Yves here. This post provides a high-level debunking of the Fed/central bank approach of squeezing wages as the first line of attack against of inflation. It cites the views of James Galbraith. If you’d like to read a fuller discussion, please see his article The Quasi-Inflation of 2021-2022 – A Case of Bad Analysis and Worse Response.
I hope you’ll circulate this article to friends and family who intuit that current policies are misguided and might want to know why.
By Conor Smyth, a recent graduate of Washington University in St. Louis, where he studied history and political science. Originally published at FAIR
Good news: Inflation is down! Way down, actually: It came in at 4% in May, after peaking at just over 9% last summer.
But don’t get too excited. The New York Times is here to tell you that inflation is still a problem, and more suffering for the working class is the solution.
In a recent episode of the Times’ flagship podcast The Daily (6/20/23), reporter Jeanna Smialek argued that the Fed may have more work cut out for itself. Discussing why inflation declined over the past year, she noted that it’s mostly the result of supply issues resolving. But inflation remains above the Fed’s 2% target:
The part of inflation we’re worried about now is the part that’s not going to come down just because of a return to normal or because of luck, but the part that is going to require Fed policy.
In other words, only the Fed can tame inflation.
‘Standard of Living… Has to Decline’
In the standard account, this is a key lesson of the last major period of high inflation that the U.S. faced. Referred to as the Great Inflation, this era lasted from 1965 through 1982, and was finally brought to an end by Fed chair Paul Volcker.
After assuming leadership of the Federal Reserve in 1979, Volcker announced, “The standard of living of the average American has to decline.” He then proceeded to curb inflation through a brutal campaignagainst the working class.
The Volcker approach was, of course, not the only available method for slowing price increases. As the progressive economist James Galbraith (Medium, 6/17/23) wrote recently, the U.S. has dealt with inflation differently in the past. During World War II, for instance, the government established the Office of Price Administration, which kept inflation in check through price controls (Guardian, 12/29/21).
These were “abolished… in 1946, over popular protest,” and were later intellectually repudiated by economists and policymakers in favor of anti-government and pro-business ideology. As Galbraith puts it, “From this, the entire charade of dumping responsibility for ‘fighting inflation’ on the central bank emerges.”
‘Springing for That Jacuzzi’
This charade has continued for decades, and has taken on renewed force in the last couple of years in the face of high inflation, with little to no pushback from corporate media. As current Fed chair Jerome Powell prepared for a new war on inflation in the spring of 2022, for instance, the Times (3/14/22) ran the headline: “Powell Admires Paul Volcker. He May Have to Act Like Him.”
The piece, by Smialek, acknowledged that a Fed campaign against inflation comes with risks, but it gave Volcker the final word:
Maintaining confidence that a dollar will be able to buy tomorrow what it can today “is a fundamental responsibility of monetary policy,” Mr. Volcker wrote in his 2018 memoir. “Once lost, the consequences can be severe and stability hard to restore.”
Nowhere in the article was there any questioning of the idea that the Fed should be at the helm of inflation-fighting—that perhaps there’s an alternative, one less painful for the majority of the country. Instead, the unspoken assumption is that this is all the Fed’s responsibility. But that’s an assumption, a highly ideological one, not an unbending law of nature.
Now, more than a year into the Fed’s campaign of interest rate hikes, the Times is continuing with the reportorial line that the Fed must be the one to bring down inflation. According to this line of reasoning, inflation must be tamed at the cost of lower incomes. That is the main channelthrough which Fed policy (i.e., interest rate hikes) works.
Smialek knows this. She may choose to obscure the class dynamics of this approach by talking (6/20/23) about how rate hikes make people less “comfortable springing for that Jacuzzi bathtub and taking on the slightly higher rent that comes alongside it.” (You know, the classic dilemma faced by low-wage workers, who are disproportionately hit by rate hikes.) But, at the end of the day, she does recognize that raising rates is about reducing people’s incomes and thus their spending power. She just doesn’t seem to have an issue with that; it’s a necessary cost of the inflation-fighting business.
‘Not as Good as 2%’
And she wants everyone to know that, if we’re really serious about taming inflation, more could be required. Towards the end of the podcast, Daily host Michael Barbaro asked Smialek:
Inflation is down overall quite a bit. But we’ve learned that a lot of it—the stuff we feel the most—isn’t truly the result of Fed policy, which is an important thing to understand… But, Jeanna, if I’m a consumer, how much do I really care about what caused this relatively positive situation?… Aren’t I just pretty happy that all of this stuff has happened?
