Anti-inflation fanaticism
Levinson, Mark
With the economy growing and inflation steady, why are so many people disgruntled? One reason may be that economic growth has not improved their standard of living. For example, in 1993, despite...
...Inflation has been called the cruelest tax...
...According to the Economist, "Sharp intakes of breath could be heard around the room" when Blinder uttered his heresy...
...Low interest rates are the key ingredient that should allow the economy to grow in the face of future large deficit reductions, which would otherwise tend to contract the economy...
...Therefore the Federal Reserve should continue to raise interest rates (which it has done six times this year) to prevent "excessive" growth...
...For example, in 1993, despite the economic recovery, the number of Americans below the poverty line increased by over a million and the median family income fell...
...Economic growth stutters and stops...
...An alternative approach favors growth over recession because unemployment is worse than inflation...
...12 • DISSENT...
...Of course the poor are vulnerable to inflation, as they are vulnerable to almost everything...
...The rate rise has drained away all of the stimulus from last year's rate drop...
...Monetary policy is too important to be left to bankers...
...It may also cost him his job in 1996...
...So it is for the functionless investors whose incomes come mostly from interest, dividends, and capital gains...
...But then the Fed started raising rates...
...Their financial net worth is zero or negative...
...Most families do not own stocks or bonds (except perhaps in their pension funds...
...At a conference in August of central bankers, government officials, and economists, one of Clinton's new appointments to the Federal Reserve, Alan Blinder, set off a storm of controversy by merely suggesting that, in addition to combat10 • DISSENT Comments and Opinions ing inflation, the Federal Reserve should be concerned about reducing unemployment...
...According to the financial press, unless the economy slows down, wages will rise and inflation will increase at an accelerating rate...
...But the popular perception that inflation hurts everyone is misplaced...
...A majority of the people are borrowers, not lenders...
...Last year the Clinton administration offered $500 billion in deficit cuts through 1997 and then hoped that the Federal Reserve would keep interest rates low...
...The 1994 Economic Report of the President described it this way: With a greatly improved outlook for the Federal budget deficit, the Council of Economic Advisors expects long-term interest rates to remain relatively low for the foreseeable future—which will help keep economic growth on track...
...The predictable consequence will be increased poverty, greater inequality, and a further deterioration in living standards...
...Creditors no doubt rejoice, but unemployment spreads through the economy, trade union militancy diminishes, wages are pushed further down...
...Economic growth will slow...
...Recession," Robert Lekachman once said, "is a phenomenon endured by the poor for the benefit of the prosperous...
...Old debts become more burdensome and new ones less desirable to contract...
...and inflation, acceptably modest now, may be reduced a bit...
...Yet in the topsy-turvy world of Wall Street the worry is that the economy is too strong...
...Eventually the economy will succumb to an unnecessary, Federal Reserveinduced, recession...
...One would hardly know from these comments that the Federal Reserve Act calls on the Fed to pursue both "maximum employment and stable prices...
...Inflation's primary victims are the rich...
...As business executives restrain their investments, factories will slow or shut down...
...Clinton's decision to pursue deficit reduction and rely on the Fed to support economic growth has meant two (perhaps three) things: he will not have any money to pay for his investment program, and he has placed economic policy in the hands of an institution headed by Alan Greenspan, a conservative Republican, who sees rising employment as a threat...
...It helps borrowers (most of whom are not rich), who are happy to pay back their debts in depreciated currency...
...Wealth holders, distinctly untypical citizens, have different economic interests than most Americans...
...The Clinton administration's problem is that it is dependent on the Fed to continue the economic recovery...
...The political importance attached to inflation is far out of proportion to its economic significance...
...Deflation dampens business activity and discourages new investments...
...It is long past time to end the Fed's fixation on containing inflation...
...Although those on a fixed income are hurt by inflation, it would not be difficult (through indexing) to protect them from rising prices...
...It is hard to exaggerate the extremism of the financial community...
...In the face of contracting fiscal and monetary policy it is a wonder that the economy grows at all...
...Given the troubled American economy one would think that maintaining, even increasing, economic growth is desirable...
...Government can choose to enhance the economic prospects of the many or to safeguard the accumulated wealth of the few...
...Robert Samuelson, Newsweek's economics columnist, stated that Blinder was soft on inflation and therefore lacked "the moral or intellectual qualities needed to lead the Fed...
...unemployment will rise...
...The Federal Reserve makes this choice by setting interest rates for the benefit of bondholders, who receive fixed interest payments on loans, and who prefer high unemployment to the merest hint of inflation...
...Since 1989, the peak of the previous economic cycle, the typical American household lost $2,344 in annual income, a fall of 7 percent...
...In the Federal Reserve's war on inflation, joblessness is the main weapon...
...Initially the bond market reacted favorably to Clinton's plan, and long-term rates drifted lower and economic growth picked up in the last half of 1993...
...Tere are times, this is one of them, when the hidden fault line of American society—the line separating those who own financial wealth from those who do not—becomes visible...
...Such a large increase in poverty and fall in family income in the second year of an economic recovery is unprecedented...
...Sooner or later rising interest rates will lead consumers to quit spending money for housing, cars and other interest-sensitive goods...
...But the costs that inflation imposes WINTER • 1995 • 11 Comments and Opinions on the poor are dwarfed by the heavy price the poor are forced to pay whenever we embark on an anti-inflation crusade...
Vol. 42 • January 1995 • No. 1
