The Federal Reserve is raising interest rates at a historically fast clip. And even as wages in general remain stagnant, central bankers are laser-focused on checking wage growth among service workers, among the lowest-wage workers in the United States.
In this interview with historian Tim Barker, which first appeared on Daniel Denvir’s Jacobin Radio show The Dig, they discuss what’s going on with inflation, the various supply- and demand-side explanations for rising prices, and why the tug-of-war between workers and employers is at the very root of it all. The transcript has been edited for length and clarity.
Let’s start with a very basic question. What is inflation?
Inflation, in the most general sense, is a sustained rise in the prices across a reasonably wide swath of the economy. It is also a price index that the government defines, because to talk about the price level across the whole economy, you have to abstract from tens of thousands of different prices in order to say that there’s an inflation rate of 5 percent or 7 percent.
You do that by picking a basket of goods and services, which are supposed to be representative of what people spend money on. And then you weight those things, because some of them are more important in a budget than others. The result is a price index like the Consumer Price Index (CPI). The rate of change of that price index is inflation.
The reason I am framing it this way is a lot of people sort of reify it and act like there’s something out there, beyond the price index, which is reality. So they’ll say, well, you know, measured inflation is rising this much, but there are some special factors in there. And if we take them out, it’s really only rising by this much. But once you start taking out the special factors, you’re just creating a new, different price index. And it’s not really clear what should count as a special factor or not. So I think in some ways, the best way to think about what inflation is is just a change in this price index. And you can look beneath the hood of what’s in the price index and ask questions about it.
Maybe that explanation is a bit too general. So I’ll give you an example of a major component of the Consumer Price Index, which is one of the big indices we use in the United States: shelter costs. A major part of the shelter component is something called owner equivalent rent or OER, which is a price paid by no one. In reality, it’s an imputed cost that represents the cost a homeowner would pay to him or herself if they were renting their own home instead of owning it. And this is a significant part of the index, but it’s not a cost that’s actually paid by anyone. It’s an attempt to sort of represent this thing that isn’t actually a market transaction or not a market transaction of that kind.
By contrast, mortgage payments, which are a real thing that everyone who owns a home deals with, isn’t part of the price index. So that’s just a way of saying that once you look beneath the hood of these indexes, you’ll see that there were choices that were made about what to include in the index that could have been made differently.
Before we get into all of the accounts of present-day inflation, what are the conventional theories of what causes inflation?
The textbook way of thinking about it is that inflation is a case of too much money chasing not enough goods. That explanation has both demand and supply elements to it, because it’s too much money, which is a way of talking about demand, and it’s not enough goods, which is a way of talking about a supply that’s limited in some way or not growing as fast as spending.
Within that way of talking about it, you can focus more on demand-side or supply-side issues. In the demand side there’s a school of thought called monetarism, which is associated with figures like Milton Friedman, and they really emphasize the money supply above all else. They thought that if the government could just control the money supply at a steady rate, you would have no problems with inflation, that there were no non-monetary causes of inflation.
There’s another demand-focused view, more Keynesian, which says that it’s not really the money supply per se, but spending that causes inflation. And so you could actually increase the money supply, but if that money isn’t being spent, you could have a huge increase in the money supply without a huge increase in inflation. Arguably, we saw an example of this for most of the decade of the 2010s, when by any measure the money supply was increasing a lot because of low interest rates and quantitative easing, but inflation was stable and the Fed even had trouble meeting its own inflation targets.
Then there’s a view which focuses less on the demand side and more on the construction of supply. The idea is that rising prices are caused by shortages or bottlenecks or other ways in which the supply of something is limited. An example of this in the current inflation is the semiconductor shortage: the price of cars, new cars and even used cars, was rising a lot because the production of new cars was constrained, because the production of semiconductors, which are needed for the car, was constrained.
And then there’s at least one other analysis of inflation put forward by the Marxist economist Michał Kalecki. What did he argue?
Kalecki interpreted inflation as a distributional struggle over the surplus that society produces. And so you can see inflation as a fight between workers, who have wages which represent their money claim to goods and services, and capitalists, who have profits which represent both the income that capitalists used to consume and the fund out of which capitalists would invest in order to make more profits. Both wages and profits represent monetary claims on the things that the economy actually produces.
So when you have capitalists and workers engaged in tests of strength to increase their wages or profits, respectively, that could lead to money claims in excess of the goods and services that were available at a current level of prices, which would lead prices to increase.
You can imagine a spiral where the inflation leads workers and capitalists to try to defend the real value of their wages and profits against the inflation. And then there’s a cumulative process in which they’re both chasing rising prices and contributing in some way to that spiral.
Inflation and the Fed
Let’s turn to where we were the last time we spoke, in July 2021. You argued then that the Fed was at the time being misperceived as dovish on inflation, only because the Fed at the time saw the power of labor to be historically weak, which meant that it was confident that a tight labor market would not pose the risk of putting upward pressure on wages and thus pushing up inflation.
