Fighting Inflation Excuse for Class Warfare

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Yves here. We’ve mentioned that central banks discipline workers by raising interest rates when they deem inflation to be a risk….which conveniently happens when labor markets are tight enough to threaten to give employees bargaining power. And in this particular inflation, not only is the US labor force participation rate below where it was pre-Covid, but some central bankers, like Andrew Bailey at the Bank of England, have admitted that they can’t do much about a commodities price/supply chain driven inflation like this one. But that hasn’t deterred the Fed.

By Anis Chowdhury, Adjunct Professor at Western Sydney University and University of New South Wales (Australia), who held senior United Nations positions in New York and Bangkok and Jomo Kwame Sundaram, a former economics professor, who was United Nations Assistant Secretary-General for Economic Development, and received the Wassily Leontief Prize for Advancing the Frontiers of Economic Thought. Originally published at Jomo Kwame Sundaram’s website

A class war is being waged in the name of fighting inflation. All too many central bankers are raising interest rates at the expense of working people’s families, supposedly to check price increases.

Forced to cope with rising credit costs, people are spending less, thus slowing the economy. But it does not have to be so. There are much less onerous alternative approaches to tackle inflation and other contemporary economic ills.

Short-Term Pain for Long-Term Gain?

Central bankers are agreed inflation is now their biggest challenge, but also admit having no control over factors underlying the current inflationary surge. Many are increasingly alarmed by a possible “double-whammy” of inflation and recession.

Nonetheless, they defend raising interest rates as necessary “preemptive strikes”. These supposedly prevent “second-round effects” of workers demanding more wages to cope with rising living costs, triggering “wage-price spirals”.

In central bank jargon, such “forward-looking” measures convey clear messages “anchoring inflationary expectations”, thus enhancing central bank “credibility” in fighting inflation.

They insist the resulting job and output losses are only short-term – temporary sacrifices for long-term prosperity. Remember: central bankers are never punished for causing recessions, no matter how deep, protracted or painful.

But raising interest rates only makes recessions worse, especially when not caused by surging demand. The latest inflationary surge is clearly due to supply disruptions because of the pandemic, war and sanctions.

Raising interest rates only reduces spending and economic activity without mitigating ‘imported’ inflation, e.g., rising food and fuel prices. Recessions will further disrupt supplies, aggravating inflation and worsening stagflation.

Wage-Price Spirals?

Some central bankers claim recent instances of wage increases signal “de-anchored” inflationary expectations, and threaten ‘wage-price spirals’. But this paranoia ignores changed industrial relations and pandemic effects on workers.

With real wages stagnant for decades, the ‘wage-price spiral’ threat is grossly exaggerated. Over recent decades, most workers have lost bargaining power with deregulation, outsourcing, globalization and labour-saving technologies. Hence, labour shares of national income have declined in most countries since the 1980s.

Labour market recovery, even tightening in some sectors, obscures adverse overall pandemic impacts on workers. Meanwhile, millions of workers have gone into informal self-employment – now celebrated as ‘gig work’ – increasing their vulnerability.

Pandemic infections, deaths, mental health, education and other impacts, including migrant worker restrictions, have all hurt many. Contagion has especially hurt vulnerable workers, including youth, migrants and women.

Ideological Central Bankers

Economic policies by supposedly independent and knowledgeable technocrats are presumed to be better. But such naïve faith ignores ostensibly academic, ideological beliefs.

Typically biased, albeit in unstated ways, policy choices inevitably support some interests over – even against – others. Thus, for example, an anti-inflation policy emphasis favours financial asset owners.

Politicians like the notion of central bank independence. It enables them to conveniently blame central banks for inflation and other ills – even “sleeping at the wheel” – and for unpopular policy responses.

Of course, central bankers deny their own role and responsibility, instead blaming other economic policies, especially fiscal measures. But politicians blaming central bankers after empowering them is simply shirking responsibility.

In the rich West, governments long bent on fiscal austerity left the heavy lifting for recovery after the 2008-2009 global financial crisis (GFC) to central bankers. Their ‘unconventional monetary policies’ involved keeping policy interest rates very low, enabling corporate shenanigans and zombie business longevity.

This enabled unprecedented increases in most debt, including private credit for speculation and sustaining ‘zombie’ businesses. Hence, recent monetary tightening – including raising interest rates – will trigger more insolvencies and recessions.

