John Buell

To Tighten or Not to Tighten: That is Not the Question

Seldom has so much attention been devoted to so minute a policy change. Whether and when the Federal Reserve will impose a.25% increase in its short-term interest rate has taken an inordinate amount of media attention. Some fear Zimbabwe style hyperinflation if the Fed does not bite the interest rate bullet. Others worry that an increase in interest rates will stall a still tepid recovery and even induce a global recession. Though the debate is more than much ado about nothing, it hides the real concerns of some participants and distracts others from the deeper manifestations of our economic fragility.

The Fed’s inflation hawks maintain that the US economy is at or near full employment. Workers are at a point where they can make wage claims in excess of productivity gains. The Fed must raise interest rates now because historically there is a long lag between interest rate changes and movements in the real economy. Fed doves and their supporters respond that there is still no evidence of accelerating wage gains, that the unemployment number is really higher than headline numbers suggests.

The dispute over how unemployment is defined merits more attention than it receives. When part time workers seeking full time employment and discouraged workers are factored in the unemployment rate is in excess of 10%, a figure quite high by historic standards.

University of Oregon economist Mark Thoma has gone on to add that concerns about the lag time of monetary policy may reflect dated obstacles and technologies. When higher interest rates impose increased costs, these can be passed on much more rapidly via digital technologies. Finally, if the Fed does move to slow the economy every time employment and wage pressure rise, the gap between workers productivity and wages will continue to grow, as it has for almost half a century.

University of Oregon Fed watcher Tim Duy puts the argument well: “Real median weekly earnings have grown 8.6% since 1985. Nonfarm output per hour is up 79% over that time. Yet the instant that there is even a glimmer of hope that labor might get an upper hand, the Federal Reserve looks to hold the line on wage growth. It still appears that the Fed’s top priority is making sure the cards remain stacked against wage and salary earners.”

These arguments are persuasive and would have a good chance of prevailing—but for an ulterior motive on the part of many inflation hawks. Though not saying so, many hawks do not want full employment. They have a deeper fear than wage gains.

They remember the relatively full employment late ’60s and early ’70s as marred by radical politics and by challenge within the workplace. Not only were wages up for dispute but also broader issues of worker representation on company boards, input into product design, future investments, and working hours. (Blue collar blues and sabotage of assembly lines were topics of popular culture. Studs Terkel’s Working chronicled and helped intensify this resistance.) These issues were bones of contention not only between labor and management but also even within organized labor itself.

As long ago as 1943 the Polish economist Michal Kalecki provided a precise rationale for industrial capital’s usually unstated reasons for opposition to full employment: “under a regime of permanent full employment, 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. Strikes for wage increases and improvements in conditions of work would create political tension. It is true that profits would be higher under a regime of full employment than they are on the average under laissez-faire, and even the rise in wage rates resulting from the stronger bargaining power of the workers is less likely to reduce profits than to increase prices, and thus adversely affects only the rentier interests. But ‘discipline in the factories’ and ‘political stability’ are more appreciated than profits by business leaders …”

For their part, inflation doves may not recognize or acknowledge the depth of the opposition to full employment. Though Paul Krugman did once briefly acknowledge Kalecki’s concerns in his blog, he has not returned to the topic and felt obliged to tell his readers that Kalecki was a Marxist. Unfortunately what might have become a broader opportunity to discuss the possibilities and limits of Marx’s understanding of worklife and human fulfillment was shunted aside.

Doves who have argued against the Fed’s tightening must also do more to address the adverse consequences of speculation by the large investment banks. These activities—often criminal — have been enabled by essentially free money from central banks. Former investment banker and Wall Street critic Nomi Prins points out that cheap capital, courtesy of central banks, does not increase general economic activity in the form of loans to new business. The big banks do move capital around the world in search of speculative opportunities. Foreign exchange, capital, and international trade have all become increasingly interrelated and unstable. Thus while an increase in the short term Federal fund’s rate might hurt mortgage and consumer lending, preservation of the status quo allows financial risks to grow and proliferate. Both in the United States and Mexico the largest banks have increased their dominance within the industry. They continue to engage in the marketing of complex synthetic financial products and derivatives. Capital often leaves such markets even faster than it enters, with potential destabilization of multiple markets to follow.

Rather than tweaking short-term interest rates, activists and political leaders ought to focus on the power concentrated both in Wall Street and Main Street. For industry and commerce, different business forms, such as cooperatives, as well as democratic unions are keys not only to social justice but also to long-term economic growth. Financial risk needs to be addressed by curbing bank size, limiting leverage, increasing cash reserves, and a financial transaction tax. There is, however, all too little discussion of any of these issues.

John Buell lives in Southwest Harbor, Maine, and writes regularly on labor and environmental issues. Email jbuell@acadia.net.

From The Progressive Populist, October 15, 2015

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