The inflation conference at Political Economy Research Institute at UMass Amherst (PERI) presented mounting evidence that raising the rate of interest will only raise unemployment and weaken the bargaining power of low-wage workers and the poor that are already hit hard by the pandemic across the world. Robert Pollin joins Sharmini Peries on theAnalysis.news.
Transcript
Sharmini Peries
Welcome to theAnalysis. I’m Sharmini Peries, and I will be back with Professor Bob Polin in just a few seconds.
The central bank of various developed countries, such as the G7 countries and the U.S. Federal Reserve, have responded to the rising inflation by raising interest rates. To curb it, they are using a micro-economic policy referred to as the inflation targeting, which is a policy where they try to target inflation at 2% to achieve price stability. Here is the chair of the Federal Reserve on December 16, 2022.
Jerome Powell
Before I go into the details of today’s meeting, I’d like to underscore for the American people that we understand the hardship that high inflation is causing and that we are strongly committed to bringing inflation back down to our 2% goal. Without price stability, the economy doesn’t work for anyone. In particular, without price stability, we will not achieve a sustained period of strong labor market conditions that benefit all.
Today, the FOMC [Federal Open Market Committee] raised our policy interest rate by a half percentage point. We continue to anticipate that ongoing increases will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2% over time.
Sharmini Peries
But is this really a rational economic approach to providing relief for the many who are suffering from rising prices and inflation? What can be done to curb it and achieve economic stability at the same time? What is driving inflation? Is it government spending, higher wages, the pandemic, pandemic-related supply chain issues, the war in Ukraine, or all of the above? What do effective alternative solutions look like? For whom is raising the interest rates a rational approach, or who does it benefit? Those are some of the questions raised at a very timely conference held in December of 2022 by the Political Economy Research Institute at the University of Massachusetts, Amherst.
Today I’m joined by one of the conveners of the conference, Professor Robert Pollin, who is a distinguished university professor of economics and co-director of the Political Economy Research Institute, PERI, at UMass, Amherst. Bob, thank you so much for joining me today.
Robert Pollin
Great to be on with you, Sharmini. Thank you.
Sharmini Peries
Bob, you have convened a conference with some very esteemed economists. It is safe to assume you are hoping to influence the economic policymakers at a critical juncture in this inflation bout. Why are you trying to intervene, and who are you trying to influence?
Robert Pollin
We organized the conference, myself and co-director of PERI, Gerald Epstein, in order to really focus on what really are the causes of the global inflation phenomenon and ways to tame inflation without attacking the well-being and living standards of working people and poor people. So that’s basically the whole thrust of the project.
I think it’s fair to say that we learned a lot. I think what we found at the conference was very different than what is guiding economic policy now. In a nutshell, economic policy is governed by the idea, as you said at the beginning, to get inflation down to a 2% target rate. The main way to get there is to raise interest rates that will slow the economy and raise unemployment, meaning hurt the working class and weaken their bargaining power. The idea behind weakening the bargaining power of workers is that workers are bargaining up their wages. They have too much power to bargain up wages, and therefore we have to attack worker bargaining power to bring them under the heel again.
Sharmini Peries
Bob, the paper you presented is titled Considerations on Inflation, Economic Growth and the 2 Percent Inflation Target, a paper you co-authored with Hanae Bouazza in which you declare that a policy framework known as inflation targeting has been in place by most high-income economies, such as the G7 countries since the 1990s. Now, they have set an inflation target of 2%, but you say there is no serious body of research that supports their operating assumption. Explain this for us.
Robert Pollin
Yeah, so as you said, in the 1990s, this idea that governments should organize economic policy around this idea of maintaining inflation at no more than 2%. The premise there is, well, if we do that, then everything else will take care of itself. Economies will grow better, and employment opportunities will expand. The main thing that we need to do is institute price stability as defined by a very low single-digit inflation rate of 2%.
Now, my paper with Hanae Bouazza is very modest in the sense it just tries to look at one little small point. The point is, do we actually observe that economies grow faster when they’re at low inflation, at the 2% inflation, at the target rate? And the answer is no. The answer is there was never any evidence. In fact, our paper is really an extension of work done in the 1990s by someone named Michael Bruno, who was at the time the chief economist at the World Bank. Bruno himself demonstrated in the 1990s that there was no relationship that economies actually grow faster at somewhat higher inflation rates. We basically extended Bruno’s results into the present and for the entire global economy. We focus on high-income countries and then even more on the United States per se.
