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Neo-Liberalism and Anti-Inflationary Policy

Prabhat Patnaik

Central banks all over the capitalist world are raising, or are about to raise, interest rates as a means of countering the currently rampant inflation, which is certain to push a world economy that is barely recovering from the effect of the pandemic, back towards stagnation and greater unemployment.

Of course the Federal Reserve Board of the U.S. which sets the standard in this respect for all other central banks, claims otherwise. It argues that the rise in interest rate it is decreeing will have little impact, or at the most a transitory impact, on the real economy; the recovery will be largely unimpaired. But this is based on reasoning which is fundamentally flawed and goes as follows.

The current inflation in the U.S., Fed chairman Jerome Powell argues, is because of a money wage push, which in turn arises because people are expecting inflation to occur; the rise in interest rate, by making people expect an abatement of inflation, will end this money-wage push, and hence actually bring down inflation. Since all adjustments will thus remain confined to the sphere of expected prices, and hence by that route to the sphere of actual prices, the real economy of output and employment will hardly face any recession. This entire argument however is wrong because of one simple fact: the workers’ money wages have lagged behind inflation, because of which they have suffered real wage declines. Hence to argue that inflation in the U.S. is because of a money-wage push, is a gross error.

Likewise the other common explanation given for inflation is that the Russo-Ukraine war has created scarcities of various commodities, especially of oil and food-grains in the world market. This explanation too however is unconvincing: while the war may cause such scarcity, there has as yet been no such scarcity. In fact there is little evidence of any decline in supplies of such commodities in the world market due to the war; hence to attribute the inflation to such war-induced scarcity is erroneous, certainly in the context of the U.S..

The reason why there is inflation in the U.S. is because prices are rising faster than wages owing to an autonomous rise in profit-margins. Profit-margins are supposed to rise when there is a scarcity of some commodities, but in the present case there is no shortage of a range of commodities that are witnessing inflationary pressures; and even in the case of commodities where there may be immediate shortages because of supply-chain disruptions on account of the pandemic, the rise in price is more pronounced and persistent than warranted. There is in other words an autonomous profit-margin push underlying the current inflation in the U.S. which is indicative of speculative behaviour.

There is a tendency to think of speculative behaviour as characterising only traders and middlemen but not manufacturers; but this has no basis. Speculation underlies pricing behaviour of multinational corporations too, and the reason why speculation-induced inflation is afflicting the world’s largest economy, is because of the easy availability of credit as a result of the extraordinarily easy monetary policy pursued until now. “Quantitative easing”, namely pushing money into the U.S. economy by the Federal Reserve and its maintenance of near-zero short-term and long-term interest rates, has created a liquidity overhang in that economy that has been conducive to an autonomous profit-margin push, and is manifesting itself in the form of inflation even before production has reached anywhere near full capacity. Further, against the inflation caused by this history of monetary policy, the only measures available are either “fiscal austerity” or a rise in interest rates (as is occurring now), both of which cause recession and unemployment.

Here we come to the nub of the problem. The economic arrangement under contemporary capitalism is such that to beat down the fall-out of the behaviour of a handful of speculators in the U.S., mass unemployment has to be generated not only in the U.S. economy (which is absurd enough in itself) but in the entire world economy. This last point arises because under neo-liberalism with global cross-border mobility of capital, especially of finance, the array of interest rates all over the world must move up when the U.S. interest rate moves up (for otherwise finance will keep flowing out of peripheral economies into the U.S. causing a continuous depreciation of the former’s exchange rates vis-à-vis the dollar). Speculation in the U.S. in other words, instead of being directly tackled through other means, is tackled, under a regime of financial “liberalisation”, through the generation of mass unemployment all over the world. This is the acme of irrationality.

John Maynard Keynes, writing under the shadow of the Bolshevik revolution and in the midst of the Great Depression, was acutely aware of this irrationality. To save the system which was his goal, he wanted what he called the “socialisation of investment”. For this fiscal intervention by the State was essential as was an appropriate monetary policy, both of which required the subservience of financial interests to the needs of society as a whole.

In this intellectual ambience, many newly-liberated third world countries after the war erected innovative financial structures that directly curbed speculation without causing any reduction in activity, let alone mass unemployment. In India for instance long-term finance for investment was provided by a whole range of specialised financial institutions at interest rates that were generally lower than the rates on short-term credit given out by banks. A range of instruments was also used by the banks, to curb speculation other than merely the interest rate (and traditional instruments like the reserve ratio). One such was the direct restriction of credit-flows to specific, speculation-hit, sectors or what was called “selective credit controls”. Inflation control was effected not only through fiscal and monetary policies but also through “supply management” and putting in place a system of public distribution and rationing. All these ensured that investment, output and employment were largely insulated from the behaviour of speculators.

