The Fight Over Inflation

Amazon workers discussing strategy at the Labor Notes

SUZI WEISSMAN INTERVIEWED Robert Brenner for the August 7, 2022 edition of her “Beneath the Surface” program on Jacobin Radio, KPFK in Los Angeles. Both are editorial board members of Against the Current.

Robert Brenner is a professor of history emeritus at UCLA and author of The Economics of Global Turbulence, The Boom and the Bubble, The Brenner Debate and Merchants and Revolution. The interview transcript has been edited and adapted for publication.

Suzi Weissman: We spend the hour with economic historian Robert Brenner, to get his understanding of this strange economic moment. What makes it strange is the combination of strong job growth and inflation, which is hitting working people’s already tight budgets hard. Despite significant nominal wage increases in terms of money, workers’ wages in real terms are lagging behind prices, but CEO pay is skyrocketing. Company profits, especially in the energy sector, are soaring.

In response, on 27 July 2022, the Federal Reserve enacted its second consecutive three-quarter percentage point interest rate increase, taking the federal funds rates to 2.25-2.50%. This is the central bank’s most aggressive push in three decades to dampen demand and slow down the economy. Are they trying to induce a mild recession? Or avoid one?

What is behind the sudden new wave of inflation? What’s causing it and what is the Fed’s response?

Robert Brenner: During the past decade we had a very long expansion, one of the longest cyclical upturns on record. But it was not a very strong one. The growth of demand was met by the growth of supply, and prices rose moderately.

Between 2009 and 2019 the consumer price index (CPI) increased at an average rate of just 1.7% per year, and with the outbreak of the pandemic in 2020, it fell back to 1.4%. There was no inflationary problem whatsoever.

But over the last two years prices have suddenly accelerated dramatically. In 2021 inflation rose by 7%, and in the first half of 2022 it hit 9%. This was a real explosion, and it represents the sudden break that we have to explain.

SW: We all know that the pandemic created severe dislocations in the economy worldwide, with a number of strange features. There’s significant pent-up demand because the economy was essentially stopped and then slowly restarted. You have shortages of goods and services with respect to demand, making for a serious imbalance. Then, of course, there’s Russia’s war in Ukraine.

Republicans argue that the reason there is a shortage of goods and supplies is that workers no longer had an incentive to work because they were getting government subsidies with rent and the CARES package. That’s now ended, and workers have gone back to work but there are still shortages.

Of course we should never forget that more than a million died here in the United States, many of them essential workers.

RB: In 2020, in response to the pandemic, the government initially imposed a deep slowdown in the economy. The result was a record fall in GDP in the first quarter. But then, to re-start the economy the government implemented a massive stimulus, and you get something like an equal and opposite acceleration of the economy, a major economic expansion.

The recovery was consolidated by the distribution of the vaccine, which brought the pandemic somewhat under control. So the economy does take off, if only hesitantly. Yet the growth of supply to meet the increase of demand is quite restrained. The question is why?

The answer is that, in one after another line of the economy, specific problems emerge to prevent supply from growing to meet demand.

In the first place, the COVID-19 pandemic disrupted production up and down the supply chain. One local example is that in the Port of Los Angeles ships could not get the crews needed to unload and transport containers.

Worldwide nearly six and a half million people have died, and this has meant fewer workers and reduced production, interrupting just in time delivery.

Second, many in the labor force, seeing the death of fellow essential workers, quit or are hesitant about returning to work.

Despite the increase in demand in one after another area, supply proves to be inadequate. So we need to understand inflation generally as the other side of the economy’s failure to raise supply to meet demand. Because output cannot rise, prices do, thus the inflationary surge.

The point is that the economy should be turning over more vigorously, but there are particular issues, in one line after another, that prevent increases in output.

The Federal Reserve Board (Fed) could, in theory, intervene to enable supply to rise more rapidly in more industries, and in that way to bring down inflation. But that is not the way the Fed has reacted to the problem.

Instead of attempting to raise supply to meet demand and thus moderate prices, the Fed has sought to reduce demand, creating upward pressure on prices by raising interest rates. It is weakening the economy in order to return it to health.

Policy Off the Rails

SW: The Fed justifies its approach here by positing an underlying problem of costs — assuming that price increases are being driven by wage increases. In other words the Fed acts as if we are experiencing a so-called cost-push, or wage-price inflation. Is this really the case?

RB: This is where, in my opinion, the Fed goes off the rails. If the inflation is the result of insufficient production, then to make the economy work, we need more output and more employment. The Fed and other institutions of government should be seeking to make the economy more productive, more efficient.

But the Fed is taking a very different tack. By dramatically hiking interest rates the Fed is slowing the economy down, which will raise unemployment, reduce wage growth, and therefore put some goods and services beyond the reach of working people.

That is, slowing output will result in a lower standard of living and, in the process, a slowdown of price increase. There are two ways to deal with inflation. The Fed is embarking on one path, I’m suggesting the opposite.

SW: If you are correct about this analysis, does the rise in interest rates push the economy into dangerous territory? Can they walk the tightrope to try to curb inflation without causing a recession? Some mainstream economists point to gas prices already coming down. What’s your analysis?

RB: My first thought is that the so-called “smooth landing” has never been accomplished. To solve inflation, the Feds are starving the economy. They are “solving” the problem by cutting demand for the goods that we need, starving the economy in order to save it.

Of course, if we don’t need those goods, if we don’t need those outputs, then inflation is no problem.

Unfortunately, working people depend on output for their employment. That is the opposite of the Fed’s method here, which you can see has a further kick — by intentionally reducing costs by putting people out of work or reducing their wages, the economy is being rebuilt on a weaker foundation.

