The
Federal Reserve is neither.
The
nation’s central bank, it’s a private/public institution technically guided by
Congress (not the White House), but Capitol Hill has about as much “control” as
a caravan led by a clown car.
And
as shown by an increasingly relentless series of hikes in interest rates, the
Fed’s monetary policymaking, bank regulations, etc., are as reserved as a rodeo
on nickel-beer night.
Facing
inflation of 8.3% over the past year, Federal Reserve Chair Jerome Powell since
Spring has raised interest rates by ¼ percentage point, a ½ point and a series
of ¾ points. On Sept. 21, his raise 0f another ¾ of a percent lifted the
benchmark rate to its highest in 14 years. He’s said his goal is a “soft
landing” -- cutting inflation and avoiding a recession. But even his peers are
doubtful.
“The
problem is that the room to do that is virtually nonexistent at this point,”
said William Dudley, ex-president of the Federal Reserve Bank of New York.
Powell
has repeatedly said wages have risen too quickly (in June saying aloud he
wanted to “get wages down”), all the while neglecting to note that inflation
has already depressed wages’ buying power.
Berkeley
economist and former U.S. Labor Secretary Robert Reich said, “Wages are lagging
behind inflation. A more accurate description of what we’re now seeing might be
called ‘profit-price inflation’ — prices driven upward by corporations seeking
increased profits.”
Generally,
the traditional perspective is that inflation stems from too much money chasing
too few goods, but that’s only part of the current story, which at least stems
from pricing and profit-taking, when someone decides to take advantage and
raise prices.
In
the short term, inflation redistributes money, but it doesn’t reduce the
country’s overall income (because as prices go up, SOMEBODY is benefiting). A
recession, however, is waste – waste of labor in particular (due to unemployment)
but also waste of production in general since less is made or done.
“The
economic damage wrought by recessions is far greater than that by single-digit
inflation rates,” comments Josh Bivens of the Economic Policy Institute.
Gerald
Epstein, an economist with the Political Economy Research Institute at the
University of Massachusetts at Amherst, said, “Moderate increases in interest
rates — say, 1 or 2 or even 3 percentage-point increases — cause only small
reductions in the inflation rate.”
Unintended
consequences
Meanwhile,
raising interest rates – the cost of borrowing for new equipment, new factories or hiring – also
means higher costs for mortgages or using credit cards. There’s less demand for
products and services – or workers. That risks mass layoffs and a recession
that would disproportionately harm ordinary people.
ProPublica’s
Jesse Eisinger, author of “The Chickenshit Club: Why The Justice Department
Fails to Prosecute Executives,” says, “The Fed functions through the financial
system disproportionately helping the wealthy. It creates asset bubbles all
throughout the economy. It then starts to tighten. And in doing so, it
disincentivizes companies from investing and growing while courting a recession
that will throw millions of average people out of work after those millions of
average people have only barely begun to benefit from a decade of loose
financial conditions by having their wages grow.”
Also,
governments – whether in Washington, London or Beijing – are freed from their
responsibilities when deferring to semi-autonomous, independent central banks.
“The
more the Federal Reserve tries to use its financial system-based tools to
respond to economic problems, the more pressure it takes off the political
system to produce legislative solutions that are more egalitarian and more
effective at solving these same problems,” says Lev Menand, author of “The Fed Unbound: Central Banking in a Time
of Crisis.”
In
theory, monetary policy adjusts demand, but it has no effect on supply.
“In
addition to being an objectively anti-worker policy, this approach is also
plain wrong-headed,” wrote City University of New York teacher Samir Sonti in
Labor Notes magazine. “Current inflation is the result of pandemic shut-downs
and war in Ukraine, not the result of an overheated economy. Monetary policy
will not do anything about the supply-chain problems, food and energy market
volatility, or corporate pricing decisions that are driving prices upward.”
U.S.
Sen. Elizabeth Warren (D-Mass.) is worried the Fed will tip the U.S. economy
into a recession.
"Do
you know what's worse than high prices and a strong economy?" she asked on
CNN. “It's high prices and millions of people out of work.
“COVID
is still shutting down parts of the economy around the world, we still have
supply-chain kinks, we still have a war going on in Ukraine that drives up the
cost of energy,” she continued. “There is nothing in raising interest rates,
nothing in Jerome Powell's toolbag, that deals directly with those.”
Inflation hurts workers and the poor the
most. (The affluent also must pay more, but their increased spending is a lower
percentage of their wealth.) Plus, workers have been coping with a
cost-of-living crisis for years, as Big Business busted unions, raises haven’t
kept up with the Consumer Price Index, pension were killed or morphed into
401(k)s, and health-care costs shifted to families.
