The penultimate chapter in Joseph Stiglitz's
The Price of Inequality illustrates how macroeconomic policy in this country is essentially made for the 1 percent because macroecomic policy, in a broad sense, affects distribution of income. Stiglitz notes that policymakers are not often aware of this and that's why we have the problems we have. People worked hard, studied hard and played by the rules but the best most can hope for in the last decade+ is just to get by. Worse, many were not even doing that as we have seen in
earlier chapters in the book.
A basic rule of economics is that life involves tradeoffs. One alleged tradeoff is the balance between inflation and unemployment. If there is low unemployment, generally speaking, there is inflation because there are more people buying things. If there is high unemployment, inflation is low as there are less people fueling the economy. In some ways, this is exactly what the 1 percent (see: financial sector) want. They make more money if inflation is low so the bondholders interest is for the focus is on inflation, not unemployment. This is where the structural problems with our economy begin. According to Stiglitz, and I agree with him wholeheartedly, there is no such tradeoff.
Imagine, Stiglitz notes, if the focus were on unemployment instead. Finding that right number on the lower end (4%?, 5%?) of unemployment that still keeps inflation low is tricky but if you start from the other side (inflation), the policy that is made tends to benefit the least amount of people...those in the financial sector. If you start from the side of unemployment, or at the very least, look for a balance, you benefit more people and the macroeconomic policy of the country as a whole. This is why the Fed fell asleep in the collapse of 2008. They had no balance, Further, they thought the banks could take care of themselves and needed no oversight. When solutions to the crisis were presented, they focused on inflation (the interests of the bankers and the financial sector) not everyone else.
But the problem, as I have always said, was really with the regulations themselves. The obsessive focus on interest rates erroneously led to the Fed believing that they had some sort of magic "lever," as Stiglitz puts it, that can manipulate the economy.
Lower the interest rate and the economy expand; raise the interest rate and it slows down. And though there are times and circumstances in which the interest rate may have those effects, at other times the links are at beast weak and other instruments might have been more effective. For instance, in response to the real estate bubble , it would have made more sense to raise the down payment requirements for mortgages than to raise the interest rates; one didn't want to slow down productive investments, just to dampen the bubble. Such regulations were anathema to the Fed, with its religious devotion to the price system and the wonders of the market.
Exactly. We're talking about a massively rigid ideology here that sadly, to this day, has not been broken.
Getting back to unemployment, such a high level of joblessness doesn't simply hurt those who are unemployed. It also hurts the rest of us because a natural effect of this is lower wages. People entering the work force for the first time are forced to take a salary that they simply can't live on. Less money goes into the economy as consumer confidence and spending shrinks due to a lack of aggregate demand. The financial sector may enjoy this "labor market flexibility" but the rest of us do not. And it's clear that the economy has suffered due to these magnanimous gifts bestowed to bankers from our monetary policy. This policy, supported by both Republicans and Democrats, has been a disaster.
The Fed's low interest rate policy hadn't led to the resurgence of investment as it had hoped. It did encourage those who were planning investments to substitute cheap capital labor. Capital was, in effect, at a temporary artificially low price , and one might as well take advantage of an unusual situation. This reinforced distorted patterns of innovation that focused on saving labor at a time when it was increasingly in abundance. It is curious that at a time when unemployment among the unskilled is so high, grocery and drug stores are replacing checkout clerks with automatic machines. The Fed was making it more and more likely that, when recovery set in, it would be a jobless one.
My only gripe about this line of thought is that it really isn't a good thing to fight progress. This is the same complaint I have about the Right on issues such as energy, climate change, and education. Our nation has one direction:
forward. If low skilled workers are losing their jobs to innovation, then it's time that we retrain them and give them the skills they need to compete in the age of globalization. Other than that, though, Stiglitz is spot on.
How did we get such a crappy monetary policy? Deregulation. I've talked about this extensively so there's no need to repeat myself. Instead, let's take a look at the consequences, via Stiglitz.