Your basic argument, in other words, was that very little had seemingly changed in the Fed orthodoxy, and that the Fed was still just as opposed as ever to allowing labor’s share of the national income to grow. What had changed was not the Fed’s thinking, but organized labor, which since the 1970s had become much, much less powerful. And the Fed liked it that way. Looking back to July 2021, did it turn out that you were right?
I do feel like I was right to be measured in my assessment of what was new about the Fed. I hate to beat up on it, because the author of this piece is a really brilliant economist who I’ve learned a lot from reading. But I remember the blog of the New Left Review ran a piece by Cédric Durand called “1979 in Reverse,” with 1979 referring to the year that Fed chairman Paul Volcker initiated his famous Volcker shock, which was a sharp increase in interest rates that intentionally increased unemployment and ultimately did a lot of damage to organized labor.
This piece was arguing that now with the expansionary politics of biodynamics and the seeming dovish turn at the Fed, we were seeing something like 1979 in reverse. That argument was clearly overstated. We were seeing something more like Volcker having been so successful, people could finally afford to be less hawkish than Volcker. I think that this was borne out, as the Fed pivoted to actually increase interest rates. Interest rates now are not at an especially high level historically, and certainly not compared to the Volcker shock, but the rate at which they’ve increased is pretty unusual. So there’s been a very, very sharp tightening and a sharp turn in direction. And as that’s happened, Fed chair Jerome Powell and other governors of the Federal Reserve Board have been very clear that their target is the strong labor market rate.
Powell says these things, which a Marxist would feel embarrassed to come up with — they would feel like they were attributing a conspiratorial mindset to the things that Powell says at his press conferences, which is that there’s an imbalance in bargaining power between people seeking workers and people seeking jobs. And that the Fed is going to raise interest rates until that imbalance is addressed and we get wages down.
It’s very clearly the way in which the boss-employee relationship is imbalanced at the moment.
If you want to be scrupulously fair to Powell, he would also say something like, inflation is bad for everyone, so we have to weaken workers for their own good. He’d say that stable wage growth can only happen within a context of price stability.
What exactly is going on with wages over the past couple of years and right now? You noted when we spoke ahead of the interview that the Fed seems particularly concerned with tamping down prices in “services other than housing.” That, of course, being a sector that employs some of the lowest of the lowest-wage workers of all. Why is the Fed so specifically concerned with service worker wages going up, and what does that reveal about prevailing monetary politics?
Let’s start with the first part of your question, which is what’s been going on with wages. The short answer is that wages, on average, have been stagnant for a long time. The minimum wage in inflation-adjusted terms is far lower than it was in the 1960s; the labor share of income, which is a way of measuring what percent of the total economic product goes to people who earn wages and salaries, is much lower than it was in 1970. And none of that has been reversing. So you might think that there’s not really any cause for the Fed to be worried about labor, and there’s something kind of paranoid about their response.
If you look at the last two years, or last two and a half years, nominal wages (wages not adjusted for inflation), have been growing, but inflation has been growing too. So in the aggregate, real wages have fallen a bit relative to their pre-pandemic level. But there’s a lot of diversity that’s covered up by an aggregate number like that. The labor market contains many different segments, many different kinds of workers.
One of the most interesting things about the tight labor market of the last two years is that wage growth has been fastest at the bottom. The workers who make the least money, including these service workers that you were talking about, have seen their wages grow the fastest and indeed have seen actual real wage growth — wage growth in excess of inflation. That’s really interesting, because it shows that one effect that a tight labor market can have is wage compression. So not just evening the playing field between capital and labor, but among workers and people who earn salaries — which, as you know, is an extremely heterogeneous group. You can have compression so that people who work at restaurants see their wages grow faster than people who work at law firms, with the result being income inequality within the working class is compressed.
It’s not just wage growth that was concentrated at the bottom, it’s also quits. An important measure of the tightness of the labor market and of the strength of workers is not just the unemployment rate, but the quit level, and we saw quits go through the roof. Over the last two years, this was referred to in some circles as the “great resignation,” and this was also concentrated in the service sector. You saw people who had service jobs they didn’t like leave them for jobs that paid better in other sectors.
And that is significant to Powell and the Fed’s current policy because Powell can’t actually point to many signs of a wage-price spiral or any threatening increase of labor power. But he can point to this incredible tightness in the service sector and then point to the growth of prices and inflation recently in the low-wage service sector.
What does Powell think should be done about service workers? Does he think that they’re paid adequately, or is that just not something he’s thinking about?
It’s a good question. I recently read a transcript of a question and answer he did after a speech at the Brookings Institution where someone in the audience — I swear it wasn’t me — asked him a question about the labor share of income, and he basically ignored it. He got asked the question twice, once from the audience, and then a reporter who was moderating the event repeated it to him. And the first time he totally ignored it, the second time he said, that’s not really what we’re talking about here.
So I think he would say that wage growth is good if it’s consistent with price stability. He’s very wary of directly talking about the distributional impact. Another thing he said in the speech is that he does see a role for automation and new investment in the service sector, potentially to help relieve some of the pressure on the labor supply. But there are two problems with that.
