July 21st, 2022

Dear Readers,

The pandemic years have been brutal for the American working class in many respects, but there have been some positive developments. Government aid not only protected many suddenly unemployed Americans from destitution—it actually helped alleviate long-standing poverty and led to a surprisingly robust recovery. The rich have gotten richer, but the job market has also been the best in many people’s lifetimes, prompting waves of unionization in both white-collar and blue-collar workplaces and a so-called “Great Resignation” in which workers have felt empowered to quit their jobs and find better ones. After decades of precarity, American workers finally have some leverage over employers.

But all of this progress is threatened by rampant inflation, which according to polls is the biggest concern among voters going into the midterm elections that will determine whether the Biden administration is able to pass any part of its agenda. Right now the United States is experiencing the worst price spikes since the crisis of the 1970s, a period that saw the end of broad-based postwar prosperity and the rise of austerity and neoliberalism. At this point, few are arguing that inflation isn’t a problem, but the question of what exactly the problem is and how it might be addressed is not merely technical—it is inherently political.

For this week’s newsletter, Jewish Currents Fellow Aparna Gopalan has put together a reported explainer that tries to make sense of the current economic moment and lays out the major debates about inflation, covering neoliberal orthodoxy, progressive technocracy, and more radical visions of empowered labor. For anyone on the left who is baffled by inflation and the politics surrounding it, this is a good place to start.

Best,

David Klion

Newsletter Editor

What is inflation and why does it happen?

It is worth disaggregating “inflation” into two parts: the economic model and the political reality.

In Econ 101 terms, inflation is defined as a simultaneous rise in the prices of most goods and services. Economics textbooks tell us that inflation is caused by a severe supply–demand imbalance. In “normal” times, when too many people want to buy too few things, those things get more expensive. Once prices rise, fewer people want to buy the things even as more people are willing to sell them; thus, the market self-corrects and resets to equilibrium. Inflation occurs when the market does not self-correct—too many people go on wanting too few things, and prices keep rising. The conventional wisdom, then, is that fixing inflation requires either reducing demand for most things or increasing supply for most things to reestablish equilibrium.

The political reality of inflation is messier, as is evident from its history. Throughout the 1970s, the prices of most goods and services in the United States were high, even as the once-robust post-World War II economic growth stagnated, leading to a crisis popularly termed “stagflation.” Images of that decade’s gas pump lines and buying frenzies have come to define inflation in the popular imagination. But the reality of that moment has been obscured by its myth. It’s not that people weren’t facing high prices, but as the historian Rick Perlstein has pointed out in New York magazine, back then most Americans received cost-of-living raises thanks to high unionization rates. “A banana or a Buick costing one-tenth more every 12 months,” he notes, “doesn’t exactly seem the stuff of world-historic melodrama.”

At least, it didn’t until an emerging, bipartisan bloc of neoliberal economists and politicians seized the moment in order to frame inflation as a full-fledged emergency. The real issue, they argued, was that everyday Americans had too much purchasing power and were creating excessive demand for a limited supply of goods. To solve this problem, the Federal Reserve began to raise interest rates throughout the 1970s, most memorably under Fed Chairman Paul Volcker, who raised them to a staggering 20% between 1979 and 1981 in what is now called “the Volcker shock.” This was supposed to lower inflation because, as the journalist Hadas Thier writes in Jacobin, “Interest rate hikes make it more costly to borrow money, and therefore discourage investment in production. This, in turn, leads to reduced productive capacity, fewer available jobs, and an increase in unemployment.” Basically, the government decided to engineer a period of massive job losses—a recession—to rebalance supply and demand. By the late 1980s, this policy had succeeded on its own terms, bringing inflation under 5%—but at enormous cost to workers, who faced severe unemployment through most of the decade. This was the beginning of an economic order that would continue almost uninterrupted until the pandemic.

Is there anything that could have been done to curb inflation other than suppressing demand? As the historian Tim Barker writes in the academic magazine Phenomenal World, supply-increasing initiatives like “public investment to relieve bottlenecks [and] nationalization of the noncompetitive and state-dependent oil and defense sectors” could just as easily have rebalanced supply and demand. Another option might have been direct interventions like “mandatory price controls on key inputs,” a staple of New Deal-era economic policy. Instead, neoliberal economists abandoned these tools wholesale and created a new economic common-sense—it even has its own graph, called the Phillips Curve—stating that the only way to manage inflation is to raise unemployment, reducing the amount of money in people’s pockets so they stop buying too much. This new consensus, which presents the management of inflation as a technical matter rather than a political one, remains with us to this day.

Why is there an inflation crisis right now?