The
Fed and its beneficiaries in banking and lapdogs in media seem to want us to
believe it’s our fault, and working people are somehow expected to bear the
brunt, not profitable corporations, much less big banks.
“We
can’t lose sight of the basic moral point that it is outrageous that
corporations are seeing skyrocketing profits while purchasing power for so many
American households is declining,” said economist Chris Becker at Groundwork
Collaborative.
Further,
over the last full fiscal year, 53.9% of what corporations are charging for
their products have gone to profits while only 7.9% went to unit labor costs,
according to Economic Policy Institute research.
“The
truth is, wages only account for 8% of the price increases, which means wage
increases account for less than half a percent of inflation, said United Auto
Workers President Ray Curry. “Nonetheless, anti-worker messengers continue to
argue the opposite: That inflation is caused by increasing worker wages and
that we must raise interest rates to slow the economic growth. What they ignore
is higher interest rates make it harder for regular people to buy cars and homes.
Higher interest rates lead to fewer jobs.
Higher interest rates are designed to slow the economy for those who can
least absorb additional costs.
“Commerce
Department data shows corporate profits rose 35% last year,” Curry continued. “The
rich got richer as those who experience sticker shock at the pumps pay the
bill.”
Amherst’s
Epstein adds, “The increase in interest rates will primarily help two groups –
those with significant amounts of financial wealth, and financial institutions
that lend money.”
Josh
Mason, an economist at the Roosevelt Institute, says “If you endorse today’s
rate hikes, and the further tightening it implies, you are endorsing the
reasoning behind it: ‘Labor markets are too tight, wages are rising too
quickly, workers have too many options, and we need to shift bargaining power
back toward the bosses’.”
However,
everyday consumers and workers ARE the economy. Without workers producing and
consumers buying, business will struggle.
Historically,
one of the United States’ worst inflation periods was after World War II, when
rationing and other emergency economic controls were lifted. By 1947, inflation
was up to 20%, yet the Fed didn’t raise interest rates. The central bank DID
limit credit to big banks and waited for Americans’ pent-up demand after years
of crisis to subside. It did in about a year, leading to the booming economy of
the 1950s (when the percentage of Americans who belonged to labor unions was
35%, by the way).
Other solutions
Lowering
costs would help everyday consumers, but increases in interest rates won’t.
The
economy – arguably the global economy – needs “an all-of-the-above
administrative and legislative approach that includes demand, supply and
market-power interventions,” said Mike Konczal, also of the Roosevelt
Institute, which in June issued a report finding that “corporate markups and
profits are at their highest recorded level since the 1950s.”
If
the Fed wanted to help regular Americans, it would address the country’s unfair
distribution of income and wealth.
*
“It requires that we think a bit differently,” says economist Dean Baker of the
Center for Economic and Policy Research. “Instead of just handing out tens of
billions of dollars in subsidies to the semi-conductor industry, we could say
that a condition of getting the money is that the research that is publicly
funded be in the public domain. That means that the chips and other products
produced as a result of the research would be far cheaper. We could do the same
with prescription drugs, potentially saving us hundreds of billions of dollars
annually on drug spending.”
*
Attorney Joel Joseph, chair of the Made in the USA Foundation, says, “The
Justice Department and the Federal Trade Commission can also enforce antitrust
and price-fixing laws against oil companies and other large corporations who
are using their market power to increase prices and profits.”
*
Reich suggests, “We should address inflation with a temporary windfall profits
tax on oil and food companies, price controls on pharmaceuticals, bolder
antitrust enforcement, a tax on stock buybacks, and higher taxes on the
wealthy,” said Berkeley economist and former U.S. Labor Secretary Robert Reich.
*
Sonali Kolkaytkar of Free Speech TV’s “Rising Up with Sonali,” says, “If prices
are rising, stop those setting the prices from doing so—it’s that simple. If
such a thing can be applied to drug prices [in the Inflation Reduction Act],
why not food, gas and other necessities?”
Indeed,
Republican President Richard Nixon in 1971 issued wage and price controls via
executive order. (Of course, if Biden tried that, a GOP impeachment effort
would rise faster than the White Sox’ p[ost-season chances have fallen in
recent weeks.)
*
The Fed should directly cooperate with government to control this cost-of-living
problem as it did when dealing with the 2008 financial crisis, Epstein says: “The
Fed should use the same effort and creativity to control inflation without
imposing the costs on workers.”
Kolkatkar
argues logic: “If more money in poor people’s pockets is supposedly the reason
for inflation, why is more money in rich people’s pockets not an incriminating
factor?”