We’re not saying we’re for hyperinflation. We’re not saying inflation is fine, and we don’t have to worry about it at 40%, 50%, or whatever. We are finding that rather than a 2% inflation target, economies perform better when inflation is somewhere at maybe 4% or 5%, maybe even 6-7% under some circumstances. Those percentage points actually make a huge difference. What we’re seeing now is this attack in order to get the inflation down to 2%, when what happened with this current bout of high inflation was that we had these supply shocks coming out of the COVID pandemic. In other words, there were shortages of food, shortages of oil, shortages of computer chips, and then the economies had to catch up as they came out of the COVID lockdown. On top of that, you had the war in Ukraine, which led to more food and energy shortages. So that’s the cause. So why don’t we address the issue of supply shocks? And then, on top of that, the big corporations took advantage of these supply shortages and jacked up their prices, so profits rose much faster than wages.
So that’s why you had, for example, it was just reported last week that the oil companies, two biggest U.S. oil companies, Exxon and Chevron, got $100 billion in profits last year, $100 billion in profits. Why aren’t they being called to account in terms of their price markups as opposed to attacking workers as the cause of inflation?
Sharmini Peries
Bob, one of the objectives of the lower inflation target of 2% is price stability, which is not so bad in itself, which sounds reasonable. Does it actually do that?
Robert Pollin
Well, I mean, if you want to get to a 2% inflation rate and stay there, you can, but you have to have the economy contract. You have to slow down activity. You have to see the unemployment rate go up. You can have deflation. The only issue is you also have a depression. You’ll have mass unemployment. We would love to have a world in which everybody is doing well, and there’s zero inflation, but that’s not how the world really works. So there are trade-offs. We have to understand, okay, if we want to get to 2% inflation, are we willing to sacrifice jobs and incomes? If we can have higher incomes and better job opportunities at, say, 4% inflation, maybe that should be our target as opposed to 2% inflation. Why make the entire global working class suffer and carry the burden in order to get to this 2% inflation target?
Sharmini Peries
Given the soaring cost of everything from grain to gasoline, can you explain why this operating assumption is weak and faulty?
Robert Pollin
So the idea is that whenever you have inflation, accelerating high inflation, it’s due to workers having too much bargaining power, bargaining up their wages. As I said, in fact, what caused the big inflation bout, the first one in 40 years, was what happened coming out of COVID. We reopened the economy and reopened the economy after there were all these supply breakdowns. There was a lockdown for what, a year and a half, two years? On top of that, then we had the war. So the real thing that should be done is to address those supply problems. We have supply shortages with computer chips, oil, food, and all of those things. And yes, we also had a supply shortage of workers because people died during COVID. People weren’t able to come back to work– the ones that were still alive. We lost in the U.S. about three and a half million people in the labor force. So that did create some labor shortages. The real solution there is to raise wages and encourage people to come back to work and make the conditions better.
Now, the fact is that the supply shortages are already getting restored. The supply chains are strengthening. For the last five months in the United States, inflation is already down to 2.4%. For the whole year, inflation is 7%. But for the last five months in the U.S., it’s 2.4%. Same pattern in Europe. In Spain, for example, inflation has been coming down for the last six months. So the supply issues are resolving themselves. Again, why would you want to attack workers and prevent them from getting some income gains as we come out of the COVID lockdown?
Sharmini Peries
Bob, your paper points to other economic options available to policymakers to stabilize and grow the economy without targeting unemployment to reduce inflation. Discuss some of these options that are available.
Robert Pollin
So they’re not exactly ultra out there because a lot of them have been proposed by the Biden administration. One of them is a windfall profit tax on– so, as I said, the oil companies made $100 billion in profits, record profits last year, all because they could mark up their prices because of the shortages; they took advantage of that. Why should they be benefiting as a result of the COVID lockdown? I’ve also written stuff about nationalizing the oil industry, and I’d love to talk about it, but let’s say we’re not going to do that right now. At the very least, their profit margins should be restrained because they aren’t doing anything new. They’re just benefiting from the supply shortages that came out of the COVID lockdown. So that would be one.
