The inflation fear-mongers are at it again.
In a futile attempt to discredit President Joe Biden’s extraordinarily popular American Rescue Plan (economic recovery) and American Jobs Act (infrastructure) the usual Republican and neo-liberal suspects are once again raising the boogeyman of inflation.
Responding to Biden’s proposals, Republican Sens. Ron Johnson, Charles Grassley and John Thune are screaming that these bills would, in Grassley’s words, “pour gasoline on the inflationary fires.”
To understand how valid these fears are, and whose interests they serve, we need to look at what inflation-phobic politicians and economists have produced in the past.
Dogma embraced by both parties
For the better part of four decades a manic fear of inflation has been used by both Republican and Democratic administrations to serve America’s investor class. They do this by claiming unemployment is too low, so wages and prices are going up too fast, then they insist that the Federal Reserve Bank raise interest rates. They point to the era of “stagflation” in the 1970s when, in violation of economic textbook orthodoxy, both prices and unemployment were skyrocketing.
But what exactly caused inflation to take off in the 70’s?
Quite simply, the military build-up for Vietnam led to too many dollars bidding up the price of too few consumer goods. When OPEC dramatically raised crude oil prices in 1973, inflation spiked even more. Unionized workers negotiated wage increases including cost of living adjustments to compensate. This “wage/price spiral” has been the nightmare inflation-phobes have been running from ever since.
In response, and following another increase in crude oil prices, the Federal Reserve under Chairman Paul Volcker raised interest rates to a peak of 20% in 1981. This, indeed, staunched inflation. But what was the impact on the middle class and the working poor?
Unequal impacts of curbing inflation
While those with money market accounts loved these skyrocketing interest rates, businesses couldn’t afford to borrow money to expand, and the middle class stopped buying homes and new cars. The plunging housing and new car markets sucked in manufacturing industries serving both, consumer spending plummeted, and the result was the highest rate of unemployment since the Great Depression, 12% nationally.
Those of us who lived through this can’t forget the lines of thousands and thousands of unemployed workers who showed up at State Fair Park in Milwaukee to apply for literally a handful of jobs when A.O. Smith announced it was hiring.
Urban industrial communities like Detroit, Cleveland and St. Louis were ravaged as manufacturing employment collapsed. Industries couldn’t invest in new equipment because borrowing money was ridiculously expensive. Families stopped buying large consumer goods and homes. Who did this hurt the most? You guessed it: Black and brown workers who had been the last hired so they became the first fired. The urban populations of industrial cities like Milwaukee, Racine and Kenosha have never recovered.
Despite these results, this bi-partisan dogma found new ways to attack the middle class. Once the recovery began in the mid 80’s, economists, pundits, politicians and policy makers of both political parties embraced a mechanistic theory called Non-Accelerating Inflationary Rate of Unemployment (NAIRU).
This mouthful held that 6% was the ideal target rate for unemployment, and if unemployment fell below 6%, prices, including wages, would start to rise. Alan Greenspan headed the Fed from 1987-2006, and for most of his tenure any time unemployment dropped close to 6%, he would automatically raise interest rates in an aggressive fashion.
Where’s the critical thinking?
The problem with mechanical theories is that they cut off critical thinking and thus the ability to re-evaluate the theory in light of new evidence. During Greenspan’s reign, for example, factors like competition from China, the relatively successful attacks on unions by Reagan and Bush the elder, and rapid technological change all increased corporate power and undermined wage growth.
The blind genuflection to NAIRU resulted in depressed employment and lowered wages. With no countervailing forces such as strong labor unions, the nation’s working and middle classes suffered tremendous losses in economic and political power. Paths for the poor to work their way into the middle class were increasingly blocked.
But some Americans did extraordinarily well. Inflation hurts the investor class — the richest 10% of Americans — whose investments lose value as prices rise. So, with the government riding herd on inflation, their investments soared during the 80’s and 90’s, effectively protected as they were from inflationary pressure.
Essentially then, using interest rates to curb inflation is a policy with a clear class bias. For two decades beginning around 1981, this policy of protecting the nation’s investor class produced eight to ten million unemployed workers, and policy makers considered this just fine. Since Black unemployment is generally twice as high as the official rate, this anti-inflation fetish ravaged the nation’s Black communities.
In effect, the nation’s most marginalized workers, young, Black and brown workers, were sacrificed on the altar of fighting the threat, not the reality, of inflation.
Clinton administration no better
There was reason to expect change in 1993 when Democrat Bill Clinton took over because he had promised to invest in people and the infrastructure. But once in the Oval Office he listened to his Wall Street advisors Robert Rubin and Larry Summers, both inflation-phobes and deficit hawks.
Rubin and Summers convinced Clinton to drop his spending plan, continuing the bi-partisan march to the bottom for the middle class.
In 1997 when unemployment fell to 6% and then below, Greenspan finally realized that increased employment, even higher wages, did not necessarily produce an inflationary threat. So, his Fed did not raise interest rates.
Lo and behold, inflation didn’t take off, and for the first time in twenty years, the wages of the bottom 20% began to increase. Why? Because a tight labor market coupled with a minimum wage increase put upward pressure on wages. This growth in jobs and income, unfortunately, ended after only three years due to the dotcom recession in 2001.
Despite convincing evidence to the contrary, and the accelerated growth of income inequality, market fundamentalists like Republican Mitch McConnell and Democrat Larry Summers are now screaming that Biden’s plans to rebuild the economy from the bottom up, rather than from the top to the top, will lead to runaway inflation. Yes, they’re raising again the ugly specter of the inflation boogeyman.
Resisting dogma will help build equality
Policy makers, legislators and the White House should ignore this economic version of crying wolf. The real unemployment rate in March was over 10%! We have nine million fewer jobs than we did before COVID hit. The nation’s infrastructure has been ignored for decades and is crumbling.
And inflation, excluding the volatile energy and food sectors, has been consistently below the Fed’s target rate of 2%.
As current Fed Chairman, Jerome Powell, a Republican, recently said,” … we now realize that unemployment can go low for quite a long time without inflation being a problem,” adding that a policy shift “will help those groups that have been left behind, thereby reducing inequality.“
For too long we have listened to the inflation-phobes and their political allies in Washington DC at the expense of the nation’s working people. If we are serious about reducing America’s growing inequality and structural racism, we need to ignore these dogmatists and invest in the nation’s people, its children and its infrastructure.
Biden’s American Rescue Plan and American Jobs Act are a great start.