Standard Anti-Inflation Policy Serves the Elites and Harms Ordinary Workers
Over the weekend The Wall Street Journal was reporting that after a few weeks of gains in the stock market, investors were rethinking inflation. That is, they were concerned that the Federal Reserve Board (Fed) wasn’t as serious about it as investors hoped it would be. Translation? The Fed isn’t being aggressive enough on raising interest rates to precipitate a recession to adequately serve the interests of elites. If anything, this simply reveals the hypocrisy of the Fed specifically, and monetary policy generally.
Monetary policy has long been practiced in the U.S. over the last several decades because controlling the money supply through interest rates and reserve requirements does not require an act of Congress. Fiscal policy, however, does. In monetary policy, the Fed raises interest rates and contracts the money supply during inflation. The goal is to make the cost of investment more expensive. Consumers who can’t obtain money so easily will in turn demand fewer goods and services, thereby bringing prices down.
Invariably, the consequence of contracting the money supply, or “pumping the breaks” as it is often called, is a recession. Then during a recession, the Fed lowers interest rates, thereby lowering the cost of obtaining money. This is often referred to as “priming the pump” and to the extent that it leads to job creation, it may also lead to inflation. In other words, it becomes a vicious circle. But because those on the Fed don’t have to stand for election, policymakers have come to rely heavily on the Fed for managing the economy.
Fiscal policy, however, calls for raising taxes during inflation as a way of reducing people’s purchasing power and their ability to demand goods and services. This, it is believed, will bring down prices as demand for goods and services drops. Then during a recession, taxes should be cut in an effort to spur demand through greater purchasing power. But this requires Congress to act. Members of Congress are typically afraid to raise taxes out of fear that it will cost them reelection. Moreover, they are loath to lower taxes because they cannot agree on where the savings from the budget should come from in order to pay for them.
It is worth noting that critics of the just passed Inflation Reduction Act have gotten it wrong. To the extent that raises taxes, either directly or indirectly, it is consistent with fiscal policy that holds that taxes need to be raised during an inflation. No macroeconomic textbook on the section dealing with fiscal policy will say differently. And yet, it would have been nice if those pushing the bill in the first place had been honest about its consistency with fiscal policy and how it would work.
That is, it isn’t going to reduce inflation because the price of drugs for some will be coming down. Rather, those forced to pay more taxes may end up purchasing less in the marketplace. Indirectly, corporations forced to pay a minimum tax will only pass that cost onto consumers, thereby raising prices. The result? Demand will drop off, thereby bringing prices down. But that isn’t how the bill was sold to the American public.
O.K. this is normal politics, but it is nonetheless problematic because it demonstrates only too well how much policymakers, including members of the Democrat party — the party supposedly of the working class — really does not care about ordinary workers. Fed policy is typically not aimed at helping ordinary workers. Rather the Fed statutorily exists to serve the Banking industry and the interests of Wall Street investors.
The language of the 1946 Employment Act says that the government will maintain as high a level of employment as practicable. From that language the Fed has inferred a role for itself in managing the economy and keeping interest rates low so the nation would not be in a recession. But it also looks for any signs of inflationary pressure, which includes declining unemployment rates.
When the “concern over inflation” comes down to the Fed not increasing interest rates as much as it could, or doing it fast enough, it effectively comes down to workers not being put out of their jobs fast enough. If workers’ wages go up, that too is regarded as inflationary. Why not just come out and say that workers are the ones to blame for the nation’s economic problems?
First of all, they want higher wages so that they too can be members of the middle class. For the good of economic health they are told they should be flexible on wages. Unless wages rise with rising prices, inflation probably hurts workers more. The currency is effectively being devalued and they are only able to buy less. But then they are told that for the good of the economy, a recession is the needed medicine for inflation, and therefore they need to be put out of work.
The same policymakers who prescribed this, of course, oppose any new programs to assist newly laid off workers because certain groups of people will have to pay even higher taxes. And new spending is well inflationary. Let’s face it, contracting the demand for yachts or private jets is not going to bring down the price of bread. Some, including former treasury secretary Lawrence Summers, are telling people that they have to be prepared to tighten their belts for several years to come in order to reign in the current inflation.
But what happened to ordinary workers here? Well, they were never a thought in the first place. It is the Wall Street investors whom the Fed is supposed to serve that are the important ones. But we have seen this all too well over the last few months. Has the price of gas gone up? No problem, buy an electric car. Never mind that ordinary workers can’t afford electric cards. And to add insult to injury, those who buy electric vehicles get a nice tax credit. That is, the federal government is subsiding the wealthy elites in the purchase of electric vehicles at a cost to ordinary workers.
Has the price of food gone up? Again, not a problem. Eat less and buy less meat. One can almost hear Marie Antoinette on the eve of the French Revolution telling them to eat cake. Isn’t that what our policymakers are doing? They are serving the interests of elites at the expense of ordinary workers, otherwise known as “deplorables.”
Whether the Inflation Reduction Act will be good for the economy is, of course, an open question. But if a majority of the public is skeptical, it may have much to do with the dishonesty in how the bill was sold to the public, coupled with policymakers’ standard disregard for ordinary workers in their anti-inflation policy. But then again, hypocrisy is nothing new