Wayne O'Leary

In the Good Old Summers Time

As the heat-wave season gradually draws to a close, a familiar name is back in the news. Lawrence H. “Larry” Summers, gone but regretfully not forgotten, is once more dispensing his version of policy wisdom in Washington and wherever the gullible are gathered.

Summers advocated for balanced budgets, privatization and deregulation as Bill Clinton’s Treasury secretary in the 1990s. His most notable achievement, in addition to selling Clinton on the need for a capital-gains tax cut, was shepherding through the Gramm-Leach-Bliley Act of 1999, which repealed the Glass-Steagall provisions separating commercial and investment banking, thereby helping bring about the subprime-mortgage financial crisis of 2007-08.

Like Henry Kissinger, Summers is one of those inside-the-Beltway types who somehow gain gravitas by continually being wrong on the issues; his prestige grows in direct proportion to the number of mistakes he’s made. Summers’ latest proclamation is that President Biden’s stimulus spending program (the American Rescue Act) “overheated” the economy and led to inflation. His solution, as outlined in August to enthralled interviewers Walter Isaacson (PBS) and Andrea Mitchell (MSNBC), is “strong action” by the Federal Reserve in the form of much higher interest rates, even if a recession results.

The Summers’ prescription, essentially reviving Fed Chairman Paul Volcker’s early-1980s anti-inflationary program of curing inflation by radically hiking interest rates — he raised them to nearly 20% — and deliberately creating a recession, is endorsed to one degree or another by other centrist Democratic wise men. Barry Bosworth, head of the Carter administration’s Wage-Price Council in the late 1970s, agrees that the $1.9 trillion pandemic-aid package of 2021 fueled inflation and that Fed interest rates will have to wring it out of the economy.

Another Carter alum, C. Fred Bergsten, assistant Treasury secretary (1977-81), cautions against any imposition of price controls, especially on energy. Even current Treasury secretary Janet Yellen, heretofore a stimulus proponent, acknowledges second thoughts about government spending. They are all suddenly channeling inflation hawk Joe Manchin’s fondness for high interest and reduced spending.

But before Joe Biden is thrown under the bus for policy malpractice, a few things should be considered. The president has certainly made errors related to the economy, but his pandemic spending program was not one of them. The latest US inflation rate (8.3%) is hardly worse than the leading countries of Europe: Germany (8.5%), France (6.8%), the UK (10.1%), and the eurozone overall (8.1%); inflation is a worldwide phenomenon and not a specifically American one caused by Biden spending “supercharging” consumer demand.

Raising interest rates pell-mell, as the US Fed and panicky central banks everywhere are doing, is precipitant and probably counterproductive. Since March, the Fed has increased rates a combined 2.25%, including its highest individual rise (0.75% in June) in 28 years — so far to no avail. Seventy-five other central banks, appearing at a loss for what else to do, have followed suit. This summer, the Bank of England and the EU’s European Central Bank announced their highest increases (0.5%) since 1995 and 2012, respectively.

These actions reflect the international consensus that formed around the Volcker response to American hyperinflation following the oil shocks of the 1970s and is now the conventional wisdom in the era of economic globalization. Its agreed-upon rule on how to respond to inflationary pressures is that central banks like the Fed constitute (in Volcker’s phrase) “the only game in town” and their power to upwardly adjust interest rates on borrowing the only quick, efficient remedy for surging prices, recession notwithstanding.

This corporate-friendly approach, which avoids harsher regulatory measures, has the added virtue of allowing big business to avoid responsibility for inflation; it implies the business sector is as much an innocent economic victim as the rest of society. It also allows the onus to be put on labor (for pursuing higher wages) or consumers (for bidding up the cost of goods and services) or the government (for putting too much cash in circulation).

If there’s any direct price to pay for ratcheting up interest rates, it will be primarily paid by workers in the form of unemployment, or small business in the form of bankruptcies. Paul Volcker showed how it was done in 1980-81, when his Fed raised rates to stratospheric levels and induced a severe recession that threw millions out of work — but inflation eventually did come down.

In actual fact, the Economic Policy Institute (EPI) is probably closest to the truth when it argues (see Josh Bivens, EPI Working Economic Blog, 4/21/22) that excessive corporate profits, an outgrowth of increased corporate pricing power built up over the period since the Great Recession, are disproportionately to blame for today’s inflation. Overall prices in the non-financial corporate sector (goods and services), EPI says, have risen 6.1% since the pandemic’s trough, and over half of the increase (53.9%) can be attributed to “fatter profit margins” versus only 7.9% to increased labor costs.

EPI’s conclusion: Simple macroeconomic imbalances of supply and demand are not driving inflation. Given that corporate behavior is the problem, then, the question becomes what to do about it. Price controls? Antitrust lawsuits? Excess-profits taxes? History offers one intriguing example that might be emulated.

In April 1962 (as related by Arthur M. Schlesinger Jr. in “A Thousand Days: John F. Kennedy in the White House”), President Kennedy, concerned about “cost-push,” or price-driven, inflation coming out of the recent Eisenhower recession, appealed to the heads of the leading steel companies to adhere to the administration’s anti-inflation guideposts by holding the line on prices. Big Steel, led by US Steel in the person of Chairman Roger Blough, informally agreed. US Steel then reneged on that promise, announcing a substantial price increase. Five other major steel manufacturers quickly did the same.

This “premeditated deceit” set off a government-industry confrontation during which JFK famously remarked, “My father always told me that all businessmen were sons of bitches, but I never believed it until now.” In short order, there followed a not-so-subtle revision in the government’s pattern of steel purchases, a formal investigation into steel-company price-fixing, and the initiation of antitrust legal proceedings against the industry.

The upshot: Within a week, the offending companies had rescinded their price increases, and steel prices stabilized, remaining unchanged through 1965. Something for Joe Biden, whose hero is supposedly JFK, to ponder.

Wayne O’Leary is a writer in Orono, Maine, specializing in political economy. He holds a doctorate in American history and is the author of two prizewinning books.

From The Progressive Populist, October 15, 2022

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