German Social Market Economy

Inflation and policy responses inevitably involve social conflicts over economic distribution. In Germany’s ‘free collective bargaining’, trade unions and business associations engage in collective bargaining without state interference, fostering cooperative relations between workers and employers.

The German Collective Bargaining Act does not oblige ‘social partners’ to enter into negotiations. The timing and frequency of such negotiations are also left to them. Such flexible arrangements are said to have helped SMEs.

Although Germany’s ‘social market economy’ has no national tripartite social dialogue institution, labour unions, business associations and government did not hesitate to democratically debate crisis measures and policy responses to stabilize the economy and safeguard employment, e.g., during the GFC.

Dialogue Down Under

A similar ‘social dialogue’ approach was developed by Australian Labor Prime Minister Bob Hawke from 1983. This contrasted with the more confrontational approaches pursued in Margaret Thatcher’s UK and Ronald Reagan’s USA – where punishing interest rates inflicted long recessions.

Although Hawke had been a successful trade union leader, he began by convening a national summit of workers, businesses and other stakeholders. The resulting Prices and Incomes Accord between the government and unions moderated wage demands in return for ‘social wage’ improvements.

This consisted of better public health provisioning, pension and unemployment benefit improvements, tax cuts and ‘superannuation’ – involving required employees’ income shares and matching employer contributions to a workers’ retirement fund.

Although business groups were not formally party to the Accord, Hawke brought big businesses into other new initiatives such as the Economic Planning Advisory Council. This consensual approach helped reduce both unemployment and inflation.

Such consultations have also enabled difficult reforms – including floating exchange rates and reducing import tariffs. They also contributed to the developed world’s longest uninterrupted economic growth streak – without a recession for nearly three decades, ending in 2020 with the pandemic.

Social Partnerships

A variety of such approaches exist. For example, Norway’s kombiniert oppgjior, from 1976, involved not only industrial wages, but also taxes, salaries, pensions, food prices, child support payments, farm support prices, and more.

‘Social partnerships’ have also been important in Austria and Sweden. A series of political understandings – or ‘bargains’ – between successive governments and major interest groups enabled national wage agreements from 1952 until the mid-1970s.

Consensual approaches undoubtedly underpinned post-Second World War reconstruction and progress, of the so-called Keynesian ‘Golden Age’. But it is also claimed they have created rigidities inimical to further progress, especially with rapid technological change.

Economic liberalization in response has involved deregulation to achieve more market flexibilities. But this approach has also produced more economic insecurity, inequalities and crises, besides stagnating productivity.

Such changes have also undermined democratic states, and enabled more authoritarian, even ethno-populist regimes. Meanwhile, rising inequalities and more frequent recessions have strained social trust, jeopardizing security and progress.

Policymakers should consult all major stakeholders to develop appropriate policies involving fair burden sharing. The real need then is to design alternative policy tools through social dialogue and complementary arrangements to address economic challenges in more equitably cooperative ways.

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  1. Altandmain

    Ultimately the Central Banks are an arm of the rich. If they don’t want a healthy middle class, the central banks will do their bidding by kicking the teeth of the working class.

    That’s what this whole situation is all about. The corporations the rich own shares in don’t want workers to have more power than they currently do and certainly don’t want to lower economic inequality.

    Right now the problem is that the rich have decided they want to concede nothing and have become too greedy. Now the central banks do what they can to fulfil the goals of the rich.

    The real problems, such as increasing the production of the goods in short supply, or securing the ability to extract certain natural resources like oil are not going to be addressed as the article notes. Actually the policies that the central banks and rich have chosen could make the problem worse by increasing the interest rates for any company that wants financing loans to pay for their capital investments.

    Addressing the real problem was never the goal. The Central Bankers themselves admit they can’t even if they wanted to. If the goal was to actually solve the shortages, the approaches would be quite different and the Central Banks could be quite productive. An example is if the Central Banks are offering super generous funding for capital projects, with high priority to the areas with serious shortages. Actually that would require that the Central Bank become a Public Bank the way that Ellen Brown or Michael Hudson talk about. That won’t happen in our current political climate because it is anatbema to what the rich and their ideology want.

    Creating “social partnerships” as described in the article would require that the rich have some sense of noblesse oblige and that they use the institutions of society under their control like Central Banks for the purposes of the benefit of everyone, not just the rich. Unfortunately that is not happening right now.

