THE FED IS INTENT ON SACRIFICING WORKERS AT THE ALTAR OF PRICE STABILITY

A few weeks ago, I sat on a panel devoted to discussing the economic challenges confronting the nation and what, if anything, could be done to protect the interests of the citizenry during this time of obvious economic distress and uncertainty. Overall, I'd say things went relatively well: the moderator kept the conversation flowing and I was successful at keeping my number of gaffes either at or damn close to zero. In addition, I learned from both the other panelists and the audience members that asked questions and engaged us all.

But I have to admit, one of the panelists really started to get to me. For some reason that panelist kept repeating the oft heard claim that our current bout of inflation is attributable to workers who pockets had been stuffed to the gill with rising wages, and with that stimmy money from Biden's American Rescue Plan (ARP). Flushed with cash, so the argument went, consumers upped their buying of goods and service and, in the process, put increased and upward pressure on prices. The result, so the panelist contended, was inflation-- the very thing that's got us all knotted up right now.

In some respects, the story is religious in nature: "We" are currently paying the price for "our" sin of too much--and careless-- spending, and our salvation, if there's to be any, will only come from turning our backs away from this spending, getting it under control, and renouncing the behavior that may have gotten us "here" in the first place, and returning to a past that, presumably, is more orderly than the present.

All in all, though, our interaction was civil and, quite frankly, I was just too tired and worn out to engage in a prolonged back and forth. More pointedly, I was exasperated because I, like many others, had been relentlessly bombarded with the argument that the current bout of inflation--which is now running at an annualized rate of 8.6%, the steepest price increase in forty years-- was attributable to workers who had become "too empowered" and to an "overly generous" federal government that had dumped too much money in the laps of households who were getting battered by the pandemic and the economic doldrums it induced.

And it doesn't take much to see where this line of reasoning leads to. If the problem is that workers, for whatever reason, are "too empowered," then the solution, of course, is to disempower them. Bring them down a peg or two. If the problem is an "overly generous" and financially undisciplined government, then the solution-- surprise!-- is to cut the "flow" of funds to certain citizens and commit to getting the public's balance sheet to, well, balance. Double down on a diet of austerity.

POWELL'S PATH THROUGH PAIN

Significantly, the aforementioned panelist is far from the only one running this argument, and trotting it out whenever matters economic, especially inflation, come bubbling to the fore. It's an argument that's embedded in the corridors of power, and it's a premier talking point for neoliberals whenever they enter discourse about the rapid rise in prices that's being experienced in the United States and elsewhere.

Take, for instance, Jerome Powell, the chair of the Fed. Powell has made it abundantly clear that, in his judgment, an overheated and "unsustainably hot" labor market is a primary driving force behind inflation and that the Fed, under his leadership, is "unconditionally committed" to getting the rate of price increase back to the long-term goal of 2 percent. Accordingly, upping their benchmark interest rate is the Fed's equivalent of cooling off a flaming labor market by dousing it in water. For Powell, the successive interest rate hikes were witnessing is akin to a doctor ramping up the dosage of medicine to strengthen a feverish patient.

The problem, though, is that you run the risk of making the patient worse off and perhaps--God forbid!-- killing him or her.

Powell knows that the Fed's strategy runs the risk of pushing the economy over into a recessionary pit. He knows, in short, that increasingly jacking up the interest rate could choke off consumer demand and business investment so much that'll result in an increase in joblessness. But, as he's made clear on a number of occasions, there'll be no pulling up short until there's incontrovertible evidence that the current price spiral has been stopped. "We'll go to that point," says Powell, "and there won't be any hesitation about it."

On this score, the Fed has faith that it can engineer a soft, rather than a hard, landing. That is, the medicine--interest rate hikes-- can be administered without appreciably damaging the patient's health or, to drop the metaphorical language, the economy is sufficiently tight that it can absorb the jacked up interest rates without provoking a recession and elevated levels of joblessness.

But the path toward price stability, says Powell, may not be smooth. Slamming on the brakes could result in some "passengers" being tossed out of the "vehicle." It's possible that some people will lose their job, that some households might be in for an unpleasant surprise. That the path back to price stability will involve some pain. "There could be," says Powell, "some pain involved in restoring price stability."

STOP BLAMING WORKERS FOR INFLATION

The bottom line is that we need to reject the narrative attributing the current and serious bout of inflation to increased earnings for workers and the juiced of consumer demand that's seen as coming with it. More pointedly, we need to repudiate the tale being spun by Powell and many of his colleagues at the Fed--namely, higher earnings and hyped up consumer demand is pushing the price level upward and, correspondingly, that the interest rate needs to be boosted in order to cool off an overheated labor market.

And we need to reject this story not simply because we may not like it; we need to reject it because, in fact, the evidence does not support it. Consider this: The economy re-opened in the Spring of 2021 but, as economist Jack Rasmus observes, it wasn't until August 2021 that prices really started to take off big time. That is, prior to August 2021, the annualized rate held steady in the 5.5% annualized range. Since then, though, there's been a steady march upward toward the current inflationary rate of 8.6%.

But here's the deal: During this upward march in the inflation rate, the real wages of workers-- earnings adjusted for inflation-- have been going down, not up! Prices are going up faster than earnings and, therefore, in real terms, the purchasing power of workers is headed--and has been for some time-- in the wrong direction. Increased prices--and this needs to be stressed-- are not due to increased worker purchasing power. All of which leads political economist Robert Kuttner to raise the rhetorical question:

How can wages be driving inflation if wage increases are far below price increases?

But what about that other thing mentioned by the aforementioned panelist? Maybe it was all those stimmy payments that sent the average price level on an upward soar. Maybe "all that stimmy" money did what workers' earnings could not. Maybe we're in this mess because of a financially undisciplined and overly generous state. Maybe--just maybe-- "Bidden and dem" should have kept those coins from flowing into the pockets of the public.

We need to stop slamming those stimmies, and I'll explain why in my text post on inflation.

In the meantime, though, let's continue to push back on the idea that labor markets need to be chilled out and workers need to be brought down a peg or two to get inflation under control. Let's push back against the Fed's attempt to sacrifice workers at the altar of price stability.

Catch you on the flip side,

Doc Greene