Political economy vs inflation
As Biden lays out ambitious plans to stimulate the US economy and fight
inequality with new money creation (spending) and money destruction
(higher taxes on corporations, capital gains and the right), a firing
squad of economists assembled to issue dire inflation warnings.
They’re repeating the economic doctrine of the pasty 40 years, an
austerity doctrine that focuses on the inflationary risks of “deficit
spending” (when governments don’t tax as much money out of the economy
as they inject in the same year).
It’s a doctrine that made a pretense to being a science, going to far as
to create a fake “Nobel Prize” in economics in a bid for scientific
credibility (the Nobel administrators eventually folded the economics
prize into its administrative remit).
The “neoclassicals” used abstract equations to “prove” a bunch of
economic truths that – purely coincidentally – made rich people much,
much richer and poor people much, much poorer.
Tellingly, the most exciting development in economics of the past 50
years is “behavioral economics” – a subdiscipline whose (excellent)
innovation was to check to see whether people actually act the way that
economists’ models predict they will.
(they don’t)
It’s this vain, discredited and shambolic group who have assembled
behind leaders like Larry Summers to decry Biden’s stimulus spending
plans, insisting that we are flirting with hyperinflation and the
collapse of the USD as a global reserve currency.
But economists aren’t the last word in understanding stimulus and
inflation. If you’re trying to figure out whether Summers is right and
inequality, poverty and crumbling infrastructure are the price of
American stability, it’s worth checking out the *political* economists.
Here’s a great place to start: Brown University economist Mark Blyth’s
interview with The Analysis, available in audio, video, and as a transcript:
Blyth doesn’t dismiss Summers’ inflationary fears out of hand, but he
does say that Summers is vastly overestimating the likelihood that
stimulus spending will trigger inflation – Summers says there’s a 1-in-3
chance of inflation, while Blyth says it’s more like 1-in-10.
To understand the difference, it’s useful to first understand what we
mean by inflation: “a general, sustained rise in the level of all prices.”
It’s not a short-term spike (like we saw with GPUs when everyone
upgraded their gaming rigs at the start of the pandemic).
It’s also not an asset-bubble. House prices in Toronto are high, but
that’s not inflation. They’re high because “Canada stopped building
public housing in the 1980s and turned it into an asset class and let
the 10 percent top earners buy it all and swap it with each other.”
For inflation to happen in the wake of the stimulus, the spending would
have to lead to too much money chasing not enough goods. Blyth gives
some pretty good reasons to be skeptical that this will happen.
Start with the wealthy: they don’t spend much, relative to their income.
Their consumption needs are already met (that’s what it means to be
rich). You can only own so many Sub-Zero fridges, and even after you
fill them with kobe beef and Veuve Cliquot, you’re still rich.
What rich people do with extra money is *speculate*. That’s why
top-level giveaways generate socially useless, destructive asset
bubbles. Remember, these aren’t inflation, which is good, because
everyone agrees that inflation is hard to stop once it gets going.
They’re speculative bubbles. We have a much better idea of how to
prevent bubbles: transaction taxes, hikes to the capital gains tax, and
high marginal tax rates at the top bracket.
Okay, fine, so the rich won’t be able to spend us into inflation after a
broad stimulus, but what about poor people? Well, the bottom 60% of the
US is grossly indebted, suffocating under medical debt, student debt and
housing debt. A *lot* of that will disappear.
That will transfer a lot of stimulus money from poor people to rich
people (who own the debt), which is why we need high capital gains and
top-bracket taxation. But it will also sweep away a vast swathe of the
financialized economy.
The point of long-term debt isn’t to get paid off – it’s to generate
ongoing cash-flows that can be securitized and turned into bonds.
Securitization converted “advanced” economies into shambling, undead
debt-zombies.
Blythe explains that if the rich have nothing to buy and the poor use
most of their stimulus to get out of debt, it will likely reorient the
US economy to useful things: creating jobs to make stuff that people
want to buy.
