve money over the last decade have been the private equity moguls, venture capitalists, and crypto promoters who’ve gotten monstrously richer as the electronic printing presses have been coining fresh money. The real value of the stock market was up 368% between the depths of the financial crisis in 2009 and its December 2021 peak.
This has made for a strange transformation in inflation politics, as Christopher Leonard’s book, The Lords of Easy Money: How the Federal Reserve Broke the American Economy, shows. It focuses on Thomas Hoenig, then president of the Kansas City Fed, who cast one “no” vote after another against QE in 2010. That gave him a reputation as a crank, and former Fed chair Ben Bernanke even complained about him in his memoir. Hoenig, a small-town Midwesterner and son of a small-business owner, might at one time have been a fan of easy money. Tight money used to be the passion of big-city bankers. But Hoenig thought QE would be a gift to those big-city bankers and lay the groundwork for credit disasters in the future.
For Hoenig, it was quite personal. He was the Fed official who told Oklahoma-based Penn Square Bank that it had to close in 1982. Though now mostly forgotten, Penn Square, headquartered in an Oklahoma City shopping mall, was a prototype of the modern loan machine: it’d make loans, then package and sell them to bigger fish so they could make more loans, mostly to speculative oil operators. While the energy economy was booming in the late 1970s, it all seemed to work well. But when oil prices fell in the 1982 recession, Penn Square went bust.
Among the upstream banks was a Chicago giant, Continental Illinois, which had bought $1 billion in the Oklahoma bank’s loans. Hundreds of other banks were exposed in turn because they had money with Continental. Little Penn Square’s collapse threatened a generalized crisis. So a rescue had to be mounted.
Continental was essentially nationalized, other wounded banks were merged into healthier ones under government guidance, and the concept of “too big to fail” was born. Bankers and speculators rightly came to assume that the government would always put a floor under their losses. Since ordinary price inflation looked to be under control, no one cared about asset inflation, the risks of bailouts, or, since 2008, near-0% interest rates. When returns on low-risk assets are close to nothing, and the cost of borrowing to speculate is close to nothing, then people who are politely called “investors” go wild. And if the worst that can happen to one of those investors is missing a bonus, why not?
Hoenig wasn’t a conventional inflation hawk, one of those cranks reading Friedrich Hayek and worrying that the wrong sorts of people (workers) might be making some money. He voted no on QE because he thought it would lead to a rerun of Penn Square on a vastly larger scale. After 40 years of this, it’s hard to disagree.
But in this new world of inflation politics, Wall Street had given up on inflation-phobia and come to love easy money and the floor the Fed seemed to put under stock prices. As Leonard points out, even Fed chair Jerome Powell — very much a creature of Wall Street and elite law — converted from a QE skeptic to its most powerful advocate. At least until a few months ago.
Because the political idiocy in Washington made serious fiscal policy impossible (the COVID-19 relief bills aside, though they were temporary), QE became a substitute. Instead of an infrastructure or jobs program ultimately paid for by taxes, we’ve had a flood of central bank money. The bridges may still be falling down, and we’re facing a summer of electricity brownouts, but QE did a lot to tack 3,200 points onto the S&P 500 since the Lehman Brothers failure in 2008.
No one can object to a central bank flooding the system with money in a crisis. But no lessons were learned in any of the financial crises of the last four decades, and the regime of perpetual credit indulgence seems immune to any challenge. If the Fed continues raising rates and draining some of the $8 trillion it added to its balance sheet after Lehman Brothers’ collapse in 2008 — over half of it since the onset of the pandemic, a rate of expansion almost 20 times the 2002–7 rate — things could seize up.
And what then? Back to bailout mode? This doesn’t seem like a strategy for the long term.
It’s been fun to see Wall Street fearing tighter money. In its March 21 investment commentary, BlackRock said of the Fed’s plans to get the federal funds rate, the overnight interest rate under its most direct control, up to 2.8% by the end of 2023, that it would be “in the territory of destroying growth and employment.” Bill Gross, once the manager of the world’s largest bond portfolio and still an investment guru, said that range of interest rates would “crack the economy.” If these claims are true, it’s a remarkable development, because periods with Fed funds below 2.8% have been very rare since the 1950s.
If American capitalism is so feeble that it can’t stand 3% interest rates, we need to have a serious talk about its condition. Raising interest rates and clawing back some of the free money the Fed provided to the markets over the last decade would calm speculative fevers. If that provokes some financial crises — and it may — then socialize the institutions involved and manage the failure so it doesn’t spread, but don’t subsidize a return to the status quo ante. We’ve got to end the Penn Square era.
The Long Run
Articles of this sort often founder on the “what is to be done” section — what my old friends at Dollars & Sense magazine used to call the “last paragraph problem.” That problem comes in no small part from our inability to imagine transcending the limited choices capitalism offers us. With inflation, we’re offered the frustrating choice between austerity and stimulus, each with substantial downsides.
Austerity’s lack of appeal is obvious — deliberately creating unemployment isn’t something socialists can applaud. But we should be honest about a few things. First, anti-inflation politics aren’t as unpopular as we imagine they might be. Over 80% of respondents to Shiller’s survey in the United States, Brazil, and Germany thought the control of inflation is one of a government’s most important economic responsibilities. When explicitly asked about a trade-off between unemployment and inflation — a complicated question, but bracket that concern for now — an overwhelming majority preferred a regime of low inflation and high unemployment to one with high inflation and low unemployment. People said they’d rank keeping inflation down as a greater priority than preventing drug abuse or deterioration in the quality of the schools. Most thought that if inflation is allowed to rise, it could get out of hand.
