An Inordinate Fear of Inflation

    As I mentioned in my last two previous posts I had a disagreement with a progressive friend over the inflation question-they think inflation is a great evil(I suspect because they relate it only to high oil prices and food prices rather than to the cost of debts-particularly both mortgage and college debt as well as an increase in growth and wages). My take on it is that our problem right now is spiraling deflation not inflation.

    Yes it might be some relief if oil prices came down but if you recall they did this sharply at the end of 2008 till March 2009 and this radical deleveraging came along with the economy falling off a cliff. When things begun to stabilize in 2009, we saw oil prices rise with equities as well as the real economy.

    Remember too, a drop in oil prices by itself is very modest relief. Many now no longer have cars-I for one had my car repoed in late August due to NYS Unemployment Insurance taking so long to finally send me my benefits. Finally 3 weeks later I received them too late to keep my car. Even if you have a car your main problem is declining wages or an underwater mortgage-which would be helped by a rise in inflation too.

    However, what has really reinforced my growing feeling that it is not inflation which is the root of all evil but the inordinate fear of it is a book I have started reading by James K. Galbraith entitled "Created Unequal: The Crisis in American Pay."

    He wrote this in 1997 at a time when there were some like himself concerned about rising income inequality. At the time it was difficult for many to take him too seriously. After all the 90s were in many ways very good economic times. During the Clinton years we saw 35 million jobs created and by 1999 an unemployment rate of only 3.8 percent.

  While some were being left behind-particularly former blue collar workers-the feeling was that the unemployed needed to just suck it up and go back to college. After spending thousands of dollars they very possibly did not have, or getting into huge student debt, they presumably would be in business.

   Galbraith denied the idea of a "skill premium" at a time when it seemed quite plausible. Of course today unlike 14 years ago, everyone knows that unemployment and low wages is not just something that happens to the "unskilled" or uneducated. The treacherous recession of 2001-far worse than people like Alan Greenspan try to make it in his book "Age of Turbulence"-changed the dynamics of unemployment as for the first time, many of those in white collar professions with good educations were out of work. And what was most treacherous is that many of them never made it back. Many had to work beneath their training, many actually ended up in the service industry. The talk of "burger flippers" applied in the 90s mostly to former blue collar workers but this now became reality for many white collar workers.

   In this sense Galbraith's message on inequality has a resonance today that it no doubt lacked when he wrote it-as most Americans were doing pretty well in the 90s. The real question is what is the cause of this? I have just started the book but what made me do a double take is his preliminary explanation. He is clear that he sees no justification in the "education gap" or "skills gap" argument, which he calls the "skills fallacy."

  Also he doesn't see free trade and rising globalization as the main or even a very important culprit. Bear in mind, of course, that he wrote this in 1997. Still his take is very interesting, and relevant today as of course the problem he talked about is much more acute today. As his diagnosis was ignored at the time, the infection has spread. As far as the deleterious effects of free trade are concerned he says this:

  "As a share of the U.S. economy, trade has been expanding since the late 1960s, and imports of manufactures from developing countries, in particular, grew dramatically in the early 1980s. The effects on wages, now thoroughly debated in a large literature, are measurable and significant, though not so vast as economic nationalists sometimes contend. It would be absurd to pretend that imports from low-wage countries have no effect on American wages; it is equally wrong to argue, as we sometimes hear from both left and right, that the Mexican and Chinese tails wage the dog of the American wage structure." (Galbraith "Created Unequal" pg.9)

   What he does see as driving rising inequality is that, beginning in 1970, "Economic policy, and very specifically monetary policy, changed. Beginning in 1970, the government abandoned the goal of full employment and instead turned its attention to a fight against inflation. ...   There followed a repeated sequence of recessions, each justified at the time as the unfortunate consequence of external shocks and events beyond national control. The high unemployment that recessions produced generated, I shall demonstrate, the rise in equality that destroyed the middle class. For this, the Federal Reserve, under its reputable chairmen Arthur F. Burns, Paul A. Volcker, and Alan Greenspan, stands primarily responsible."  (Also found on pg 9 in Galbraith)

   I did a double take when I came across this because this is an idea I have been kind of groping after that a big part of our problem during the last 30 years is due to the very thing that these reputable Fed chairmen are so proud: The Age of Moderation; the period of low, stable inflation. If you were going to explain the shambles we are in today due to this 30 year process of income stagnation for most Americans, I think you would point out that this process coincided with two big events: the rise of Reaganomics and the Age of Moderation.

    You could say that in fiscal policy we have, to paraphrase Jimmy Carter, an inordinate fear of budget deficits; in monetary policy an inordinate fear of inflation. One of the dispiriting aspects of the four month debate as to whether we should even raise the debt ceiling is that many Americans have drunk the koolaid that deficit reduction is a short term concern. With regard monetary policy the same is true of inflation.

    When Nixon instituted wage-price controls in 1971 it's important to remember that this was done as a measure to fight inflation. To bring down inflation the much more obvious method would have been to raise interest rates, but at the time Nixon feared that this would be so unpopular politically that a radical move like wage-price controls-the first time we have ever had them during peace time in American history- was more palatable.

   That even many liberals have joined the witch hunt against inflation shows how successful the disinformation campaign has been.