One is that even in a tight labor market like the one we’re seeing, it’s not clear how many opportunities there are for labor-replacing investment. In a factory, it’s fairly simple in a lot of cases to replace a worker with a robot. In the service sector, there are QR code menus and self-ordering kiosks, there is some low-hanging fruit, but with a lot of things, like child care, it’s very hard to imagine completely automating that. So there’s an inherent difficulty with responding to a labor supply issue with innovation in the service sector.
On top of that, though, if Powell’s goal is to make the labor market less tight and to bring down wage growth, then that’s also going to reduce the incentive for capitalists to do whatever innovations are available in the service sector.
Who stands to benefit from a Fed-induced crash? Business, of course, loathes the tight labor market as much as workers welcome one, but today corporate profits have been doing well and I doubt that finance would welcome a stock market crash. Have the class coalitions around monetary policy changed since the eve of the Volcker shock?
Labor-intensive employers, which includes both service-sector stuff, which could include large chains — but you might imagine that small business owners have a more direct and immediate sense of authority over their workers, and so they also feel this power imbalance more directly and personally than a corporate HR department might. So I think some of those, you know, either low-profit margin, labor intensive, or small business employers are going to be the biggest, strongest anti-inflation faction at this point.
You ask about finance, which I think is one of the most interesting questions, because there’s a lot of evidence that finance has a much more complicated relationship to inflation than it has had in the past. Historically, finance was at the center of sound money politics, of anti-inflation politics.
Because inflation is good for debtors and bad for creditors, because the nominal value of the debt stays the same while the actual value of it declines.
Exactly. It’s significant that Paul Volcker came to the Fed from the Chase Manhattan Bank and that he was suggested to [Jimmy] Carter as a Fed chair by David Rockefeller, who was the head of the Chase Manhattan Bank.
What’s interesting today is, for a number of reasons, finance seems to be less monomaniacally anti-inflation. One is that the actual business of finance has become more complicated. Most financial entities now are both borrowers and lenders on a large scale. So you can imagine an investment bank that is leveraging or borrowing money to then make certain investments. Another part of it is that the relatively easy money we’ve seen has also been associated with high asset prices and historical booms in the stock market. And there’s a perception on Wall Street that raising interest rates too quickly or to too high of a level will be really bad for the stock market and for financial stability in general.
This has led some people to conclude that finance is now an unequivocally easy money constituency, but I think that it is a sort of overcorrection to put it that simply. For one thing, Jerome Powell is a former private equity person, and the Federal Reserve as an institution, is very close to the financial community (although it has enough distance to impose discipline sometimes). I think it would take fairly heroic assumptions about the relative autonomy of the Fed to think that they’re doing something that has no relationship to what finance desires. Furthermore, when you look at the statements of a lot of people in finance, they seem conflicted. I think they want, if possible, a kind of Goldilocks soft landing in which the Fed is able to bring down inflation without causing a recession.
An interesting figure to look out for here is Bill Ackman, who’s a big financier, hedge fund manager. If you look at Ackman’s public statements over the last two years, he’s all over the place. One month he’ll be calling for Powell to emulate Volcker, the next month he’s really worried that the stock market is going to get too messed up. And then he’ll tweet out that we need to increase immigration, because that’s a way you can bring down wages without raising interest rates.
Most recently — and this is actually significant — Ackman has called for an adjustment to the Fed’s inflation target of 2 percent. Now, 2 percent is really low by world historical standards. If the Fed targets 3 or 4 percent inflation, instead of 2 percent automatically, that limits how much damage they’re going to have to do to meet their target. Around the same time, William Spriggs, who’s the chief economist of the AFL-CIO, also called for the 3 percent inflation target. And so in terms of coalitions, it’s really interesting to think about Ackman and this guy from the AFL-CIO both making this call for a 3 percent inflation target.
The caveat about Ackman is that his embrace of this new target doesn’t necessarily mean he’s not worried about inflation. I think it means that he just wants to stabilize it at a level that won’t be too painful. So if you could stabilize it at a higher level, he would like that. I think if it threatened to get out of control, he might return to his more hawkish mood that we’ve seen at other points over the last few years.
We’ve set the domestic scene a bit, but before we move on, we should note that capitalism is most certainly a world system. How does the Fed and its moves relate to other central banks and what they do all over the world?
The US Federal Reserve is the de facto central bank for the entire world for a couple of different reasons. One is that the dollar is the de facto reserve currency. It’s the currency in which many transactions all over the world are denominated. It’s the safe asset that people who hold wealth all over the world seek to store their money in when they want to keep it safe. So part of it is just the importance of the dollar.
The other, and this is related to the importance of the dollar, is that the Fed has room for maneuver that a lot of other central banks don’t have. They have the freedom to run a very loose policy if they want to for a very long time, because there’s such strong structural forces supporting the role of the dollar in the world economy. And so especially over the last ten or fifteen years, the Fed has become of increasing importance to the world economy, both directly and indirectly.
