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Home Publications Blogs Beat the Press The Morality of the Other Side in the Class War

The Morality of the Other Side in the Class War

Thursday, 25 August 2011 07:55

The Washington Post and Robert Samuelson did their part in publicly passing along the marching orders from the rich and powerful to Ben Bernanke and the Federal Reserve Board. The word from these folks is "No Inflation!" If that means millions more people will suffer unemployment for a few more years, that's a price that the Post and Samuelson are willing to pay.

Of course the rich and powerful have numerous channels for making their concerns known to the Fed, they don't need the Post and Samuelson to put them into print. So, this really is a public service.

What's neat about this picture is that there is little dispute about the basic facts surrounding inflation. Inflation is a problem that stems from an overheated economy. Apart from war or political collapse there are no instances of inflation just shooting up from low levels into Weimar type hyper-inflation. This means that if we are going to have a problem with inflation, it will arise gradually and we will first have to get back to something near full employment. It will not just creep on us overnight when we are sleeping. (There can be supply induced inflation. Suppose Saudi Arabia's oil fields are blown up and the price of oil goes to $400 a barrel. This would cause inflation, but the Fed's actions are not going to affect this outcome.) 

The other basic fact is that moderate rates of inflation do very little harm. The economy operates every bit as well with 4-5 percent inflation as it does with 1-2 percent inflation. This is a heavily researched topic and the overwhelming majority of this research has found little or no negative effect from moderate rates of inflation (e.g. here and here).

Yet, both the Post edit board and Samuelson argue strongly that Bernanke should not risk higher inflation to try to reduce the unemployment rate. The edit told readers:

"the core rate of inflation (price increases excluding food and energy costs) has crept up to within striking distance of the Fed’s 2 percent target. Printing more money might push it above that, unleashing dangerous inflationary expectations."


Ooooooh, dangerous inflationary expectations. That's really scary. Since the core inflation rate has been above 2.0 percent for most of the last 50 years, it's hard to see what anyone would be worried about.

But then the Post gets to the substance of the matter:

"The Fed recently promised to continue making funds available to the financial system at nearly zero percent interest. While perhaps necessary in the short run, this policy amounts to a penalty on prudent savers and a reward to over-leveraged debtors."

Yep, we should really be worried about rewarding those over-leveraged debtors -- lazy bums, many of them are not even working. And the "prudent savers?" Yes, that woud include all those wealthy people with large amounts of money to invest. But hey, no class issues here.

Robert Samuelson also notes how more expansionary policy has the effect of transfering wealth from creditors to debtors in the context of discussing a proposal by Harvard economist to deliberately target 6 percent inflation for a couple of years:

"To be sure, higher inflation represents a wealth transfer to debtors (who repay in cheaper dollars) from creditors (who receive cheaper dollars). That’s unfair, Rogoff says, but it may be less unfair and disruptive than outright defaults by overborrowed debtors."

Samuelson concludes that the risks of inflation are just too great and then wrong tells readers:

"Remember: The economy’s basic problem is poor confidence spawned by pervasive uncertainties."

As noted in today's lesson on accounting identities, the share of GDP devoted to investment in equipment and software is almost back to its pre-crisis level. And, the saving rate is still below its post-war average, meaning that consumption is high, not low. The economy's basic problem is that the dollar is too high, which is causing a large trade deficit.

When we think about the trade-offs between inflation and unemployment it is important to remember that the tens of millions of people who are unemployed or underemployed today did not do anything wrong. It was people like Alan Greenspan and Ben Bernanke who messed up. And of course other actors in national policy debates, who were too obsessed with budget deficits to notice an $8 trillion housing bubble did not help either.