Smialek’s response:
Sure. And, reasonably, you would be. But if you’re a consumer, you also don’t want this to be temporary. And 4% inflation is better than 9%, but it’s still not as good as 2%, which is what it used to be. So I think that that’s the thing to keep in mind.
Interest rate hikes are the implied method for getting inflation back down to 2%, which is the Fed’s target level. But other commentators have a very different take on what remains to be done to contain inflation. Galbraith (Medium, 6/17/23), for one, sees historically high profit margins as the remaining issue that could keep inflation persistently elevated. The solution here, in his view, is strategic price controls. These would cap prices charged by companies in particular industries, taking away the companies’ ability to keep pushing prices up at rapid speed and instead forcing them “to focus, as they should, on quality and quantity.”
Smialek doesn’t so much as mention this alternative approach. In a follow-up article (6/21/23) the day after the podcast, she instead focused on the question of how much interest rates will have to raise unemployment to bring inflation down to the 2% target. She ended the piece by quoting Jason Furman, a Harvard economist and former Obama adviser, who asserted, “People have been so crazily premature to keep declaring victory on inflation.”
Just two paragraphs earlier, Furman had suggested that unemployment (the Fed’s favorite tool for lowering incomes and slowing price increases) might need to reach 10% to tame inflation. Whether it would be irresponsible to throw something like 10 million people out of work so that a loaf of bread costs $2.55 next year rather than $2.60 was not questioned.
An Arbitrary Target
Even more glaring is that Smialek never once acknowledged, in the podcast or the follow-up article, that the 2% target is largely arbitrary, not based in economic law. Or that, when Volcker tamed inflation, he stabilized it at close to 4%, not 2%.
Also not mentioned: Very mainstream economists, including the Times’own Paul Krugman, have said recently that 2% is actually too low, and that a bit more inflation would be preferable (Financial Times, 11/28/22; New York Times, 12/2/22). Krugman, in fact, wrote decades ago:
One of the dirty little secrets of economic analysis is that even though inflation is universally regarded as a terrible scourge, efforts to measure its costs come up with embarrassingly small numbers.
For instance, studies have found that inflation doesn’t start to have a negative impact on growth until it is wellabove 4%.
From Smialek’s article and her podcast appearance, you would have no idea about any of this. But you would have the strong impression that a major jump in unemployment could be required to get the situation under control.
The effect, if not the goal, of this style of reporting is to narrow the conversation and create the appearance that there is no alternative to what the Federal Reserve is doing. In the Times’ narrative, inflation is a problem that must be tackled, and the only way to do so is through lowering incomes and potentially jacking up unemployment.
This narrative may appeal to the paper’s upper-class readership, who are generally insulated from the worst effects of rate hikes. For the poor and working class, a deeper understanding of inflation might be welcome—and for people looking for an understanding of how economic policies affect different groups, it’s necessary.
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Every Wall Street wonk, supply side economist, Republican all say the same thing. They are all waiting the labor market to slow down. Just think how great the economy will be with more unemployment.
Morning comment about Bidenomics, well at least unemployment is low. Which something that few are willing acknowledge.
Yes, the CDCs program to kill workers is working better than the Fed’s program to disemploy them.
It’s a race to zero in which each participant, the CDC and the Fed, has an ideological lens making the other invisible.
The Oligarchs behind each will always find people to lucratively lie to them to sustain the illusion they’ll remain insulated from the collapse: robots; AI; Mars etc…
Many Americans are lucky enough to have 3-4 jobs! USA!!
Inflation doesn’t sink all boats equally.
Which is why the C-Suite loves Modi.
From the Inflation Calculation for India:
Rupee Value End of 2008: 100. Value at the beginning of 2023: 274.15 rupees
Price increase (= depreciation) in 15 years: 174.2%
This corresponds to an average depreciation of 11.61 rupees per year.
With a corresponding decrease in value of the rupee.
In 2008, when Modi was elected, $1.00=82.1675 /rs. In 2023, $1.00=82.1675 /rs.
Who wouldn’t love a nearly 50% reduction in labor costs?
Expect to see the few remaining American jobs to be outsourced there very soon.
>>>about how rate hikes make people less “comfortable springing for that Jacuzzi bathtub and taking on the slightly higher rent that comes alongside it.”