Directly we saw this with the establishment of what are called swap lines after the 2008 crisis, which still exist. The swap lines essentially create a way for the Federal Reserve to provide dollar liquidity to other central banks in other countries, which is a step toward officially embracing this role as a central banker to the world.
Even aside from the swap lines, what the Fed does has impacts all over the world, because if the Fed raises interest rates, other central banks are compelled to follow if they don’t want to see money flow out of their economy and into the United States in pursuit of the higher interest rates. And so there’s this a cumulative tightening cycle which the US has helped to kick off.
It’s interesting because on the Left, we often think of there being this broader capitalist world system that’s not really being run by anyone in particular. But in a sense, that world system is in significant part governed by the Fed.
If anyone is running it, they are, right? I mean, we want to be careful, you know, not to —
My big pause there was to try to avoid sounding like Ron Paul. But it’s certainly something.
No, it’s true. The Fed has attracted a lot of interest from conspiracy theorists for the very good reason that it is a small, unelected group of people who exercise perhaps more control over economic events than any other group of people. We don’t want to exaggerate their control in certain ways. Their impotence is also really striking. We’re in a situation where food and energy prices and semiconductor prices are rising and the Fed can’t do anything about that. Powell himself would tell you we can’t drill more oil, we can’t relieve the pressure on grain or meat markets, we can’t negotiate an end to the war in the Ukraine.
But to the extent that any group of people has control over economic events, the Fed does, and if they don’t have the power to relieve supply constraints, they do unquestionably have the power to create a recession if and when they want. Which is, really, a godlike power.
What’s Causing Inflation?
Let’s turn to the many competing accounts of today’s inflation. One is that it’s been caused by pandemic-related supply chain disruptions alongside this pandemic time shift in consumption from services to goods, which in turn put incredible pressure on those supply chains, all of which was then worsened by the Russian invasion of Ukraine, which also had particular effects on particular sectors, like grain exports. What’s your assessment of that causal analysis?
There’s been a huge flowering of interest in these supply-side explanations of inflation. In earlier moments, most people would have chalked up inflation to excess demand and stopped the story there. And even if you think about the way that people remember the 1970s, which was clearly a decade of important supply shocks — oil shocks, grain price shocks — it has often been remembered as a time when there was too much money or wages were too high.
I think one reason this has happened is that it was very clear, especially for the first year, that the price increases were concentrated in a few sectors. Most important were motor vehicles and some other durable goods and energy prices and rents.
What’s happened since then is there has been some broadening of the categories of prices that have been rising. As that has happened, there’s been kind of a comeback for the more conventional story about an aggregate excess of demand, because you see prices rising in sectors that aren’t as specialized, that aren’t as directly linked to the pandemic or the reopening. A bigger percentage of the prices in the price index have been changing. That said, I still think that there’s a basic plausibility to the idea that the most important factors in the inflation have been these special conditions related to the pandemic, the war, and supply disruptions.
And you see that now, by some measures, the inflation is coming down and it’s also narrowing again in terms of the number of prices affected.
So if that’s the case, why has the Fed responded by hiking interest rates? Or is the Fed just predisposed to a monetarist sort of view, given that what they control is the money supply, not fiscal policy?
I think the answer is the second thing you said — when you have a hammer, everything looks like a nail. And to think about it conceptually, there’s a bit of a false dichotomy in talking about supply or demand as what’s at issue, because even if you have a supply constraint on a specific part of the economy — say the supply of energy or semiconductors is driving the inflation — it is possible to relieve the bottleneck in the specific sector by reducing demand in the economy until it’s below the supply available of those things.
Because if I get fired, then I’m neither buying a new car nor a new video game console.
Exactly. A supply constraint is only binding if there’s demand for the thing that’s being supplied. So there’s always an interaction of these things going on. What’s at stake, though, is that if you decide that the level of demand in the entire economy is going to be reduced to the thing that is the narrowest supply constraint, you’re reducing the demand for a lot of other things below the available supply. So in order to get demand in line with the availability of new cars, you’re going to end up creating idle capacity in a lot of other lines where they actually could accommodate more demand if only this one bottleneck were broken.
I think the Fed has taken this view. I think they’re basically persuaded by the supply-side accounts, and they also acknowledge that they can’t really do anything about these various supply issues. But they do think that they have a responsibility to restore price stability, and they do think that if they reduce demand enough, that will have an effect not on relieving the supply constraints, but on making the supply constraints less binding because no one’s asking for new cars anymore.
The popular fiscal hawk explanation for inflation, common among conservatives and centrists, revolves around the economic stimulus of the early years of the pandemic. In short, there was too much of it, especially too much in the form of checks sent out to everyday people, which contributed to this tight labor market and thus gave workers too much leverage vis-à-vis employers, pushing up wages.
What is the status of that account? We talked about the Fed’s focus on bringing down service worker wages, but Powell’s view, I think, is still not the view of, say, Larry Summers.
The simple monetarist explanation — that the problem is printing too much money — is completely untenable for the reason that monetary policy was also very loose and deficits were being run for the ten years between 2008 and 2018 without any real evidence of it causing inflation.
