Time to mobilize against inflation paranoia


T.J. Kirkpatrick/Getty Images

T.J. Kirkpatrick/Getty Images

One of the biggest problems in our political discourse is the cultural hegemony of austerity. That is to say, a substantial fraction of the American elite and media takes as a given that the national debt is the most critical problem facing the nation, and that any measures taken to reduce the debt are by definition good.

Validity aside, the problem here is that such a view is contestable, but the discussion is often framed in a question-begging way: “name three areas where Americans will feel real pain in order to balance the budget?” as opposed to “should we reduce the deficit, or are other things more important?” It’s getting easier, but especially in 2010-2012 it was almost impossible to get any purchase with anti-austerity arguments, because key elites simply refused to acknowledge there was any disagreement.

There is a similar issue at hand with monetary policy: the cultural hegemony of inflation paranoia. In this case, inflation is treated as though the first goal of monetary policy should be to keep it under control under any and all circumstances. But like the austerity debate, this sweeps a huge disagreement under the rug. As the unemployment rate continues to fall, Fed Chair Janet Yellen is going to face increasing pressure to tighten money before inflation starts to creep up. This would be a tremendous mistake, and the left must mobilize against it.

Over at Business Insider, Matthew Boesler shows us exactly how this pressure is going to happen:

Janet Yellen honed in on long-term unemployment yesterday…suggesting that it may be a source of slack in the labor market that is not captured by the headline unemployment rate…However, the findings of Linder, Peach, and Rich, posted on the New York Fed’s website, suggest that this may be a dangerous approachthe focus on long-term unemployment may cause the Fed and others to underestimate wage growth…

The view advanced by Yellen and the FOMC — that long-term unemployment is a hidden source of labor-market slack — does not hold up against this analysis, and is beginning to come under fire by market economists on Wall Street…Elevated long-term unemployment is still an important social and economic issue. However, the Fed may be forced to abandon its view of labor market slack if short-term unemployment continues to improve and wage growth continues to rise.

Note the passive voice (“may be forced to abandon”) and the question-begging — nobody actually defends placing inflation above mass unemployment, they just assert that it must be done. What are we supposed to do, just accept rising wages for a time? Inconceivable!

But let’s be clear: this is an agenda of straight-up class warfare, one with a long history. As Doug Henwood’s excellent book Wall Street demonstrates, pressuring the Fed to keep a lid on wage growth is one of the key methods that organized capital uses to protect its colossal income share. Our current mass unemployment has the handy property of keeping wages low, and profits and bonuses high, and so from a stinking rich perspective, better to tighten now lest we chance even the slightest risk of wage growth. How is Jamie Dimon supposed to get by with anything less than $20 million per year?

But in truth, there’s also no reason to accept this model as gospel. Standard macroeconomic models are squishy enough that you can make one to say basically whatever you want. Other models suggest exactly the opposite, in support of Yellen’s position, more convincingly in my view.

Given that uncertainty, plus the fact that moderate inflation isn’t that bad (remember, it was about 4 percent for most of Reagan’s term), plus the stupendous misery and waste of mass unemployment, plus the fact that we got unemployment down to four percent for whole of the year 2000 with flat inflation, plus the fact that median wages have been stagnant for 40 years, I believe we should keep stimulating until inflation really starts to kick up past 5 percent or so on a sustained basis. Then we’ll know for sure that the economy is near capacity, and we’ll know which model is correct.

I think the fact that inflation paranoiacs generally fail to address these concerns reveals that theirs is a project of protecting the interests of the very wealthy at the expense of the rest of the country. So economic progressives must be vigilant, because as unemployment comes grindingly down, we will face increasingly loud demands for tighter money from this quadrant.

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