>>>Just two paragraphs earlier, Furman had suggested that unemployment (the Fed’s favorite tool for lowering incomes and slowing price increases) might need to reach 10% to tame inflation. Whether it would be irresponsible to throw something like 10 million people out of work so that a loaf of bread costs $2.55 next year rather than $2.60 was not questioned.
WTF is this? Going by my own experiences, living standards reached their peak at about 1975 or 48 years ago. Longer than my entire adult life.
Without hyperbole, this is how revolutions and civil wars happen, and the increasing disconnect between reality and the modern American Mandarins’ worldview is scary, and this is not to point to the coldblooded narcissism shown is enraging; I not only fear for myself, but I can remember the growing numbers of the homeless on the streets of San Francisco starting around 1980 or over forty years, which is still my entire adult life. All this is crazy talk.
IMHO the peak of the living standards occurred some time in the middle 1960s US
It’s really fascinating to compare how long we need to work to afford basic necessities, with how long a median worker in 1960s did
I live in a Western country, earnings in the top 2%, some years I make it to top 1%. For most items, I have to work longer or the same as 1960s Joe Average. Electronics and exotic fruits are the only categories that improved. Quite a poor showing for 60 years of “progress”. Oh, and our grandparents didn’t get to experience joys of late stage capitalism like see-through toilet paper, or chicken meat pumped with water
And the people in power thing they can return to that golden era, if only they can curb the excess of their gluttonous offspring (oh, and browbeat Russia and China into being good little vassals).
My back of the envelope calculations say that at least forty dollars an hour is needed just to maintain the poor or barely working class lifestyle of my family back when I was a child. Really, it should be closer to fifty, but I am trying to be conservative. Yet, the official federal minimum wage is still $7.35 with several states having effective minimum wages of less than three dollars, and those states with the highest minimum wage of $15 still have an inadequate wage because those states also have the highest cost of living.
Just wait until student loan repayments start back up again this fall. Should do great things for the economy as whole! Debt service that serves no productive purpose!
And start up again they will. Our supremes continued legislating from the bench this morning.
Inflation is caused by the working class trying to keep up with inflation?
For the working classes, keeping up with inflation means having adequate food and shelter. Not keeping up with inflation means keeping either food, or shelter, but not both.
To echo JBird4049 above, this is how revolutions, or, given a robust enough system of State Control, slow collapses occur.
The end games of empires are almost always messy and bloody affairs. If it’s not ‘Barbarians at the Gates,’ it’s ‘Deplorables on the Streets.’
Stay safe. Remain situationally aware.
Well when you put it that way …
Well, I mean, the effort is a clear violation of Neoliberalism’s Rule 2.
Yes indeed. In this “game,” the penalty box is a coffin. Sounds like a Mayan or Aztec ‘ball game.’
“In order to keep things from becoming too expensive, we must increase the cost of everything.” – The Fed (maybe)
Seriously, it makes no sense at all.
“The fabulously rich are not yet quite rich enough–just a few more million starving will get us there” — The Fed.
Things are slowing down fast here in the Interior. Business for us is down 33% from June of last year. We are missing almost a full month of sales in the first six months of this year. We have been in business 43 years with a 5 star rating. Trucks delivering to us from the distributors are almost empty. I shudder to think what the evil competition is going through (nice blokes really, do their best you know).
Distributors are having almost weekly sales events every Monday before the weekly orders are placed.
Funny thing. Just finished Lowenstein’s book on the history of the Fed (not that I recommend it). One historic palliative promise for the masses was the Fed’s mandate for full employment. Gonesville.
Michael Hudson is a God that Walks the Planet!!!
How about the mandate of stable prices? Food, shelter, energy inflation, while extremely high in last few years, have been grinding the middle class since the fed began – especially since the 80s.
End the Fed
After yesterday’s article about oil speculation and its roll in inflation, I’m more confused. I suppose I should assume that these economists know all about the oil speculation/inflation angle. So is this all maskirovka in the class war?
>>>So is this all maskirovka in the class war?
I would say it definitely is, but going along with the greed, there is also a soupçon of stupidity, a dash of ignorance, and a heaping tablespoon of arrogance.
Always has been, as the meme goes.
Any time some economist comes close to actually stating it though, their theories gets ignored and distorted to maintain the status quo.
