Saturday, May 14, 2022

Anti-Inflation as Class Warfare


There were two reasons that I got political.  One summer in the early-1990's I read two books.  One of them was Necessary Illusions: Thought Control In Democratic Societies based on Noam Chomsky's 1988 Massey Lectures. That one told me that the world we live in was far more monstrous that I could have ever possibly imagined.  The second was John Raulston Saul's Voltaire's Bastards: The Dictatorship of Reason in the West. That one told me (among other things) that the Canadian government's debt and deficit situation had not been caused by lazy people mooching off the welfare system (which was the general consensus) but by the ruinous, asinine anti-inflation policies of the Bank of Canada (which was itself following the monetarist consensus established by Paul Volcker and Milton Friedman in 1979). 

It is to the second issue (monetarist anti-inflation policies as class warfare) that I wrote my two recent posts about the current price inflation and the establishment's preferred way of dealing with it.  (In the second post I neglected to continue my response to a quote about how 1970's price controls ... specifically over the price of oil ... led to difficulties at the pumps):

Price controls on gasoline exacerbated shortages, by not allowing rising prices to curb demand. The controls allowed refiners to raise gasoline prices each month based on the previous month’s crude oil price. In an environment of rising prices, the price controls incentivized refiners to withhold gasoline and sell it later at higher prices, rather than selling it today. Further aggravating the shortages, the federal government had an allocation system that did not allow gasoline distribution to adjust to demand conditions around the country. Some states also established a policy that only allowed drivers to buy $5 of gasoline at a time, meaning that they had to buy more frequently, virtually assuring longer lines.

Crude oil markets were regulated as well. Different prices for “old” and “new” oil were a relic of the earlier oil shock in 1973-74 that established perverse incentives, reducing domestic production and increasing imports. Additionally, in April 1979, the Department of Energy ordered large refiners to sell crude oil to smaller refineries that could not obtain affordable supply on the market. However, these smaller refineries were generally less complex, able to produce less gasoline from a given crude oil than their larger counterparts, deepening the supply shortage.

The situation drove a groundswell of anger against U.S. oil companies and public support for President Jimmy Carter dropped substantially. The crisis highlighted the inefficiencies inherent in government control of fuel markets, although the public wanted the government to do something about high prices and long lines.


I also pointed out how one economist recalled the absolutely horrible struggles between employers and workers over "Cost Of Living Allowances/Adjustments" during wage negotiations in a time of inflation.

"When I was a graduate student, all the professors would say, 'Oh, we'll never see this era again of letting the inflation genie out of the bottle,'" economist Constance Smith, a professor emeritus at the University of Alberta, said wryly.

Like others who lived through that time, she remembers it as being "unpleasant" — a term echoed exactly by Powell from his own memories, as repeated attempts by central banks to quash inflation failed to convince people that prices would stop rising.

Smith remembers constant battles over wage demands eventually leading to cost-of-living adjustments, or "COLA clauses," being written into employee contracts, to assure that workers' incomes would not constantly shrink due to unpredictable inflation.

Knowing as we do that the the mainstream economics' response to all inflation is to vastly increase the price of money (the rate of interest at which it is to be repaid) which thereby causes a massive recession, which thereby causes massive unemployment, which thereby causes massive government deficits (which must be financed by borrowing at a high rate of interest), which thereby causes austerity, which thereby causes the elimination of federal support for affordable housing, and also causes cuts to the public health care system, and also means that tuition costs skyrocket, all of which meant the destruction of worker's unions and bargaining power and the resultant increases in inequality, household debt, job precarity, and on and on, ... I'm pretty sure that those people stuck in long line-ups at the gas stations would have elected to suffer that temporary inconvenience over the insanity that their overlords had in store for them.  And they'd obviously prefer to still be able to fight for COLA's in the face of a rising price level.

Today, Ian Welsh posts about the class warfare being practiced by the USA's Federal Reserve as "inflation fighting":

Since 1979 the only type of inflation pressure either the Federal Reserve or legislatures have been willing to recognize is wage-push inflation.  (See HERE for a long explanation of how the Federal reserve crushed wages with wage push inflation measures.)

This is why, for going on 43 years now, workers wages have not kept up with GDP, most people can’t afford to buy a house, rent is thru the roof, and people die due to medical care costs.

But the way to deal with companies increasing prices faster than their costs isn’t to stop employers from hiring, it’s to institute an excess-profits tax, where companies that are making a lot more than they did before the pandemic simply have it taxed away. Granted, that would take legislative action, but the Fed isn’t even calling for it, and the Fed has a powerful bully pulpit.

You could also aggressively act on anti-trust concerns and break companies up so that they have competition: they can raise prices in large part because they are unregulated oligopolies who raise prices in lockstep.

Those are legislative actions, but the Fed is the main regulator of banks and brokerages and could stop loans from being given to firms buying up the housing and rental supply and jacking up prices. It could encourage the government entities which guarantee housing loans to put conditions which disallow rent increases beyond a few percentage points, and not allow large numbers of homes to be owned by corporations.

There are certainly other steps which could be taken, but the point is that the Fed isn’t pushing anything but “don’t hire and don’t give raises”.

In tight labor markets wages should rise. That’s good. If every time there is a tight labor market you squeal about inflation then hammer the economy into the ground to kill wages, of course people’s wages will fall behind, and if that’s substantially the only thing  you ever do to deal with inflation for over 40 years, of course wages will be hammered.

If, at the same time you run policies which cause massive inflation in housing, rent, and medical care (and now food), well then, ordinary people will be screwed because those are things they must have, no matter the cost, so if they can pay they have to.

What the Fed is doing, in other words, is class warfare, the same as everything of significance it has done since 1979. People will die because of this and become homeless.

I agree with pretty much everything he says there.  This isn't "objective economic [pseudo-]science."  This is class warfare.

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