I think there’s a stronger case to be made that spending contributes to price increases. It relates to the conversation we were just having, which is that without effective demand, supply constraints aren’t binding. So if you had responded to the pandemic by having a depression and having everyone’s incomes fall, no one would have been buying new cars and no one would have noticed that there was a semiconductor shortage.
But it raises the question, should we have done anything differently? Would it have been better to respond to the pandemic by having a depression, if that meant there wouldn’t be inflation? The answer is clearly no. There was going to be some cost of the pandemic in economic terms always. And paying that cost in terms of rising prices seems far preferable than paying it in terms of a depression.
One more thing I’d add is that even if you accept the view that spending by the government and spending by households during the pandemic was a necessary part of the inflation, you shouldn’t exaggerate that either, because the government’s fiscal stance was tightening during the period when the inflation accelerated and became more broadly based. So if there was really a direct connection between these things, you would expect that to be moving in the opposite direction.
To the extent that universal basic income–type policies can contribute to inflation, is there an argument there for progressive fiscal policy focusing on funding universal basic services rather than putting money in people’s pockets to spend in whatever sector of the capitalist marketplace they choose?
I think so. A good example for thinking about that is health care, which is a huge part of not just the price index, but is actually the service part of the price index that we’ve been talking about where prices have been increasing.
The health care sector is intimately tied up with the government in many ways. I think seeking to control the prices within that sector, while making sure that everyone has access to those services, would be more effective than just giving people money to give to for-profit health care providers who can then run up their margins essentially on a cost-plus basis because of this government demand.
If we want to think about a left-wing anti-inflation strategy, controlling costs in health care by limiting the profits of health care and pharmaceutical providers would have a noticeable impact on the CPI. And it’s something that you couldn’t do just by giving people money to spend.
Notably, defense spending never seems to be on the chopping block. And it was defense spending, after all, during the Vietnam War that did so much to drive inflation in the 1960s and ’70s. Today, we’re once again seeing record levels of defense spending. What role might defense spending be playing in driving inflation right now? And at the risk of setting up a real T-ball question for you, why is that not part of the discussion?
We’re on the verge of spending nearly a trillion dollars every year on the defense budget. There was a textbook example of the way this is discussed in a New York Times story the other day about the defense budget. It mentions how high the budget is and that Congress tacked on more money than even Joe Biden wanted to fund weapons systems that even the military doesn’t want. Clear signs of excess and bloat. It mentioned that inflation has reduced the real value of the military budget. It mentioned that Lockheed Martin, Raytheon, and other huge defense contractors are complaining about how hard it is for them to find skilled workers or to source components like semiconductors.
So there’s all this stuff about how big the budget is, about the effects of inflation, but there’s not even a sentence suggesting that defense spending might be contributing to inflation. Just do the thought experiment of what would happen if there was a $850 billion a year Green New Deal budget (which is far more than we’re spending on climate). Yet if anything, the argument is that inflation means defense spending needs to rise in order to make up for the real value that’s been lost.
With that said, it’s still an empirically open question how much defense spending is contributing to the current inflation.
I imagine there are different ways that you could measure the effect of defense spending on inflation. Like, for example, what if you were to model what it would look like to redeploy a big chunk of both the capital and expert labor currently employed in the defense industries to the very industries that are undergoing supply chain issues or shortages or under capacity.
That’s a great point. So what you’re saying is that even if by most measures defense spending is not driving inflation, there’s an opportunity cost to using all these engineers at Lockheed, rather than employing them to make sure that we can have enough electric vehicles for everyone who wants one.
Monopoly Power, Shareholders, and Neoliberalism
So we’ve covered some of the supply-side accounts of inflation, though not all of them, as well as demand-side theories that revolve around government spending and its interaction with a tighter labor market.
But there is yet another causal story that some on the Left — and sometimes the Biden administration — point to, which is corporate profiteering made possible by monopoly power. What do you make of the argument?
It’s a complicated one. I’ve done my best to read smart people who’ve written about it, and they seem to disagree among themselves about exactly how to think about the problem. What does seem clear is that by many measures, corporate profits are at record or near record levels. And so at the very least, we can say that, well, wages have not departed meaningfully from their sort of long-run pattern of being depressed and we have seen a lot of action in corporate profits.
There’s then a separate question about to what extent that behavior of corporate profits has been causally central to the inflation. And that question is trickier to answer, partly because of basic questions about data that are actually political in an interesting way. We just don’t know a lot about how corporate pricing decisions happen, and we don’t know about profit margins on particular products. Public companies do release earnings reports, so you can imagine figuring out how much profit Johnson and Johnson is making, but we don’t really know what profit they’re making on a specific kind of diaper or how they made that decision.
So one answer to this question is that it’s hard to know, but we should have much more of a public spotlight on these potentially very important decisions about pricing and profit.
However, I think there is mounting evidence that corporate profit margins have contributed in some way to the recent inflation. One of the most detailed empirical studies on this was done by Mike Konczal, a macro economist at the Roosevelt Institute, and he looked at firm-level markups — so, how much firms are marking up prices over costs.