The Bretton Woods institutions and its loyal neo-liberal economists were staunchly critical of all these arrangements. They called such financial arrangements “financial repression” and wanted instead a “liberalisation” of the financial system where all such direct interventions in financial markets were eschewed. They even wanted a jettisoning of public distribution and rationing that still continues in the case of foodgrains, and got the Modi government to pass the three infamous farm laws towards this end. Though they did not succeed in their endeavour to jettison public distribution and rationing, they did enforce “financial liberalisation” as part of the neo-liberal “reforms”.

“Financial liberalisation” virtually meant an exclusive reliance on the interest rate as an instrument of monetary policy, and even here since the interest rate in a world of relatively easy financial flows is linked to the U.S. rate (as noted earlier), the country did not have much leeway. And since “fiscal responsibility” meant that government spending got linked to government revenue and government revenue itself could not be raised through heavier taxes on the rich (for they would then look elsewhere for locating their investment projects), the same interest rate that was used for inflation control was also a key determinant of investment, output, employment and growth.

This meant going back to a world where not only do we have the behaviour of a bunch of domestic speculators determining output and employment in a particular country, but the behaviour of a handful of American speculators determining the output and employment in every country of the world, that is, in the entire world economy.

The eminent economist Dr KN Raj had once lauded the financial system we had under the dirigiste era on the grounds that it did not allow the whims of a handful of speculators to determine the employment prospects of millions of workers. Financial liberalisation destroyed precisely this insulation; and, what is more, it linked every country’s level of employment to the whims of a few American speculators.

Much is being written all over the world debating the wisdom of raising interest rates as a means of combating inflation. This discussion generally presumes a neo-liberal setting and then takes positions on what particular point should be chosen in the trade-off between unemployment and inflation; but the trade-off itself arises because of the neo-liberal setting that removes a range of other instruments from the government’s hands. The whole point therefore is to avoid such a trade-off altogether by transcending the neo-liberal setting itself; but this scarcely figures in the discussion.

(Prabhat Patnaik is Professor Emeritus at the Centre for Economic Studies and Planning, Jawaharlal Nehru University, New Delhi. Courtesy: Prabhat Patnaik’s blog at networkideas.org.)

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Inflation – A Junk Economics Perspective

Michael Hudson

Inflation is the excuse that right-wing governments have for trying to lower wage levels by blaming the inflation in rising wages.

I want to talk about what inflation is not – but what the neoliberal economic mainstream wants to blame it on: on labor, on government social spending, and of course on Russia seeking to break away from America’s unipolar international economic order.

Inflation is the excuse that right-wing governments have for trying to lower wage levels by blaming the inflation in rising wages. Federal Reserve chairman Paul Volcker raised interest rates to 20% in 1980 to cause a recession that would lead to less hiring and thus stop labor’s wage gains of the 1970s. And more recently, the present Federal Reserve chairman Jay Powell came right out and announced the Biden Administration’s Democratic Party policy: “get wages down, and get inflation down without having to slow the economy and have a recession and have unemployment rise materially.”

In other words, if labor wants to get a job – and the health insurance that goes with it – it will have to lower its wage levels.

This is junk economics, of course. Today’s inflation – throughout the world, not only in the United States – is led by pure monopoly power, headed by energy and food prices. US-NATO tries to blame inflation on Putin and Russia not exporting oil and gas to Europe (as a result of NATO sanctions). But the gas hasn’t stopped yet, at least until Thursday, May 10. The U.S. oil companies have said that, looking forward, they SEE a supply problem – and so are raising prices now.

Likewise in agriculture, farmers are getting less for their crops, but the great intermediary monopolies such as Cargill are raking off more commissions in buying crops cheap and selling them at a high price to markets. So it is a pure monopoly squeeze.

Rent also is soaring – as a result of the plunge in home ownership rates started by President Obama’s mass evictions of victims of junk-mortgage lending, and the private capital investors such as Blackstone that have bought up these properties and turned them into rental properties. Middle- and working-class housing construction has faltered for over a decade despite the plunge in interest rates, except for luxury housing.

The inflation will be much worse for Global South countries, largely because of their widening balance-of-payments deficits.

For starters, they have been steered for over 70 years by the World Bank not to produce their own food, but to produce tropical export crops that do not compete with U.S. agriculture. They will face a rising food deficit, on top of their oil and energy deficit.

Meanwhile, Global South countries also have a drain of debt-service or their dollarized foreign debt. The U.S. dollar is soaring, largely because the Fed is raising interest rates here. That already has led the euro to plunge, nearing parity with the dollar. The Japanese yen also has plunged, as have many Global South currencies.

Their currency depreciation means that much more of their income must be paid to service the stipulated interest and amortization payments on their foreign debt.

This forces them to make a choice – and that is indeed the intended policy of U.S. economic strategists. Either they have to cut back their food and energy imports, OR they pay their foreign bondholders and banks. What will they do – or more to the point, what will most client oligarchies do?