Comments (18)Add Comment
Weak dollar or weak demand or both?
written by pv, August 25, 2011 10:23
Up front: I'm not an economist but am relatively numerate. I like your blog because you make arguments from data. I'm confused as to what you think the real current situation is. Previously I got the impression that: collapsed bubble --> less $$ for consumers to spend and lousy chances for credit for them --> less consumption/less demand --> businesses not hiring --> lousy employment --> vicious cycle. Recently you've read the lower than historical savings rate to say that spending is high, not low. Is the issue falling median wages? spending relative to capacity or ...? Clarification appreciated.
Cure Worse than the Disease
written by izzatzo, August 25, 2011 10:34
If inflation was a disease and Samuelson was the doctor all his patients would be dead now.

Stupid liberals.
Cross of gold
written by Gary, August 25, 2011 10:43
I feel like I'm reading a free silver tract here sometimes. Which I say entirely sympathetically, by the way.
" consumption is high, not low" Really?
written by Paul, August 25, 2011 10:54
Not according to the Bureau of Economic Analysis which shows that Real Personal Consumption Expenditures in 2Q11 are less than 1% above 4Q07


Weaker, but still strong consumption
written by Dean, August 25, 2011 11:42

in response to your question, the collapse of the bubble did cause consumption to plummet, however the levels of the bubble years were unusually high. There is no reason to expect that we would get back to those levels (at least relative to disposable income) nor is there any reason to think it would be desirable if we did. (People would reach retirement with no savings.
The housing bubble was driving the economy in the 00s and the stock bubble in the 90s. we should want to see something else (net exports) fill the gap, not try to re-inflate the bubble. So, there is no doubt that consumption is down from its bubble peaks. that is a big part of the recession, however it doesn't follow that we should want to return to the pattern of consumption that we had in the bubble years.
The Price
written by Hugh Sansom, August 25, 2011 11:50
It would be more accurate to say that the price of greater poverty, more unemployment, declining living standards is a price that the Washington Post and Samuelson (and The Times and Brooks and CNN and NPR) are will to make us pay. The practice of making labor pay for the incompetence and crimes of capital is now fully institutionalized. To hear the right-wing and most 'moderates' speak, we'd have to conclude that it's Constitutionalized.
Reuter's: USA Becomes Food Stamp Nation
written by Union Member, August 25, 2011 12:20

USA Becomes Food Stamp Nation, But Is It Sustainable? - Kristina Cooke 8/24/11 (Yahoo)

This article should be read in its entirety (sorry no link)

It reveals the content of the character of the economists, policy makers and columnists who failed to notice the housing bubble.
written by Ellen1910, August 25, 2011 12:25
"The Committee discussed the range of policy tools available to promote a stronger economic recovery . . . ." FRB Press Release 8/09/2011

Yeah right! Like what?

I don't disagree with Dean that inflation would be desirable both to reduce X-M and to speed up consumers' balance sheet repair.

What I do disagree with is his acceptance of the conventional idea that the Fed can generate inflation or even that it can "print money" (helicopter drops being the exception).

What "policy tool" does anyone think the Fed could employ to produce inflation?
written by dunkelblau, August 25, 2011 12:48
re: What "policy tool" does anyone think the Fed could employ to produce inflation?

Would Ron Paul's proposal to allow the Fed to retire its Ts have this effect?
written by JBG, August 25, 2011 1:07
"Suppose Saudi Arabia's oil fields are blown up and the price of oil goes to $400 a barrel. This would cause inflation..."

No, it wouldn't. Because energy is involved in so many things, many prices would go up, but many would also go down. The amount of purchasing power available would divide itself differently, but it would not increase. Inflation is when the available purchasing power increases. I know you know this perfectly well and can state it better than I have.
No Return to "consumption that we had in the bubble years?"
written by Paul, August 25, 2011 1:33
In the last bubble year, 2007, unemployment was well under 5%. Given a choice, I think a large majority of Americans would be happy to get back to those years, especially since there is no prospect of reducing the dollar's value sufficiently to eliminate the trade deficit.

Why are putative Keynesian economists so opposed to increasing the propensity to consume which is exactly what Keynes recommended the the General Theory when government spending on infrastructure is no longer politically feasible?
"The Morality of the Other Side in the Class War"
written by diesel, August 25, 2011 1:53
"it is important to remember that the tens of millions of people who are unemployed or underemployed today did not do anything wrong" asserts Dean, and in this he could not be more wrong.

