Yves here. This post provides a high-level debunking of the Fed/central bank approach of squeezing wages as the first line of attack against of inflation. It cites the views of James Galbraith. If you’d like to read a fuller discussion, please see his article The Quasi-Inflation of 2021-2022 – A Case of Bad Analysis and Worse Response.
I hope you’ll circulate this article to friends and family who intuit that current policies are misguided and might want to know why.
By Conor Smyth, a recent graduate of Washington University in St. Louis, where he studied history and political science. Originally published at FAIR
Good news: Inflation is down! Way down, actually: It came in at 4% in May, after peaking at just over 9% last summer.
But don’t get too excited. The New York Times is here to tell you that inflation is still a problem, and more suffering for the working class is the solution.
In a recent episode of the Times’ flagship podcast The Daily (6/20/23), reporter Jeanna Smialek argued that the Fed may have more work cut out for itself. Discussing why inflation declined over the past year, she noted that it’s mostly the result of supply issues resolving. But inflation remains above the Fed’s 2% target:
The part of inflation we’re worried about now is the part that’s not going to come down just because of a return to normal or because of luck, but the part that is going to require Fed policy.
In other words, only the Fed can tame inflation.
‘Standard of Living… Has to Decline’
In the standard account, this is a key lesson of the last major period of high inflation that the U.S. faced. Referred to as the Great Inflation, this era lasted from 1965 through 1982, and was finally brought to an end by Fed chair Paul Volcker.
After assuming leadership of the Federal Reserve in 1979, Volcker announced, “The standard of living of the average American has to decline.” He then proceeded to curb inflation through a brutal campaignagainst the working class.
The Volcker approach was, of course, not the only available method for slowing price increases. As the progressive economist James Galbraith (Medium, 6/17/23) wrote recently, the U.S. has dealt with inflation differently in the past. During World War II, for instance, the government established the Office of Price Administration, which kept inflation in check through price controls (Guardian, 12/29/21).
These were “abolished… in 1946, over popular protest,” and were later intellectually repudiated by economists and policymakers in favor of anti-government and pro-business ideology. As Galbraith puts it, “From this, the entire charade of dumping responsibility for ‘fighting inflation’ on the central bank emerges.”
‘Springing for That Jacuzzi’
This charade has continued for decades, and has taken on renewed force in the last couple of years in the face of high inflation, with little to no pushback from corporate media. As current Fed chair Jerome Powell prepared for a new war on inflation in the spring of 2022, for instance, the Times (3/14/22) ran the headline: “Powell Admires Paul Volcker. He May Have to Act Like Him.”
The piece, by Smialek, acknowledged that a Fed campaign against inflation comes with risks, but it gave Volcker the final word:
Maintaining confidence that a dollar will be able to buy tomorrow what it can today “is a fundamental responsibility of monetary policy,” Mr. Volcker wrote in his 2018 memoir. “Once lost, the consequences can be severe and stability hard to restore.”
Nowhere in the article was there any questioning of the idea that the Fed should be at the helm of inflation-fighting—that perhaps there’s an alternative, one less painful for the majority of the country. Instead, the unspoken assumption is that this is all the Fed’s responsibility. But that’s an assumption, a highly ideological one, not an unbending law of nature.
Now, more than a year into the Fed’s campaign of interest rate hikes, the Times is continuing with the reportorial line that the Fed must be the one to bring down inflation. According to this line of reasoning, inflation must be tamed at the cost of lower incomes. That is the main channelthrough which Fed policy (i.e., interest rate hikes) works.
Smialek knows this. She may choose to obscure the class dynamics of this approach by talking (6/20/23) about how rate hikes make people less “comfortable springing for that Jacuzzi bathtub and taking on the slightly higher rent that comes alongside it.” (You know, the classic dilemma faced by low-wage workers, who are disproportionately hit by rate hikes.) But, at the end of the day, she does recognize that raising rates is about reducing people’s incomes and thus their spending power. She just doesn’t seem to have an issue with that; it’s a necessary cost of the inflation-fighting business.
‘Not as Good as 2%’
And she wants everyone to know that, if we’re really serious about taming inflation, more could be required. Towards the end of the podcast, Daily host Michael Barbaro asked Smialek:
Inflation is down overall quite a bit. But we’ve learned that a lot of it—the stuff we feel the most—isn’t truly the result of Fed policy, which is an important thing to understand… But, Jeanna, if I’m a consumer, how much do I really care about what caused this relatively positive situation?… Aren’t I just pretty happy that all of this stuff has happened?
Smialek’s response:
Sure. And, reasonably, you would be. But if you’re a consumer, you also don’t want this to be temporary. And 4% inflation is better than 9%, but it’s still not as good as 2%, which is what it used to be. So I think that that’s the thing to keep in mind.
Interest rate hikes are the implied method for getting inflation back down to 2%, which is the Fed’s target level. But other commentators have a very different take on what remains to be done to contain inflation. Galbraith (Medium, 6/17/23), for one, sees historically high profit margins as the remaining issue that could keep inflation persistently elevated. The solution here, in his view, is strategic price controls. These would cap prices charged by companies in particular industries, taking away the companies’ ability to keep pushing prices up at rapid speed and instead forcing them “to focus, as they should, on quality and quantity.”
Smialek doesn’t so much as mention this alternative approach. In a follow-up article (6/21/23) the day after the podcast, she instead focused on the question of how much interest rates will have to raise unemployment to bring inflation down to the 2% target. She ended the piece by quoting Jason Furman, a Harvard economist and former Obama adviser, who asserted, “People have been so crazily premature to keep declaring victory on inflation.”
Just two paragraphs earlier, Furman had suggested that unemployment (the Fed’s favorite tool for lowering incomes and slowing price increases) might need to reach 10% to tame inflation. Whether it would be irresponsible to throw something like 10 million people out of work so that a loaf of bread costs $2.55 next year rather than $2.60 was not questioned.
An Arbitrary Target
Even more glaring is that Smialek never once acknowledged, in the podcast or the follow-up article, that the 2% target is largely arbitrary, not based in economic law. Or that, when Volcker tamed inflation, he stabilized it at close to 4%, not 2%.
Also not mentioned: Very mainstream economists, including the Times’own Paul Krugman, have said recently that 2% is actually too low, and that a bit more inflation would be preferable (Financial Times, 11/28/22; New York Times, 12/2/22). Krugman, in fact, wrote decades ago:
One of the dirty little secrets of economic analysis is that even though inflation is universally regarded as a terrible scourge, efforts to measure its costs come up with embarrassingly small numbers.
For instance, studies have found that inflation doesn’t start to have a negative impact on growth until it is wellabove 4%.
From Smialek’s article and her podcast appearance, you would have no idea about any of this. But you would have the strong impression that a major jump in unemployment could be required to get the situation under control.
The effect, if not the goal, of this style of reporting is to narrow the conversation and create the appearance that there is no alternative to what the Federal Reserve is doing. In the Times’ narrative, inflation is a problem that must be tackled, and the only way to do so is through lowering incomes and potentially jacking up unemployment.
This narrative may appeal to the paper’s upper-class readership, who are generally insulated from the worst effects of rate hikes. For the poor and working class, a deeper understanding of inflation might be welcome—and for people looking for an understanding of how economic policies affect different groups, it’s necessary.