Janet Yellen, former Fed chairman and now Secretary of the Treasury has an answer. She has said that the upcoming IMF meetings may create new SDRs – paper gold, most of which is given to the United States – to enable countries not to default. But the policy price is high: they must submit to IMF austerity, becoming “more competitive” by cutting their wage levels and living standards. (That always is the neoliberal answer to any economic problem.) The SDRs will be conditional on countries selling off yet more of their natural resources and public infrastructure to U.S. and other foreign investors. Privatization will sharply increase prices for what formerly were public services and basic needs. This will of course increase inflation, squeezing disposable personal income all the more.

In sum, the so-called fight against inflation is a euphemism for the fight against labor – against labor unions, against land reformers, and against democratic politics.

The NATO attack on Russia is being shaped to have this inflationary effect at home. The beneficiaries are the monopolies, banks and distributors. The payers are labor and taxpayers.

Inflation also is blamed on government budget deficits. The “cure” is said to be cutting back public social spending. This theory assumes that inflation is a purely monetary phenomenon, not one of rent-extraction and financialization benefiting the One Percent.

The irony: More money REDUCES consumer prices. That is because most money is bank credit, and 80% of that is used to finance real estate purchases, bidding up its price. The result is that housing’s share of a typical family’s personal income has risen from 25% in the 1970s to over 40% today. That leaves less income available to spend on consumer goods and services – a deflationary effect.

What is inflated are asset prices, not commodity prices – except where monopolies control a rising share of the market.

[Michael Hudson is the president of the Institute for the Study of Long-term, Economic Trends, ISLET. He’s a Wall Street financial analyst and a distinguished research professor of Economics at the University of Missouri, in Kansas City. He’s also the author of numerous books. Courtesy: Michael’s blog at michael-hudson.com.]

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How Corporations Are Using Inflation to Take Your Money

Robert Reich

Corporations are using inflation as an excuse to raise their prices, hurting workers and consumers while they enjoy record profits. Prices are surging – but let’s be clear: corporations are not raising prices simply because of the increasing costs of supplies and labor. They could easily absorb these higher costs, but instead they are passing them on to consumers and even raising prices higher than those cost increases.

Corporations are getting away with this because they face little or no competition. If markets were competitive, companies would keep their prices down to prevent competitors from grabbing away customers. But in a market with only a few competitors able to coordinate prices, consumers have no real choice.

As a result, corporations are raking in their highest profits in 70 years.

Are they using these record profits to raise their workers’ real wages? No. They’re handing out meager wage increases to attract or keep workers with one hand, but effectively eliminating those wage increases by raising prices with the other. Wages grew 5.6 percent over the past year — but prices rose 8.5 percent. That means, adjusted for inflation, workers actually got a 2.9 percent pay cut.

So what are corporations doing with their record profits? Using them to boost share prices by buying back a record amount of their own shares of stock. Goldman Sachs expects buybacks to reach $1 trillion this year – an all-time high.

This amounts to a direct upward transfer of wealth from average working people’s wallets into CEOs’ and shareholders’ pockets. Just look: billionaires have become at least $1.7 trillion richer during the pandemic, while CEO pay (based largely on stock values) is now at a record 350 times the typical worker’s pay.

The Federal Reserve wants to curb inflation by continuing to raise interest rates. That would be a grave mistake, because it doesn’t address corporate concentration and it will slow job and wage growth. The labor market isn’t “unhealthily tight,” as Fed Chair Jerome Powell claims. Corporations are unhealthily fat.

So what’s the real solution?

First, tougher antitrust enforcement to address the growing concentration of the economy into the hands of a few giant corporations. Since the 1980s, over two-thirds of American industries have become more concentrated, enabling corporations to coordinate price increases.

Next, a temporary windfall profits tax that takes corporation’s record profits and redistributes them as direct payments to everyday Americans struggling to cover soaring prices.

Third, a ban on corporate stock buybacks. Buybacks were illegal before Ronald Reagan’s SEC legalized them in 1982 – and they should be made illegal again.

Fourth, higher taxes on the wealthy and on corporations. Corporate tax rates are at near-record lows, even as corporate profits are at a near-record highs. And much of billionaires’ pandemic gains have escaped taxes altogether.

Lastly, stronger unions. As corporate power has grown, union membership has declined, and economic inequality has risen – the reason most workers haven’t seen a real raise in 40 years. All workers deserve the right to collectively bargain for higher wages and better benefits.

In short, the real problem is not inflation.

The real problem is the increase in corporate power and the decline in worker power over the past 40 years. Unless we address this growing imbalance, corporations will continue siphoning off the economy’s gains into their CEOs’ and shareholders’ pockets — while everyday Americans get shafted.

(Robert B. Reich is Professor of Public Policy at the Goldman School of Public Policy at the University of California at Berkeley. He has been a member of the faculties of Harvard’s John F. Kennedy School of Government and of Brandeis University. Article courtesy: Robert Reich’s blog, robertreich.org.)