How about a redistribution of income with a nice fat tax on everyone making more than $200K.
You mean like back in Eisenhower’s Administration? The Golden Age of America.
Nett or gross?
The persistence of extreme inequality will depend, primarily, on the effectiveness of the apparatus of justification.
Thomas Picketty
About a month ago I saw a 200 page document produced by PG&E of California for its most recent shareholder meeting. It was all about their new formula for executive compensation and it was nuts. They had this crazy algorithm based on a linear algebra summary addition; each corporate goal (of which there were about 10) achieved to X degree over the year will drive executive compensation and bonuses by Y%. And they discussed how they would audit or assess each goal. And they kept reiterating that this was necessary to effectively align the executives’ behavior with PG&E corporate goals. And it took 200 odd pages to explain this ridiculous algorithm to shareholders because shareholders were being urged to endorse this.
Corporations do not hire ordinary workers who are at odds with corporate objectives; if they accidentally do, then those workers are fired and replaced. That’s how executives should be handled, too. But of course that’s not the case. Executive control fraud simply redesigns the corporate compensation package to optimize executive take.
Well the Times pundits and I might agree, the difference is whose wages and incomes should be cut, and who should face a life style change. For instance all of them should be replaced by lower paid workers. Any C suite denizens who are making more than twenty times their lowest paid employee should have their income cut. Companies should face taxes that increase exponentially at profits above eight figures. Investment income should be treated as regular income after a relatively low cap on so-called capital gains.
But then unlike those pontificating, I have actually noticed what has been found to be fueling inflation and it isn’t an increased minimum wage.
IIRC, in the 60s, it was normal for the top wage for a CEO was thirty times the lowest worker’s pay. Unlike the hundreds of times that is normal today.
Drucker at the Deming Institute advocated for a wage disparity cap of between 25 to 1 or 20 to 1, CEO versus line worker wages. His main argument was not that line workers would be discouraged, but that middle management would chafe at the inequality. In this scenario, the line workers and middle management were united in being taken advantage of by senior management.
See: https://deming.org/peter-drucker-advocated-a-ratio-of-20-to-1-for-ceo-to-average-worker-pay/
A. https://www.factandmyth.com/taxes/eisenhower-tax-rates-90-percent
Plus excellent explanation of marginal tax rates.
B. Pre 1992, all executive compensation in excess of of $1m had to come out of of POST-tax income, i.e., profits.
/snark Bill Clinton: “We need to stop punishing those poor, overworked C-Suite executives. From now on, compensation can come out of PRE-TAX income, [i.e., compensation became TAX DEDUCTIBLE.] C-Suiters will finally get their due, and Taxpayers will not miss the loss of Treasury income because the economy will be performing fabulously. /end snark
We all know how THAT worked out.
Deductions in the Eisenhower administration were generous, and why the government had to invent (and fund) a venture capital industry, because private venture capital was not really viable at those marginal rates without similarly generous deductions as the real estate, insurance, oil and gas, and automobile manufacturing industries. It was a big government, big labor, and big business centered economy.
When those deductions were dramatically reduced through the 1986 tax reform, we ended up with a depression in commercial real estate that was worse than the Great Depression. I had Manhattan developers tell me that they could not sell office buildings for 15% of what it cost to build them.
During one of those Eisenhower years, only eight Americans paid at the top marginal rate. The effective rate for top earners was about five percentage points higher than now, but the system was actually less progressive than now because we now have the earned income tax credit.
In my opinion, our problem is that the price of necessities like housing, education, and healthcare have gone up far faster than wages. Elizabeth Warren did a great analysis in ‘The Two Income Trap’ of why two income households led to higher prices and more precarious family finances.
All the cheering for inflation (2%, 4%… any percent) is insane to me. It all causes exponential loss of quality of life over time. In the 1970s, my mother in law, as a single mom of 3 kids in long island ny, could buy her own 3-bedroom house and car with just her single income off of a high school diploma. Today, you need 2 high incomes to get less of a house.
End the Fed
My (likely naive and poorly informed) view is that the crunch for working folks is lack of growth in real wages, starting in the late 1970s. If wages keep pace with inflation, it is lenders holding debt as assets who get smacked by inflation. But the wages of the working class — those who depend on a paycheck for income — have been flat for decades in real terms. Working families have kept their heads above water over this period only because (as you point out) both parents now work full time (or more). Regardless of its dual mandate of stable prices and high employment, the Fed has acted only to constantly (re)inflate asset values — working folks can just pound sand.