He found there were significant increases in markups in the last couple of years and, more interestingly, that the firms that did the most marking up in the last couple of years were also the firms that had been doing the most marking up before 2020. So that suggests that increases in markups during the pandemic inflation were caused by market power because the firms that were able to do it even before the recent boom were already doing it. They just started doing it more intensely during the recent inflation.
One more piece of evidence — which some people may consider circumstantial, but I find actually quite telling — is that Lael Brainard, a member of the Federal Reserve Board of Governors, has mentioned in a couple of speeches that they’ve observed rising profit margins well in advance of any rise in costs, whether labor or other input costs in certain sectors, including retail. If you know anything about the Federal Reserve, you know that they do not go out of their way to criticize businesses for their decisions about pricing or to call into question the rate of profit. That stands in stark contrast to their glib loquaciousness about how wages need to be brought under control.
So the fact that a member of the Federal Reserve Board was naming specific industries and calling out their margins suggests to me that they wouldn’t do that without pretty good reason to do it. It’s hard to imagine what the Fed gains from making up a story about reflation.
There’s an organization called Groundwork that has studied a lot of corporate earnings calls and found strong anecdotal evidence that there are corporations talking about doing this sort of thing — opportunistically using the situation of general price increases to impose a price increase which is in excess of the costs they’re actually facing.
You might respond to that by saying that corporations profit maximize and so there’s nothing scandalous in it. You know, what reason would they have to limit their cost increase to their actual increased costs?
But I think what makes it a political question is this issue of market power. And something like price controls, which have seemed politically impossible in the United States, seem eminently reasonable — Congress should demand some kind of permanent standing oversight of how pricing decisions are made and what profit margins are in economically significant industries. And, you know, hopefully that would come with some real subpoena power where you could just ask them to open their books and present information that would help us clear this up.
Yeah. It also gets to the fact that it’s deemed legitimate for the Fed to check the price of labor, but not for the government to control the prices of goods and services.
Right. It’s really interesting that at the same time I’m saying price controls are impossible, Jerome Powell has announced an explicit target for wage growth. So he has an income policy. He says we want wage growth, but it has to be consistent with our 2 percent inflation target. What is that if not a sort of price control for wages?
You can think of another example, which in some cases benefits homeowners: we have the thirty-year fixed mortgage rate, which is a kind of price control for homeowners that renters don’t get to have. So there are all kinds of double standards in the system. And in both the case of homeowners, or this case of profits versus wages, they tend to benefit people who own property rather than people who rent or people who work.
Returning to the supply side question. Many on the Left argue that inflation has been driven by a lack of productive capacity in the economy. In other words, the drags on the output of goods and services in whatever sector or maybe across the board help cause abrupt price spikes. Radhika Desai writes in the New Left Review: “The real culprit here is the diminution of US productive capacity caused by four decades of neoliberal policies — disinvestment, deregulation, outsourcing — which have rendered the economy extremely vulnerable to supply chain disruption and prevented supply side measures to bring prices down.”
So this is an argument about what makes the economy vulnerable to supply chain disruption in general. What do you make of this argument?
Within the Left there are all kinds of disagreements about monetary policy, about asset price inflation, about the role of corporate profits. But as far as I know, everyone seems to agree that fixed investment both by businesses and public investment has been really low for several decades in the United States. So there are two things to talk about here.
One is, where does the other investment come from? The other is, how is it contributing to inflation? I’ll start with how it contributes to inflation. The idea here is that the supply constraints that have contributed to the recent inflation are not just the result of these exogenous shocks like the pandemic or the war in Ukraine. Those shocks reveal existing fragilities rather than creating the fragilities.
In this case, the really low rate of fixed investment in the economy meant that the economy didn’t have a lot of spare capacity. So when there were disruptions because of the pandemic or because of the war, those constraints became really binding. If you imagine a system with more capacity built in, with more resiliency — more redundancy would be another way of thinking about it — then you could have these episodic disruptions to supply without them being catastrophic.
But under neoliberalism, there has been an approach to corporate governance which focuses on cutting the fat and returning money to shareholders in the forms of dividends and buybacks while avoiding costly and risky capital investments. There’s also been a restructuring of production, which focuses on lean production or just-in-time supply chains, where the whole purpose of the thing is to try to increase profits by ironing out any redundancy in the system. So you have not just a lack of investment, but a whole approach to structuring production and circulation that systematically takes spare capacity out of the system.
The second part of what you’re asking is, where does this underinvestment come from? There are a couple different stories there, which are mostly compatible with each other. So one thing you hear about a lot is shareholder control and the “shareholder revolution.” The idea there is that, especially since the 1980s, shareholders of publicly owned companies have organized and become activists to put pressure on corporate managers to pursue certain strategies. And these strategies have tended to favor maximizing free cash flow, which is then used either to buy back the company’s own stock and inflate the value of the stock or return to the shareholders in the form of dividends or lavish executive compensation. And that comes at the expense of investing right in new capacity.