    1. SocalJimObjects

      Talking about conceding nothing, the squillionaire class has lost quite a little bit of “wealth” over the last few weeks/months. After all, when interest rates increase, stocks tend to lose their value, and for bonds that’s pretty much a mathematical certainty, and the rich certainly owns a lot of stocks and bonds and real estate.

      No, I am not sympathizing with them, but not even the rich can change how bond math works.

        1. John Zelnicker

          SocalJim – You were right the first time. Your correction is a double negative. Only one “not” is correct, either one.

      1. Jacob Hatch

        If they are wealthy enough, they can always buy an option, or even take a short position to off-set losses on the bonds, but if they are really wealthy, then they simply get Uncle Sam to buy them back and issue them new bonds at a higher rate.

  2. Larry

    The ethno-nationalism sure is on the rise. CPAC live from Hungary with some special Nazi guest speakers. Meanwhile, in the Bay State we have a full fledged take over of the state GOP by the ugliest far right elements.

    Now it is very unlikely the GOP will gain significant ground in the State. But the idea that we go from Charlie Baker to this is startling. This dark vision of attacking enemies offers nothing to suffering workers other than attacking the other.

    1. lance ringquist

      once you radicalize your people, its hard to get them back. from 1993 on wards, nafta billy clintons criminal policies ruined americas middle class, and gave away over 200 years of progress and manufacturing know how.

      empty suit hollowman obama set those criminal policies into stone. nafta joe biden, billy and obamas right hand man said nothing fundamental will change.

      myself i have wondered why its taken this long to get to where we are today. california is ripe to flip, as well as new york and illinois.

      if the GOP flips one or more of them, its over with for the nafta democrats, then any future predictions are thrown right out the door.

      as far as i am concerned, i hope the right takes the nafta democrats to the floor mat. they deserve it.

      but that would be unhealthy, but its to late now.

      the clintonites rigged two elections in a row and tried a coup, its to late, the majority are now radicalized.

      bernie, the squad or any other niave fools, have no idea whats coming. they should have said no to nafta joe from day one.

      any leverage they thought they had, was gone the minute they caved in in january 2021.

      1. Grayce

        Nafta is just working stiffs in another country trying to make a living. Take another look at the Federal Reserve tinkering to make to make investor profit constant from one year to the next, no matter if sales are up or down. The party of elephants favors investors, not working stiffs. If you did not like the policies that came with Biden, you would have needed a better opposing candidate. Biden was no more than the majority safe vote.
        Who caved in January 2021? Not the mob that wanted trial by combat. Elections are not so much rigged as they are lost by extreme candidates. In those elections, the winner gets a combination of voters who are not all of one mindset, but who are alike in not wanting the other candidate. Like 2020. A fair and balanced election. Majority rule. Law and order.

        1. lance ringquist

          nafta billys nafta set american wages till nafta billy clinton sold out the american worker again in 2000 with free trade with china.

          demand for goods and services is wage driven. no amount of cheap money has ever over come that. that is why the bubbles inflate, then deflate. the fed helps sure, but the fed cannot raise wages, instead they supply cheap money.

          working stiffs in mexico did far better under sovereignty than nafta billys free trade. why do you think we keep getting flooded, they are economic refugees, starving under free trade.

          as far as bernie and the squad is concerned, manchin led the way. bernie and the squad should have been a equal push back, instead they caved till you have today.

          as long as you ignore the damage done to the worlds economy under free trade, the worse things are going to get. those working stiffs did far better in their own small farms and businesses.

          one country after another is going bankrupt under the lunacy of free trade.

  3. kriptid

    I’m reminded of a Hemingway quote I read once, which according to the Internet comes from an article written by Mr. Hemingway in 1935 for Esquire, “Notes on the Next War.” Sadly the archived article is paywalled, but the quote I recall goes thus:

    “The first panacea for a mismanaged nation is inflation of the currency; the second is war. Both bring a temporary prosperity; both bring a permanent ruin. But both are the refuge of political and economic opportunists.”

    Quite relevant to the times we find ourselves in now, no?

    Another thought to add to this — I recently was pondering why Uncle Joe is polling so low with the younger generation, who less than 18 months ago were ready to swear fealty to anyone who wasn’t Donald Trump.

    If you’re under 45, you’ve never seen the sum total inflation of food, fuel, and rent increase as rapidly as they have in the past 12 months.




    How about another quote:

    “It’s the economy, stupid!”