What I miss in these types of debunking is pointing out that what FED calls inflation, which for them is rising prices and wages, is different from how public understands that word (rising just goods/services prices, i.e. they get less goods/services for their wage). From the point of view of average worker who lives from paycheck to paycheck, changing rate of this “FED inflation” from 5% to 2% and back means nothing in direct material terms.
I agree. The numbers mean nothing to me if the supermarket prices are the same or higher. In fact, it seems that no one has done anything to bring down prices; it’s just the opposite. Plus the number of homeless seems to be exploding. Oh, and I see talk of commercial real estate imploding. It’s all getting very ugly.
The NYT? Is it satire and parody, or supposed to be real news and journalism? Sometimes I can’t tell anymore ;-)
BTW, has anyone at NYT spoken out about Julian Assange or Shireen Abu Akleh?
The US oligarchy does not appreciate free speech, free press or journalism..
If it was ‘real journalism” it wouldn’t be in The New York Times.
Since a tenet of the Modern New Left, as oppose to the 1960s New Left, is to believe in the goodness of the CIA (As a child of of the old New Left, I’m weeping bitter tears and pounding my head here on the desk.) perhaps to them it is real journalism as both Assange is, and Abu Akleh was, an opponent of the American security state.
Orwell would marvel the this effect campaign of Minitrue, aka the Ministry of Truth or the Ministry of Propaganda, on the by the American apparatchiks to worship Miniluv, aka the Ministry of Love or the Ministry of the Interior.
Just a dumb observation, but you know what happens when your elites destroy your middle class?
Your elites global empire goes poof, and vanishes in a puff of smoke.
Well, now we know whose side the middle class is on, and we can ignore feelings-based commentary to the contrary.
It was theorized long ago on NC that the “middle class” was a decision by Capital in response to the Communist threat, back in the day, e.g. redistribution of – its – wealth to productive family formation sorts.
With the fall of the Communist threat they have then worked to reclaim all their wealth, neoliberalism was the framework to obfuscate that agenda.
I’m just a stupid scientist sitting on the sidelines and watching. I find it amazing how the banks were saved around 2008 but that subsequently everyone else had to suffer to keep the banks alive. Clearly this is a financial system driven by credit and not any real assets.
I’m a stupid scientist. Managed by even more stupid people.
TINA.
“…But, at the end of the day, she does recognize that raising rates is about reducing people’s incomes and thus their spending power. She just doesn’t seem to have an issue with that; it’s a necessary cost of the inflation-fighting business…”
Isn’t unearned income also people’s income and spending power?
The ridiculous nature of hyper-financialization in the economy requires asset bubbles to maintain the illusion of prosperity.
Thus this week people are hearing stories like this in the news (worthy of 5 trillion clown emjois):
Apple is the first company to end a day with a market cap of over $3 trillion. Four other US companies are worth more than $1 trillion, led by Microsoft at around $2.5 trillion, along with Alphabet (Google), Amazon, and Nvidia.
I’ve always instinctively distrusted any argument from the usual suspects that’s dressed up with the obligatory “won’t somebody think of the poors?” As if they ever gave a toss about anyone in the lower half of the income distribution — they’re like the Walrus in Alice in Wonderland greedily gobbling up as many oysters as possible, never mind his crocodile tears …
Furthermore, inflation favours debtors over creditors — which group do you suppose has more money?
Finally, the logic that “lower inflation must be better” ought to lead to a preference for deflation, a position only possible for someone who has never experienced it in their lifetime.
I keep hearing the legend of how Paul Volker tamed inflation with his iron finger on the interest rate button. Not too many people mention that inflation actually started dropping after the collapse of oil prices in the early 80s. While Volker did not necessarily slay inflation, he sure weakened the labor force’s ability to protect its standard of living.
The current Fed, channeling their inner Volker is trying the same magic. This time around, there will be no oil price collapse to save them and each 1% increase in interest rates will cost taxpayers just over $300 billion per year as the national debt gets turned over. All that to save 5 cents on a loaf of bread.
re: “Inflation is down! Way down, actually: It came in at 4% in May”
that’s a year over year reading and it fell because last May’s 1.0% increase was eliminated from the comparison…unfortunately, that’s the measurement our arithmetically challenged media is now citing..