We had a clear demonstration of this in a couple of recent headline cases. One is with the oil and natural gas industries where, you know, there was a lack of energy in response to the surge of demand. Even as prices rose, there wasn’t a lot of interest in new investment in those sectors. There were surveys done, including by the Fed branch in Texas, asking producers, why aren’t you responding to the higher prices with more investment?
The biggest thing the energy producers mentioned was what’s called capital discipline — pressure from shareholders to keep your capital spending, your investment in new plant and equipment, low. In this case, it’s not just that the shareholders are greedy. It’s that there’s a real risk involved in investment, which is that there won’t be demand there to validate the investment once it’s finished. Investment takes time: if I’m going to build a new factory or a new oil well, it’s not going to be done tomorrow. And so a capitalist is taking a gamble when they build that demand will be there and there won’t be a depression.
What happened in the energy sector specifically is that there was a huge boom, a huge expansion of capacity around fracking in response to an earlier spike in prices. And a lot of those firms ended up really wiped out because there wasn’t actually the final demand there and there’s a kind of overexpansion.
And OPEC [the Organization of the Petroleum Exporting Countries] also launched a sort of coordinated assault on the American fracking boom.
Another industry where we see this clearly is in railroads. At the heart of the recent labor dispute was a version of this shareholder strategy, which was imposed by activist shareholders, including Ackman and eventually Warren Buffett. They decided they were going to make the railroads more profitable by really minimizing operating expenses, including labor costs, so they could return more money to shareholders. And this has meant running really long trains. They were lobbying Congress so that they could run trains with one conductor.
What does Biden’s Build Back Better program, the passage of the Inflation Reduction, the CHIPS Act, and the infrastructure bill tell us about these competing theories in American politics? Does it signify that that portions of the liberal policymaking elite are not wedded to a sort of soft monetarism and deficit hackery in the way they might have been a decade ago? That policymakers largely, in fact, believe that inflation must be tackled by increasing supply rather than throttling demand? And then lastly, to what degree will the Inflation Reduction Act and these other measures actually get at these supply-side problems?
I think there is a genuine change going on in the Democratic Party and within liberalism more broadly that is very clear if you compare these Biden initiatives that you mentioned to the Obama administration. [Barack] Obama’s stimulus contained what was at the time relatively large by the pathetic standards of American history, but is, in retrospect, a really tiny amount of funding for any kind of green investment. The core of the Obama crisis response was to get financial markets running again and then to move on to entitlement reform, even at a time when unemployment was still around 10 percent.
So I think Obama was still very much in the mindset that responsibility and price stability called for cutting Social Security and raising taxes. That’s different than the Biden response. There is a real commitment borne partly out of the recognition of a necessity for a green transition, but also out of a growing sense of rivalry with China. And this is clear in stuff written by various people who went on to become part of the Biden administration in the lead-up to 2020, that it’s really China’s example as a mixed economy with significant state-directed investment, which has made it effective in terms of energy policy, crisis response, and militarily. I think that’s pretty important to whatever is genuine in this embrace of the sort of supply-side view.
However, it’s also notable that the Biden administration has been completely supportive of Powell’s hawkish turn. Biden has actually gone out of his way to say that he will never criticize the Fed because he values its independence. And so, you might think about that as a good cop, bad cop strategy. Or you might just think the Biden administration thinks that it cannot afford to pick a fight with the Fed, because of whatever effect that would have on business confidence. I’m not sure exactly what it is, but there’s a little bit of, again, talking out of both sides of one’s mouth — to promote the Inflation Reduction Act and then not even breathe a hint that this might be in conflict with a concerted effort to slow down the economy and slow down hiring.
One more thing to say is that there’s a difference between public investment and what the economist Paul Samuelson calls the “bribe to capital formation,” which is a phrase I love. There are different things that the government can do to induce investment. One is to become an investor itself, like you would see in the Tennessee Valley Authority. Another is to basically bribe private producers to invest. And almost everything we’ve seen from the Biden administration has been examples of the bribery approach.
So oil producers are unwilling to drill because they don’t know if the demand will be there. You say, we’ll guarantee the demand will be there, please go enjoy your well — and you do that instead of building a government well or building a government refinery. And that’s not surprising given the state of power and the balance of class forces in American society. But it is worth insisting on, because public investment is a different approach and one that, as far as I’m concerned, we’re not really trying yet.
What is going on in Democratic economic policymaking and what accounts for the shifts?
I would narrate the shift starting with the 2016 election, which came as a huge shock to many people including the Democratic Party policy elite. The election of [Donald] Trump brought home to them that there were real political costs to the Obama approach to handling the economy.
It’s significant that the 2016 election was preceded not by an outright recession, but by a noticeable slowdown in the economy that was caused by the Fed raising interest rates. This affected demand in a lot of the world and in certain parts the United States. There have been pretty credible efforts to connect that slowdown with the 2016 election, which brought a lot of awareness of these so-called “deaths of despair” and the idea that a lot of the country was not doing well economically. For example, places like Ohio, which were willing to vote for Obama and then became solidly red states.