After all, if they didn't do anything wrong, why then are they unemployed? Would a fair market (and more importantly, a Just God) allow events to occur that are incompatible with its (His) own welfare? By what mechanism and how could the free market err in its dispensation of rewards and punishments? If what Dean says is true, then all of us who, with prudence and foresight, scrimped and saved while working two jobs and attending night school, while walking two miles each way to our jobs in deep snow on our shoeless feet wrapped in old copies of the National Review were fools. Is this what we want? A system that rewards laziness? Baker would place the blame for their inadequacies on "we the living" incarnation of righteousness.

I say unto you, a Nation so conceived cannot long endure. God will not be mocked, nor His Law transgressed. We ignore this at our peril. The unemployed had their chance and they blew it, and fittingly, after they experience Hell on Earth they shall burn for Eternity in the afterlife (or at least I hope so).
written by urban legend, August 25, 2011 2:07
Dean's statement that consumption is "high" despite the general observation that the economy is failing because demand is too low is very confusing, and he does not appear to see the apparent inconsistency to those of us who are not technically trained in economics but follow political economic writings carefully.

If I can imagine how to break that inconsistency, it is that while consumption rates relative to savings remain high, there is simply too little money in the hands of 99% of Americans due to low wage growth and high unemployment -- such that high consumption rates still means inadequate demand. If Americans had more money, consumption rates might decline (and savings rates increase) while aggregate consumption in dollar amounts would nevertheless increase.

Is that right? It would be nice to see Dean recognize and clarify apparent conceptual conflicts like these for his usual fans.
References needed
written by Bill Turner, August 25, 2011 2:13
The economy operates every bit as well with 4-5 percent inflation as it does with 1-2 percent inflation. This is a heavily researched topic and the overwhelming majority of this research has found little or no negative effect from moderate rates of inflation.

Dean's blog is great when it uses actual information to combat the nonsense that is fed to us daily from so many sources. I am unhappy, though, when he makes a statement like that quoted and then does not provide any references. Sure, I could possibly google this, but those results would likely turn up many more nonsense articles than the quality research he assures us exists. I am not an economist, I don't know how best to find such information. Perhaps he could write a tutorial of some sort for those of us that want to see the facts?
written by denim, August 25, 2011 5:05
Without COLA reform and restoration, morality and economic justice rings hollow and loud to the fixed and low income population. Deflation is justice unless there is a COLA in place to take care of the injustice of inflation.
high rates or high numbers
written by Ethan, August 25, 2011 11:42
Urban Legend
Seems to me that you understand it. Rates vs. Absolute Numbers.
I think you made a mistake.
written by procopius, August 26, 2011 8:26
"... other actors in national policy debates, who were too obsessed with budget deficits to notice an $8 trillion housing bubble did not help either." During the bubble years I don't remember any of those people being concerned about deficits. As I remember it they were quite satisfied with the deficits that Bush produced, which actually weren't all that big. It wasn't until 2010 that demagogues and political hacks (liars) started screaming about the deficit and the debt (which they don't really care about except as a convenient weapon to use to force Obama (and the country) to fail. It's the same thing with the current Republican reluctance to extend the payroll tax holiday. They were perfectly happy with "temporary" tax cuts when Bush was asking for them; it's only when Obama wants them that they suddenly discover their principles against "temporary" tax cuts.
Insufficient demand
written by Mike B), August 30, 2011 8:57
How can workers save 'the economy' when they don't have sufficient pay to buy the commodities they produce? Without sufficient pay, the capitalists won't invest in 'growing their businesses'. Thus, stagnation is founded on workers having insufficient pay. For all the capitalist saviours out there, why not increase the social wage by making education free again, like it used to be? Why not institute free medical care? These two items alone would put billions of dollars back in the pockets of workers and allow them/'the economy' to recover from 'insufficient demand'.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.