Similarly, the investments in building up green energy mean that we increase the alternative supplies relative to depending on oil and other fossil fuels. Now, those things work, but fair enough, they probably are not as forceful as creating mass unemployment in terms of reducing price pressure. So the point is, do we really need to push prices all the way down to the 2% target? And if we don’t have to be that aggressive in terms of reducing prices, then we can use these other policies to control inflation.
Here’s another example. One of the things that pushed up prices of food and oil is speculation on the futures market. So why not control speculation on the futures market? If you combine these alternatives, you will have a set of policies that are able to restrain inflation without attacking the well-being of working people.
Sharmini Peries
Bob, in your paper, you demonstrate that green growth policies identified by the U.S. Inflation Reduction Act passed last year are a viable option to reduce inflation. Explain how we can deal with the environmental crisis and inflation at the same time.
Robert Pollin
Well, yes, it’s not going to control inflation in the next two months. It is actually called the Inflation Reduction Act. I mean, really, it’s more about investing in building a green economy. Overall it was a good measure. It could be much, much, much better. We’ve talked about this before, but given what it is, nevertheless, the faster we transition to green energy, obviously, it addresses climate change by reducing CO2. Also, renewable energy is cheaper than fossil fuel energy; it’s half the price in terms of generating electricity. Solar and wind are half the price per kilowatt hour without any subsidies; it’s half the price of coal. That’s where we are right now. In addition, when I say a green transition, we also talk about raising energy efficiency standards, so you don’t need as much energy to keep your house warm, to turn on the lights, or to drive from point A to point B. So that also lowers all of those things meaning that we are reducing the demand for fossil fuels, and that will help reduce inflation over time.
Sharmini Peries
So how much of the inflation we are experiencing is COVID related? And how much of this inflation is due to the war in Ukraine, supply chain issues, or the stimulus packages?
Robert Pollin
Well, I think, first of all, inflation is real, so we do have to control it. And people like the progressive people, we do have to be concerned about inflation. There’s no question about it. It’s just how you do it. And then, in terms of solutions, number one, I think we need to be very clear that inflation is already coming down. It was these massive supply problems coming out of COVID and the war that really pushed up inflation. So, therefore, let’s let those things work themselves out, and then let’s stay focused on– I mean, unemployment could be lower, but it’s as low as it’s been in generations. To be at less than 4% unemployment and to push it down even lower, that’s an incredibly important goal.
Among other things, it does give workers more bargaining power. Workers should have more bargaining power. The average worker in the United States hasn’t seen a raise in 50 years in real dollars, whereas the average CEO has seen their real income increase tenfold. So that’s what we’ve had under neoliberalism. And the idea that workers shouldn’t be able to get any kind of raise is basically saying we’re going to keep running neoliberalism indefinitely. The policies of the central bank, the Fed, and similar policies in other countries are effectively saying we’re not going to run capitalism by letting workers get any benefits or any raises.
Sharmini Peries
Bob, one of the things we have to keep in mind is that in the United States, we are dealing with an election cycle every two years. Policies are often geared to pleasing those who contribute substantially to the election process. Now, give us a sense of the current policies and how it may be benefiting those that are major contributors to the election cycle. Of course, the decision-making process is geared towards them and not the ordinary person on the street.
Robert Pollin
The story coming into the next election cycle should be that, yes, we had these huge stimulus policies during COVID and that prevented a Great Depression because, between March 2020 and April 2020, unemployment went up from about 3.5% to 14% due to the COVID lockdown. It would have stayed there. We would be in a Great Depression right now had we not had the stimulus policies. The stimulus policies did contribute to putting a floor on the economy and therefore did contribute in its own way to inflation. Inflation at 3-4% is better than deflation; it is better than a depression. So I think that story needs to be told moving into the next election cycle.
Now that said, you do have this view on Wall Street that the first and foremost thing that we want is we don’t want workers to get more bargaining power. We want to keep jacking up profits unconstrained, as the oil companies have just done. The oil companies and other big corporations are certainly going to be financing politicians that are going to want to keep workers’ demands at bay.
Sharmini Peries
Thank you, Bob.
Robert Pollin
Thank you very much.
Sharmini Peries
Let me remind everyone that Bobs and other conference papers are available for your perusal at the Political Economy Research Institute at UMass Amherst.
Robert Pollin
We have a shorter one that’s in the American Prospect, a summary that’s also available. You can find it on our website site, too.
Sharmini Peries
We will be unpacking all of them by interviewing the leading authors. So please join us for this series, and thank you for joining us here on theAnalysis.
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