But what about the dollar’s status as a global reserve currency? Won’t
all that stimulus send other countries scurrying around for another form
of national savings? Blyth’s answer is pretty convincing.
First, because there aren’t any great alternatives: the European economy
is growing at half the rate of the US. The Chinese economy is booming,
but if you buy Chinese assets, there’s a good chance you’ll never be
able to get them out of China.
Gold? Bitcoin? Leave aside the deflationary risk of pegging your
currency to an inelastic metal or virtual token, leave aside the
environmentally devastating effect of cryptocurrency (cryptos consume
enough energy to offset the entire planetary solar capacity!).
Instead, think of the volatility of these assets, with their drunken,
wild swings – countries that dump USD due to inflationary fears are
hardly likely to switch to a crypto that can lose 20% of its value in a day.
And remember how much of that volatility is driven by out-and-out fraud,
with major crypto exchanges and gold schemes imploding without warning,
taking hundreds of millions of dollars with them. This is not a stable
alternative to the dollar!
Beyond the lack of an alternative, there’s another reason to believe
that the USD will remain a global reserve, as Blyth elegantly explains.
Think of a Chinese company supplying the US market. Chances are, that’s
actually US company’s subcontractor, getting paid in USD.
These end up swapped with the Chinese central bank for Chinese money,
because Chinese companies need to pay salaries, rent, and other expenses
in Renminbi, not dollars. The Chinese central bank holds onto the USDs,
using them as a national savings, a reserve currency.
If China were to dump all its USD holdings into the world economy, it
would tank the US dollar – which is to say, it burn China’s own national
savings. China’s central bank needs to do something with those dollar
savings, so they buy 10-year US T-bills.
Same goes for Germany – net exporters depend on a net importer to buy
their stuff, and primarily that’s the USA. They are stuck in a form of
“monetarily assured destruction,” and a crisis of confidence is unlikely
“because you’ve got nowhere else to take your confidence.”
Next, Blyth takes up is the proposed increase in the corporate tax rate,
and he says that investors are actually surprisingly okay with this – he
reminds us of Buffett’s maxim, “Only when the tide goes out do you
discover who’s been swimming naked.”
A hike in the corporate tax rate has the potential to reveal which of
the “great” firms “are just really good at tax optimization” rather than
efficient production. It’ll smash those unproductive firms to pieces
that can be bought by good firms for pennies on the dollar.
The final issue that Blyth takes up is an excellent one for this May
Day: the relationship of higher wages to inflation. When the US had
large, centrally managed industries with large, centralized unions,
there was the risk that higher prices would trigger higher wages.
But the US doesn’t have a unionized workforce with guaranteed COLA
inflationary rises – there’s no “wage-price spiral” risk of higher
prices leading to higher wages and then higher prices.
The neoclassical theory of wages is based on the “marginal productivity”
and “higher than outside option” theories: wage-levels are the product
of how much money they stand to make from your work, and how much
someone else is willing to pay you to work for them.
But economists like Suresh Naidu describe how high-tech surveillance can
disrupt this equilibrium: you can spy on workers instead of paying them
more, can impose onerous conditions on them that wring them of
everything they can produce.
This kind of bossware was once the exclusive burden of low-waged,
precarious workers, but thanks to the shitty technology adoption curve,
it is working its way up the privilege gradient to increasingly elite
workforce segments.
Digital micromanagement went from the factory floor to remote
customer-support reps to office workers who are minutely surveilled by
Office 365, all the way up to MDs and other elite professionals:
This has led to increased profits for firms – firms now take a larger
share of their productivity gains, and workers see stagnant or declining
wages. That excess profit represents slack in the system.
It means that even if companies’ costs go up, they can hold prices
steady – all they need to do is reduce their retained profits.
We’ve had 40 years of price stability at the expense of a living wage
for working people.
Higher wages are only inflationary if we assume that the 1% will
continue to extract vast sums from their investments and use them to
kick off destructive asset bubbles.
Pluralistic C Doctorow