This deregulation had two related consequences. First, it led to the increasing financialization of the economy-with all its distortions and inequities. Second, it allowed the banks to exploit the rest of society-through predatory lending, abusive credit card fees, and other practices. The banks shifted risk toward the poor and toward the taxpayer: when things didn't go as lenders had predicted, others had to bear the consequences. The Fed not only didn't discourage this; it encouraged it. It is clear that, from a social perspective, the banks did not help people manage their risk; they created it. But when it came to managing their own risk, the bankers were more successful. They didn't bear the consequences of their actions.
Stiglitz identifies a common ground here where liberals and conservatives could work together. At the time of the crisis, there wasn't really a choice in terms of letting the banks fail. It would have collapsed the economy. Now, however, we can regulate the industry so that none of these institutions are "too big to fail" or, better yet, too interconnected to fail. In short, Glass-Steagall for the 21st Century. Dodd-Frank is a start but it still gives the Fed responsibility for implementing the new regulations. Its track record thus far has shown that it is less than average in doing this.
At this point in the chapter I realized that Mr. Stiglitz should be the new Fed Chair! Obviously, it's never going to happen especially now that we have Janet Yellin but we do need someone who will kick the inflation obsession.
It should be apparent at this point that the banks should be focusing on banking and not macroecomic policy. How did we get to this point? More importantly, can we ever break free of this framework and have government leaders who are not influenced by the financial sector of this country? Even the evidence that the Fed was forced to reveal, which showed that the large banks were both borrowing substantial amounts of money from them while also claiming publicly that they were in great shape, was not enough to change the system. Indeed, our problem, as Stiglitz notes, is "more ideological conviction than economic analysis." This, of course, comes directly from the NUMERO UNO free market fundamentalist himself, Milton Friedman, a colleague of Stiglitz.
I remember long discussions with him on the consequences of imperfect information or incomplete risk markets; my own work and that of numerous colleagues had shown that in these conditions, markets typically didn't work well. Friedman simply couldn't or wouldn't grasp the results. He couldn't refute them. He simply knew they had to be wrong. He, and other free market economists, had two other replies: even if the theoretical results were true, they were "curiosities," exceptions that proved the rule; and even if the problems were pervasive, one couldn't rely on government to fix them.
Sounds familiar, eh?:) Many of the problems we have with our modern economic policy can be attributed directly to Mr. Friedman. His cult-like worship of the free market has led to far too many people turning brain dead in terms of economic analysis.
Recall that the Fed's main purpose should be focused on inflation, employment and growth. The second of these three has fallen by the wayside as the bankers have more or less taken over the show. So, the government is the problem but not in the way conservatives would have you believe. It's not that it's too big. It's that it simply doesn't function in the way it is supposed to function due to monetarists' obsession with inflation and their complete ignorance of unemployment. This obsession is based on three very questionable hypotheses. First, inflation is the supreme evil. Second, maintaining low and stable inflation is necessary and almost sufficient for maintaining a high and stable real growth rate. Third, everyone benefits from low inflation. Stiglitz wraps up the chapter explaining that none of these beliefs are true and that inflation hawks have been basically telling tales out of school.
For inflation hawks economy is always at the edge of a precipice: once inflation starts, it will be difficult to control. And since the cost of reversing inflation-disinflation, as it's called-is so large, it is best to address it immediately. But these views are not based on a careful assessment of the evidence. There is no precipice, and mild upticks in inflation, if they look as if they might become persistent, can easily be reversed by tightening credit availability. In short, it was simply wrong that the best way to maintain high employment and strong growth as to focus on inflation. The focus on inflation distracted attention from things that were far more important: the losses from even moderate inflation were negligible in comparison to the losses from financial collapse.
So, we need to remove ourselves from the shackles of obsession over inflation. Our monetary policy should strive for the best possible balance between inflation, employment, and growth. We can't continue to make trickle down policy that is made specifically for the benefits of the banks. In a preview of the last chapter, Stiglitz argues that there is no single best policy. Certainly the obsession with inflation has proved that. Further, there is nothing natural about our currently very high state of unemployment or the low level of aggregate demand. It is the result of policy that caters to serve the small number of people in the financial sector in this country and they have scammed us into thinking that any changes will result in another economic collapse.
Therefore, the first step in changing the system is to not believe them anymore.
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