Then during the Trump administration, we had easy monetary policy for a while and Trump actually introduced a new level of fiscal policy, which was somewhat unexpected. If you go back and read Paul Krugman’s columns around 2018, he is actually warning that Trump’s tax cuts and military budget are going to push the economy into overheating territory. But it actually ended up pushing the economy toward the lows of unemployment that we hadn’t seen before. So there was an experiment, which was maybe easier for a Republican president to do first than a Democrat, which shifted everyone’s sense of what was possible and how low unemployment could go.
Then there’s the China issue, which is significant both as a real motive and as a way of selling this policy. There’s an idea that, especially in certain strategic sectors like semiconductors, that American capitalism, at least as currently structured, was in danger of falling behind the sort of capitalism with Chinese characteristics. And, of course, the pandemic also created an openness for spending and transfers to households, including the expanded unemployment insurance, which was probably the most significant part of the CARES Act.
How about the limits? One we mentioned is the Fed. It’s not clear how sharply the Fed’s tight monetary policy will conflict with the Biden administration’s investment approach, although at the margin it will certainly make investment less likely. Just as important is this question of shareholder control. There has to be a reason that the investment hasn’t been happening on its own. And it stands to reason that a good part of the explanation is the preferences of the people who control investment decisions. And if that’s the case, is the Biden administration willing to confront the people who’ve been making the decision to underinvest?
I would like to be optimistic here, but the showdown over the rail labor dispute gave a strong indication that if there was anything that shareholders strongly object to, even something as basic as paid sick leave, all the rhetoric in the world about supply chain resiliency or rebuilding the middle class didn’t really count for anything. Biden and [Nancy] Pelosi were at pains to deny this basic right to workers. You don’t want to generalize too much from one example, but I really saw that as a clear test, and I saw very little appetite for confronting the people who control corporations.
Militarism and Inflation
There’s obviously a major danger in this revival of industrial policy being tied up with the new Cold War with China — the greatest of many dangers, of course, being military conflict with China. But I also want to ask, how does this emphasis on geopolitics limit where and how the center-left is willing to intervene to expand the productive capacity?
It’s a really interesting question. You mentioned the CHIPS Act earlier, which is targeted high-end electronics, which are used in advanced weapons systems. With the Inflation Reduction Act, you also see some willingness to do this in the sphere of energy and the energy transition, which is also something that American defense planners have identified as a security-relevant issue for many years now.
Ahead of the midterm elections, it was widely believed that inflation would doom congressional Democrats to this much dreaded historic red wave. That wave, of course, failed to materialize. While I don’t think that means that people aren’t worried about inflation, because it’s clear that many people are worried about inflation, it does suggest that other things mattered more. There’s been a lot of attention, I think rightly paid to Dobbs [v. Jackson Women’s Health Organization] and the fact that people are generally put off by the right wing’s culture war extremism. But were economic forces perhaps also at work, like the fact that unemployment had not shot through the roof the way that it did after the 2008 crash?
Yeah, I think it was an interesting test case of what’s been called popularism, promoted by people like David Shor and Sean McElwee.
Funded by SBF [Sam Bankman-Fried].
And funded by SBF, but which you also could find in the pages of Jacobin — the idea that it’s unfortunate because it’ll create unemployment for workers, but it’s just a sort of fact that no one likes inflation, even workers. I do think it’s true that people don’t like inflation, especially if you ask them a question like, do you like inflation? But the revealed preference did suggest at the very least that it’s not a complete disaster.
I’m generally skeptical of attempts to overinterpret the elections, but we can say at the very least that it makes it impossible to argue that inflation, even at a rate that we literally haven’t seen since the 1980s, is necessarily fatal to politicians, which is kind of interesting, because that is sort of a return to what right-wing political economists in the ’70s had taken as axiomatic — that voters kind of like inflation, and that’s why these right-wing people didn’t like democracy. They thought that if it was just up to the voters and politicians, you’d end up with inflation forever.
We touched on this a little already, but one area where the center-left center of gravity does not seem to have shifted at all is on price controls. Why have price controls, which used to be fairly normal in American politics, proven so impossible to renormalize in this moment of crisis?
I’m a historian by training, and my field of study was the American military economy. So it’s worth pointing out that many, if not most, of the American experiments with wage price policy have been in the context of a military conflict. World War II was the most famous one, but there were also wage price controls during the Korean War. And then the Nixon controls, which are often hilariously referred to as the first peacetime wage price controls in American history when, of course, they were imposed in 1971, when the US was actively involved in a military conflict in several different countries in Southeast Asia.
So there’s this recurring dynamic in American economic history where people ask: We did this during wartime why can’t we do it during peacetime? There’s no good reason for it. But it’s often hard to create a moral equivalent of war. You see that with the war on poverty and with the Green New Deal. But somehow there’s no substitute for war in actually making powerful people do things they would not have done otherwise.
And that applies to price controls, too. I think the idea of controlling prices is basically offensive to the dominant American ideology about private power in the economy, and it’s been hard to overcome that opposition.
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