    1. lance ringquist

      what really stunned me about the youth is, didn’t they see what nafta billy clinton did to their grand parents, and what empty suit hollawman obama did to their parents. trump looked good to their grandparents/parents compared to another nafta billy clinton.

      and soaking up what the legacy media was barking and braying, told me that if advertising, propaganda and lying did not work, no one would ever use it.

      the legacy media educated the so-called enlightened youth who have new technology that by passes the old way of propaganda, to vote themselves into grinding poverty under the thumb of the global oligarchs.

      the youth are going to reap what they sowed, tough s##T!

      1. digi_owl

        Back when it happened they were busy looking at cartoons, and this time round they were busy virtue signaling peers on campus in the hopes of some one on one back at the dorm.

  4. digi_owl

    I’m starting to develop some respect for the Bank of England, as that is also the central bank that published a pamphlet some years back pointing out that private banks printed money each time they approved a loan.

    Also, that double whammy the article mentions sounds suspiciously like a stagflation…

  5. anon y'mouse

    it’s very wrong of me, but i shuddered throughout the article at the use of “stakeholders”.

    who exactly are we talking about? someone’s rolodex? big names? “voices”?

    this is more indirect than actual representative governance systems.

    i guess at very least, if you’re talking about union leaders then those people have been elected to represent and bargain for the employees within the union.

    it just seems to me that “stakeholders” is a cover story for gathering up those with authority (vested by whom and for what?) and public name recognition to give a gloss of mutual benefit. there’s no guarantee that the “people in the room” will genuinely carry out what the people they’re nominally there to represent want. indeed, they may get a better deal for those people being there (or not. i think it depends upon whom exactly these “stakeholders” are and how they arose to those positions) but it still is a very informal system of representation.

    the Davos crowd appears to talk a lot about “stakeholders” as well. does anyone have any real faith that they are going to be voting to or forming agreements that the average Joe Citizen worker would want? i think we all know that “stakeholders” can be a very nifty cover story.

    reminds me a lot of “working families”, which the author also almost uses. what think tank comes up with these terms of obscurantist ideologically bound art?

  6. carpenter

    I dont know if I agree with the title of this article.
    I heard before that inflation hurts most the poor.
    I know it now to be true because I am becoming one.

  7. ghiggler

    I completely agree with the main thrust of the article.

    Prices of many, even most, goods are rising because of supply constraints. Rising interest rates hurt both supply and demand. Can anyone tell me why this is supposed to work to reduce prices? It could go either way.

    Demand is crushed when consumers lose the ability to buy stuff. They lose the ability to buy stuff when they lose jobs, have hours cut back, have wages cut back, spend more on car loans, house loans, and so on. As stated, “central bankers are raising interest rates at the expense of working people’s families, supposedly to check price increases.”

    Businesses typically finance inventory, accounts receivable, business expansion. These costs will rise with interest rates, and they seek to cut costs by reducing the headcount. Furthermore, they know that in recessionary times, people become less able to buy their products. They will forecast reduced sales, which – guess what – leads them to reduce costs by reducing headcount. Vicious race to the bottom, “at the expense of working people’s families.”

    When prices rise because of supply constraints the best action is to do nothing. Rising prices themselves reduce demand and are an incentive for producers to increase supply. Crushing both supply and demand by raising interest rates makes no sense. Stagflation is not a necessary, but at least a possible consequence.

    The problem is that doing nothing feels stupid. The thought process goes like this: rising prices affect everyone; somebody should do something. It looks like inflation, so has something to do with money. Things having to do with money are in the purview of the central banks. The central banks should do something.

    Unfortunately, central banks’ tools are restricted to two things: influencing how much it costs to borrow money and influencing the amount of money in the system. This becomes the situation where “if the only tool you have is a hammer, every problem looks like a nail”. If central banks cannot resist the pressure to do something, pounding on people with the hammer of higher interest rates is the apparent solution.

    Or to pull a metaphor from a different field: sick people mostly heal themselves. The best doctors heal by – mostly – sympathetically doing nothing and – rarely – intervening.

    1. carpenter

      If prices are rising because of supply constraints how do you explain that house prices went up 40% since Covid yet our population/family formation hasn’t changed much?

      1. ghiggler

        House prices are regional. Each of the following comments will apply to some region, but not necessarily all.

        People move to where there are jobs, but people already there will not want new affordable housing near them, fearing lower prices for their homes. Supply constraint.