SW: Essentially you are saying that by raising interest rates the Fed can set up the conditions for a coming recession, which will create unemployment that will be especially harmful to those most vulnerable to the downturn in the economy, the same people who are struggling the most from rising prices.

You also question whether this method takes on what drives inflation. Price rises are outpacing real wages, completely undercutting the fight for the $15 an hour minimum wage. Little attention is paid to how CEO pay is skyrocketing. How can you explain it?

RB: The Fed’s view is that rising prices are the result of rising costs of production. The implication is that these are coming from workers’ wages. Therefore, the key to solving this problem is getting that cost under control. Mainstream economists are telling us costs are too high, we have to cut back.

But what we have quite clearly is a situation where real wages are falling under the pressure of inflation. The Fed is solving the wrong problem, and that will result in human suffering.

SW: It seems like an incorrect analysis is leading the Fed to use tools that aren’t helpful. Are you suggesting then the traditional Keynesian method of job creation, and to spend, spend, spend? That method would spur growth and perhaps overcome the supply chain shortages.

RB: This is where a little history might be of use. The Keynesian revolution in the 1930s and ’40s was a theoretical breakthrough in macroeconomic management to guide demand relative to supply.

The idea was that the economy needed to create more demand by creating more supply. The budget deficits resulting from government spending will add to output by creating social demand.

However, we have lost the political will to use expansionary policy because it leads to increasing both the demand for labor and its cost — a problem for capitalists who aren’t interested in increasing even potential worker power. So we’re now thrown back to having just this this very narrow path of manipulating interest rates.

What Kind of Recovery?

SW: Given the unique circumstances because the whole world economy stopped and then restarted, and at the same time there are mounting demands from workers, can raising interest rates somehow engineer a soft landing from an inflationary surge?

If you were a mainstream economist, you might point to the new jobs report that shows an increase in both job growth and profits. Chevron, Amazon and other corporations are making record profits. Can’t the economy continue to grow?

RB: There has been an “expansion” of capitalist recovery, even capitalist expansion. Parts of the economy, such as Amazon, have been understandably successful. But Amazon is not exactly your typical company today, although it’s a very profitable one.

But most of the economy is not taking off. In any sort of expansion, raw materials such as oil and gas will be among the first commodities needed. The increased demand for these raw resources will increase prices and profitability. But this does not seem to be happening.

In this context it is really kind of criminal — I don’t think that word is too strong — for the Fed to respond with a slowdown when the problem is insufficient supply.

The Fed’s response to rising prices is to see the economy as overheating and moving to cool it off. This adds to the economy’s inability to meet demand.

Instead, policy should be moving to underwrite public spending, such as increasing the supply of affordable housing, and cancelling student debt.

SW: Given the precarious situation not just in the U.S. economy but in the world economy, what are the monetary policies that might work?

RB: The phrase “wage price spiral” has crept back into the economic discourse, so to speak, because it presents the story that the problem is an overheating economy.

But there is no wage price spiral — as if labor costs are interfering with capital accumulation. That’s the last thing we’ve seen in the current period.

SW: What might have been done politically in contrast to the Fed’s money-tightening? Biden’s Build Back Better plan was a spending bill that was squashed. Now we have the Inflation Reduction Act, a smaller package to be sure, but is this the kind of policy that could rein in inflation?

RB: Again, you have two ways of dealing with inflation that comes with insufficient supply relative to demand. Cutting back can occur through tax increases and raising interest rates, therefore reducing the demand. That is preferred by the establishment because by slowing down output, you’re slowing down the need for employment and an upward pressure on wages.

The alternative would be to do whatever it takes to raise supply. One obvious way would be to have the government directly enter into various forms of production, making things that are needed and hiring people who otherwise don’t get hired.

A Green New Deal would be a way of addressing the real economic situation, as well as the climate catastrophe that we now see every day.

In this second scenario, the government would effectively be adding to output, creating both demand and a responding supply through what we call the state sector.

There are many parts of the state sector that we still rely on, such as education. So despite rightwing propaganda, there’s nothing inherent in the state sector that makes it problematic. Just the opposite, as studies have revealed. It is a problem only if you’re a capitalist propagandist.

In that case, as you know, there is a pressure to privatize — even in education. We know how much of the economy has been privatized over the last 40-50 years, and what hasn’t is now funded through “public-private partnerships.”

A Small Step Forward

SW: We’re also seeing in the Inflation Reduction Act that finally Medicare will be able to nego

RB: I think that to give the devil his due, the Biden administration have done probably as well as you could expect in fashioning an economic recovery package. It’s an interesting phenomenon, I think, that in this long neoliberal period within which we’re still deeply operating, this package offers a small step forward.

The precedent of allowing government programs to negotiate prices is very important, but, as you say, it is just 10 drugs starting in 2026, and another 10 drugs each three years thereafter, so it is a very small portion of the thousands of prescription drugs used in the United States.

The scale of the impact will depend on whether more drugs can be added to the negotiable list, including the biggest moneymakers that are now excluded.

SW: Because of the international situation — starting with the war in Ukraine and a shortage of wheat as well as reduced flows of gas to Europe, but also considering how the climate crisis is affecting production and immigration issues — will there be a change in the global supply chain and even in just-in-time production?

RB: Insofar as there could be a moderation — not an end, but a slight reduction in depending on the supply chain — it would involve at least an initial subsidy for certain things that are not being produced.

To get them produced, probably the easiest route would be through the state and through taxation of the rich and expenditure on public goods.

That term “public goods” is a vague one. But what we need is as big as possible a public sector to meet people’s needs — starting with an efficient public health care system.

Even under capitalism, social demo­cratic attempts in Scandinavia or Austria or a handful of other places, with some political commitment — although hardly nirvana — reveal a stark disparity between their quality of life and what is available in the United States.

September-October 2022, ATC 220