There’s a psychological angle to inflation — Perlstein has a point here, but he may be flipping cause and effect, or separating the two in a rude, anti-dialectical fashion. There were substantial numbers of people in Shiller’s survey who worried that inflation could lead to declines in social cohesion and concern for the common good — and, if allowed to rise unchecked, “economic and political chaos.” There was near-universal agreement about this among Americans (91%) and Germans (95%). Brazilians agreed less strongly, but still in a substantial majority. Curiously, most respondents thought inflation was a cause, not a consequence, of instability. It makes sense that a pandemic would produce an unusual sensitivity toward social cohesion and loss of concern for the common good. This shouldn’t be dismissed as a moral panic.
But endless stimulus has problems, too, as inflation and this asset bubble are showing us. All the temporary pandemic aid — which, left kvetching aside, was the most broad and generous in us history — kept millions afloat and kept the economy from imploding. But huge deficits, over half of them financed indirectly by the Fed, have sparked a serious inflation. Those inflationary pressures will probably ease over time. On the demand side, the benefits have largely ended, and the bulge in some savings accounts they funded will erode. The federal deficit will shrink from $2.8 trillion to about $1 trillion a year. On the supply side, the chains will clear, even if they don’t return to their old tightly choreographed performance.
A lesson of this inflationary period, whether it’s transient or something more long-lasting: if we want to make a civilized welfare state, it’s got to be paid for with taxes — and taxes on the rich, though a nice start, couldn’t fund it.
Modern Monetary Theory–style money printing looks to be thoroughly discredited. Despite the belief that big budget deficits are good for the working class, the United States consistently has the biggest deficit among the richest nations. All that red ink hardly produces an egalitarian paradise: we have the highest poverty rate and the most unequal distribution of income among all the rich countries.
Even as the supply chains clear, we will have lingering capacity constraints that are both very real and tighter than anyone might have imagined before March 2020. For the last few decades, public infrastructure investment has barely exceeded depreciation, which is how accountants measure decay over time. Private corporate investment hasn’t been doing much better. That, combined with the just-in-time global supply chain model, is a recipe for rapid overheating. Austerity is a way of coping with a rotting infrastructure, but we don’t want that. We want it rebuilt — led by public investment, and run in a fashion that’s friendly to workers and the earth.
But rebuilding our infrastructure could create inflationary pressures at first, and that would threaten the project’s political support. If, by some stroke of magic, we get a Green New Deal, this economy would have a hard time supplying it without years of productive upgrading. While that would be nothing but good over the long term, there could be politically difficult costs of devaluing an old, dirty model and replacing it with something sustainable and clean in the shorter term. A Green New Deal would require stepping on capital’s freedom of investment and management, and capital could protest by going on strike. This is why socialists should be bolder about demanding more planning and socializing more of investment.
In the short term, the sting of inflation could be softened. The British government is proposing a benefits package to help poorer families pay their energy bills that’s partly financed by a tax on oil and gas companies. Their numbers are small; we could do something larger. Corporate profits are taxed at the lowest rates since the 1930s; we could change that and use the revenue to fund a more generous unemployment benefits system on the model of the pandemic emergency.
Inflation may have peaked. But we may soon have another problem on our hands — a recession. Or perhaps another relic of the 1970s: stagflation, the hybrid of the two. Maybe the us economy is so feeble that 3% interest rates will sink it, or a trillion-dollar deficit won’t be enough to sustain it, or the loss of fresh trillions from the Fed will cause the financial markets to seize up. It does seem like the most dynamic phase of the pandemic recovery is over. Stocks, crypto, and housing all look to have peaked. The Fed isn’t buying Treasuries anymore, which might require paying higher interest rates. Inflation is biting into household budgets; a survey reported by Bloomberg found 61% of households living paycheck to paycheck, an increase of 9 percentage points from a year earlier.
Rising prices and the possibility of recession force us to confront one of the perpetual miseries of life under capitalism: the trade-off between inflation and unemployment. Attempts to describe that relationship rigorously with mathematical models have mostly failed, because the relationship is too inexact. But the two are in tension, even if that tension can’t be quantified. If the labor market gets too tight, wages will rise, profits will be squeezed, and capitalists will demand the government induce a recession to revert to the order they find most pleasing.
For now, profits aren’t being squeezed — they are high, though not record-breakingly so — but that won’t be the case forever. Profit squeezes and recessions (or worse) have been constants throughout the history of capitalism, and they’re not going away. Were the Fed to retreat from its tightening path — one embraced by most of the world’s other central banks — and the expansion allowed to keep chugging, there would eventually be a recession.
Michał Kalecki offers a way of thinking ourselves out of this wretched compromise in his classic essay “Political Aspects of Full Employment.” In the most famous portion of the work, he argues that sustained full employment is impossible under capitalism because it would weaken the economic and political authority of the boss. That remains a great truth. But in a less-noticed passage later in the essay, Kalecki imagines a situation where stimulus has to be constantly applied:
The rate of interest or income tax [can be] reduced in a slump but not increased in the subsequent boom. . . . [T]he boom will last longer, but it must end in a new slump: [stimulus] does not . . . eliminate the forces which cause cyclical fluctuations in a capitalist economy. In the new slump it will be necessary to reduce the rate of interest or income tax again and so on. Thus in the not too remote future, the rate of interest would have to be negative.
That sounds neither sustainable nor inspiring, but not irrelevant to today’s situation. Instead, Kalecki says we should demand more than perpetual stimulus — we should demand a regime that can guarantee full employment. To do that without inflation would require a serious overhaul of the productive structure, as well as public control over investments that are now planned by ceos.
Fighting inflation, in other words, should make us more ambitious socialists.