        People in the time of COVID wanted to stay away from other people so looked for ex-urban housing. Supply constraint in the face of higher demand.

        People in the time of COVID who worked from home needed to more space so wanted to move. Supply constraint in the face of higher demand.

        Lumber and other building material suppliers had mismatched supply and demand forecasts because of these changes. Mismatched supply constraint and higher demand.

        Lower interest rates made it easier to buy houses as the above factors played out. I consider this to be true asset inflation. Asset inflation is a real thing that has been going on for twenty years or so, and it needs to be addressed by slightly higher interest rates for longer periods of times, but it’s a completely different animal than the price increases we’ve been seeing and reacting to now.

  8. Grayce

    Just one term, “wage-price spiral,” needs a comment by someone over 50 years old. This Madison Avenue construct is a buzzword at best and fear-to-knee-jerk bait at worst. Here’s why: there is no such thing.
    The missing component, in the 360 degrees of the spiral, is “profit.” Where, in the economic life of all of “we the people” is it written that profit must remain constant?
    Where is it written that prices only go up due to wages? We have seen enough executive compensation by bonus to know that industrial costs are not rooted only in human resources below the C-Suite. Moreover, do the stakeholders of stock have a guarantee of a level profit every year? Is the Federal Reserve commissioned to protect double digit profit every single fiscal year? Does it not matter that a downturn in sales every now and then could mean a different outcome for stockholders? (And, oops, bonused executives.)
    Imagine a system that preferentially punishes one of three stakeholder groups: the investors (gone tomorrow), the managers (incentivized), and the wage earners (holders of corporate memory on how-to).
    Not all wage/salary earners are represented by union coalition, yet media pundits scratch their heads when “professionals” start to organize. There are many “professionals” below the C-Suite, and except for the honor so artificially maintained, their salaries are also flattened when the Fed fixes things for the investors.

  9. Boshko

    One great of irony of the current cries for putting workers in their place, squashing any more pandemic fiscal support of the working class, and jacking up interest rates is that this fundamentally monetarist philosophy in action was born out of the supposed failure of Keynesianism during the stagflation of the 1970s. Well, cue the stagflation.

    A second irony is that the mechanism we hear preached by our all knowing technocrats is monetarist to its core. That is, controlling the supply of reserves through open market operations will set our short run interest rate accordingly–in this case, the Fed selling assets will reduce reserves and thus increase the price of money, i.e. the short-term interest rate. But of course this theory, no matter how dutiful the business media, congress, and our technocratic mouthpieces are at telling us that this is how it works, is total garbage in our current era of QE-induced excess. The actual interest rate floor is set by….setting a price! The IORB fka IOER is simply set, that’s it. No free market, no open market operations, no monetarism at play. Just a simple price control.

  10. schlott

    Few among our leadership continue to believe in the merits of a free market economy. Corrective actions to produce more goods and thus moderate prices, will not occur, because the system is broken. The federal government is going to go right on borrowing money into existence, even as the interest rates rise and inflation increases. More of our fellow citizens will be building bombs and cruise missiles for Ukraine, and fewer will be planting food we wish to eat or other things we desire. We citizens have no mechanism to stop their spending. We are forced to earn, and save, and spend in the currency… but they can “print” as much as they want, to buy whatever they want, for free. The yard stick, the dollar, by which we measure the value of everything we own and create and buy… is being actively manipulated to facilitate greater central authority control. And any state, city or town politician who objects to their excessive spending, is cut off from the flow. What politician would be foolish enough to not embrace more free money in the form of grants, subsidies, awards, programs etc? The design of the system has turned nearly all our politicians into beggars and whores because any who didn’t follow the central authorities decrees, get reduced free money. The entire system is becoming ever more economically unjust because they have lost the discipline to maintain a stable currency which we (ever fewer) remaining free market citizens need to engage in fair commerce. When it was gold/silver, they were forced to be disciplined, because a periodic run on the bank would occur and reveal which bank had been lending excessively . That all changed in 1913. And our political process has been growing more corrupt ever since. Global Weimar here we come. Best prepare yourself for the ride as you are able.

    1. Basil Pesto

      The federal government is going to go right on borrowing money into existence

      From whom?

      Global Weimar here we come.

      Want a bet?

      1. Erick B.

        The federal gov’t doesn’t actually borrow anything to spend, that’s a myth.

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