The current inflation rate in the US is calculated at around 9%, representing a massive imbalance between the demand and supply of most things—groceries, rent, gas, consumer goods, and services. One widely agreed-upon reason for the current inflation spike is the economic fallout of the pandemic. “In the spring of 2020, we shut down a $20 trillion economy in the United States, and much of the world economy,” Claudia Sahm, a macroeconomist who has worked at the Federal Reserve and in the Obama White House, told Jewish Currents. “It’s a lot easier to shut something down than it is to start it back up.” Most production is so thoroughly globalized that these shutdowns reverberated across the world. US manufacturers relying on raw materials from China, for example, could no longer count on getting them on time. Courtesy of “just-in-time” production, most manufacturers did not have extra inventory on stock to continue selling while waiting for production to resume. The result was a goods shortage that spanned sectors and industries. “We learned that our economy is not as resilient as we thought it was,” Sahm said.

The second major factor contributing to inflation is what Paul Krugman has termed “the Putin shock.” Russia’s invasion of Ukraine has led the US to create what Sahm called “an embargo against Russian oil.” “Russia is the second-largest oil producer,” said Sahm. “That’s a lot of oil and natural gas that basically disappeared from international markets.” Oil price hikes are felt not just by ordinary consumers at the gas station, but by any business that transports items, such as a grocery store. Other contingent explanations of high inflation include climate change causing wheat and soybean shortages that lead to high food prices, and the expiration of the rent moratorium, which allowed landlords to hike up rents.

These are shortages in supply, but many economists agree that high demand is also fueling inflation. “There was a lot of support pushed out to families,” said Sahm, pointing to the almost $5 trillion in fiscal assistance released in the form of stimulus checks, unemployment benefits, and other aid since the start of the pandemic. While the total amount any given American received might not seem like very much, the increase in overall purchasing power was significant. “Households, and not just the rich, spent heavily on appliances and vehicles because they weren’t going to stores or restaurants,” the progressive journalist and economic analyst Doug Henwood wrote in an email to Jewish Currents, “at the moment manufacturing and transportation were hammered by Covid.”

While all this is true, Sahm noted that research from the Federal Reserve Bank of San Francisco has shown that today’s inflation is not predominantly demand-driven—in other words, the purchasing power of consumers is not the main issue. Nonetheless, neoliberal economists are following in the footsteps of their 1970s forebears in identifying high demand not only as the primary cause of inflation but as a crisis comparable to the stagflation of the 1970s. For Larry Summers, who served as Secretary of the Treasury during the Clinton administration and later helped mastermind the Obama administration’s response to the 2008 financial crisis, every inflation seems to be a repetition of the 1970s. Predictably, people like Summers are also demanding a repetition of that era’s solution: an engineered recession.

Many leading economists are saying we need to “cool down” the economy by deliberately creating a recession and raising unemployment rates. Is this a tradeoff we should be willing to make?

There’s a common argument that since 2020, the US economy has been “feverish” or “too hot” (metaphors with a very particular history). The reasons given for this undesirable, inflationary overheating are the very things that an ordinary person might see as the pandemic’s few silver linings: government support for working people, low unemployment, a labor market in which workers have some leverage, and an increase in wages that had been stagnant for decades. Each of these things puts money into workers’ pockets, thus increasing demand.

For economists like Summers, there’s an inescapable tradeoff between well-paying jobs and affordable prices. On a recent episode of Ezra Klein’s New York Times podcast, Summers explained the general principle behind his analysis: “Wages are the ultimate measure of core inflation. Most costs go back to labor.” While government aid, good jobs, and leverage over employers might feel good for workers right now, he said, letting this situation continue is akin to “the doctor who prescribes you painkillers that make you feel good . . . [and] you become addicted.” Summers’ model is not an outlier: It’s the orthodoxy taught to economics undergraduates. According to this view, there are now too many jobs that pay what almost amounts to a living wage, and the solution is to follow the example of the—in Summers’s words—“celebrated” Volcker and create a recession.

A recession, however, can only reduce demand; it can do nothing to increase supply. “The Fed can’t pump oil, it can’t grow wheat,” noted Sahm. “There is no unemployment rate in the United States that would replace all of the Russian oil and gas.” Nobel-winning economist Joseph Stiglitz similarly argues that what is needed right now is not a recession but “policies to open supply bottlenecks”—investing in energy production, for instance. As economist Max Sawicky pithily notes, “a serious response to an undesirable increase in energy prices would do something about . . . energy,” rather than punishing people who rely on it for their everyday lives.

Moreover, even if causing a recession actually curbed inflation, many believe it would not be a worthwhile tradeoff. “Unemployment is a concentrated disaster, whereas inflation is a diffuse issue,” investment strategist George Pearkes noted in an interview with Jewish Currents, explaining that inflation affects everyone a little, but unemployment affects some people drastically. Ultimately this is a question of which is worse: everyone facing a $200-300 increase in annual costs, or between 6 and 10% of people losing their jobs altogether. Summers and the reigning economic elites at the Fed think the former is the real crisis; many others fear the latter more.

What about the argument that wages need to be cut to lower inflation?

Contra Summers et al., depressing wages would not put a dent in today’s inflation rates. This is largely because, as Thier has pointed out, wages have not kept up with prices in the first place, only rising at about half the rate of inflation. This leads to a second, more polarizing question: Is cutting wages ever necessary to reduce inflation? While some progressive economists like Sahm say wage cuts are not needed to fix inflation right now, they leave open the possibility that there might one day be an inflation spike caused by workers earning too much, in which case engineering a recession might be a good idea.

Others, like Thier, question the field of economics’ basic assumptions about the inflation–labor power tradeoff. “Economic pundits conspicuously avoid the possibility of addressing inflation by constricting profits rather than wages,” Thier writes in Jacobin. “What if, instead of raising prices, businesses were forced to make do with smaller profit margins? Or if instead of raising interest rates to constrict the economy’s growth, targeted price controls and socialization of public needs were used to lower the cost of living?” These options reverse the mainstream economic consensus that workers’ lives are variable and profits are constant. Moreover, “if a slight uptick in wages throws the entire economy into a freefall,” Thier said, “do we want that kind of economy?” Henwood’s perspective is similar. “We want higher wages and more unions, but we have to admit those could be inflationary,” he wrote. His conclusion, however, isn’t that workers should make do with less, but that we need “social control over pricing and investment” so inflation does not threaten workers’ gains.

Whereas mainstream economists typically approach inflation as a technical issue, Thier and Henwood regard it as a form of class warfare. As Barker and Mason have pointed out, neoliberal elites have also long used inflation to implement policy on behalf of the wealthy. In 1966, for example, the White House directly limited wage increases to below 3.2%, ostensibly to curb inflation but also as a cap on labor’s power. In the 1970s, Volcker essentially ran the Fed on behalf of the plutocratic Rockefeller family. As CUNY economist Josh Mason has shown, throughout his tenure, Volcker “considered rolling back the power of organized labor . . . to be his number one problem.” Volcker was so preoccupied with unions that he “carried an index card schedule of upcoming union contract negotiations in his pocket.” Volcker’s successors—from Alan Greenspan to Janet Yellen—have continued to favorably reference “job insecurity” as a desirable anti-inflationary measure.

The goal of inflation as class warfare on behalf of the rich is not just to limit wage growth and save employers money. Economist Michael Kalecki has explained that if workers became too powerful, “The ‘sack’ would cease to play its role as a disciplinary measure. The social position of the boss would be undermined, and the self-assurance and class-consciousness of the working class would grow.” The constant threat of mass unemployment helps contain this threat. Drawing on Kalecki, Henwood suggested that business leaders might even appreciate labor discipline and political stability over profits. In this understanding, he wrote, inflation battles are “really conflicts over shares and the nature of production and distribution, hidden behind a veil of technique.”

How can the left agitate around inflation? What are good targets for activism?

In answering this question, the distinction between inflation as an economic model and inflation as a political reality becomes all-important. The former comes with built-in neoliberal goals and agendas, but the latter is open for appropriation by the left.

“As soon as we frame the problem as inflation, we’ve already lost the game—or at least lost key ground—to people like Larry Summers,” Mason told Jewish Currents. Instead of talking about “taming inflation” in the abstract, Mason suggested that left activists specify all the things that are unaffordable and address the root causes of each.

For instance, gas is expensive, which points to the need for short-term relief in the form of gas vouchers (though there’s a danger in subsidizing gas consumption to the point where it’s more attractive than other, cleaner options). Moving toward alternative energy sources and mass public transit would be long-term solutions to price volatility as well as planetary destruction. Similarly, unaffordable housing calls for rent stabilization in the short run and public housing in the long run. On the progressive-to-left spectrum, there is broad consensus on the need for many of these investments, some of which are bundled together in the Biden administration’s proposed Build Back Better bill, which has stalled in the Senate thanks to centrist obstruction. As Sahm argued, passing that bill would go a long way toward addressing supply shortages of essential goods and services.

More ambitious arguments call for a broader systemic overhaul. In defiance of conventional economic wisdom that frames unionization as inflationary, journalist Hamilton Nolan has argued for a return to aggressive unionization rates and cost-of-living raises to allow all workers to ride out inflation. Thier pointed out that targeted price controls, so unpopular as to sound un-American, were used as recently as the Nixon years, and could be used again to curb inflation. Other classically left-wing solutions to inflation include the socialization of the means of survival, nationalization of key enterprises, and taxes on companies taking advantage of inflation to price-gouge.

What all of these left-wing proposals share is an understanding that inflation is not an issue the left can afford to cede to technocrats, but rather a fundamental terrain of class struggle. Mason has shown that elites explicitly seek to make economic decisions outside public scrutiny, highlighting a 1997 article where a Clinton economic advisor publicly claimed that those in power have left “too many policy decisions in the realm of politics and too few in the realm of technocracy.” Praising the Fed as a model economic institution, the advisor added: “The tax system would surely be simpler, fairer, and more efficient if . . . left to an independent technical body like the Federal Reserve rather than to congressional committees.” It’s in the interest of economic elites to depoliticize wealth distribution and move it beyond the reach of democratic power. A true left response to inflation would learn from this strategy and aggressively advocate for the opposite: ending the “republic of the central bank” in favor of a true people’s economy.