Rapid economic growth solves problems. Slow growth causes them. China is trying to accelerate growth again after the Xi debacle COVID-related bugs While the Federal Reserve raises interest rates and puts pressure on the brakes to fight inflation. China’s commitment to growth while the Fed goes in the opposite direction should worry Americans deeply.
Rapid growth is the basis for progress. Electric vehicle and chip factories, roads and transportation systems are being built and better jobs will come with them as President Biden’s infrastructure legislation will demonstrate. Rapid growth facilitates transitions from old work to new types of work. People are drawn from low paying jobs to better jobs. Employers train employees in new skills to retain them. The belief that the Fed should slow growth to fight inflation is toxic because it makes change more difficult. It is also a story that always ends up blaming inflation on higher wages for workers.
Fed Chairman Jerome Powell and the Federal Reserve see rapid growth as inflationary, so they sharply raised interest rates to slow it down. They want the stock market to fall further along with housing prices and rents. Most know in their bones that slow growth gives employers more control over employees, but they don’t advertise it. On the other hand, rapid growth empowers working people. It makes employers pay childcare workers more and makes “essential workers” such as teachers, firefighters, police, carpenters, plumbers and hospitality workers more expensive.
Media attention to the Fed’s approach to high interest rates/slow growth as a cure for inflation also shifts attention to problems in specific economic sectors that monetary policy cannot solve. Market manipulation by the OPEC cartel plus Russia was the main driver of inflation from 2020 through mid-2022. It was an even stronger driver of inflation in 1973-1981. Slowing down the entire economy by raising interest rates will do little to curb the energy union’s market power. What has long been needed is alternative energy policy and investment, an approach the fossil fuel industries dislike and is outside the Fed’s monetary narrative.
And the narrative that glorifies the role of the Federal Reserve takes our eyes off the internal relationships and conflicts of interest in corporate America. This has resulted in massive and unwarranted compensation packages for CEOs, allied residents of C-suites, and the top 0.1% of professionals who surround CEOs. The undemocratic distortions that this concentrated power and wealth creates is a political problem that the Fed’s monetary policy hides as well.
The inflation story is very important. The interpretation of the causes and remedies for inflation prevalent today is based on a misunderstanding of the causes of inflation in the fifties, sixties and seventies. The American economy after World War II was built around oligopolistic firms and the powerful unions that emerged from the Great Depression and the war. Oligopolies can raise prices year after year in large sectors of the economy including manufacturing (automotive and steel complex), trucking, railroads, airlines, telecommunications, banking, and even retail.
Leaders in both parties at the time understood the problem of inflation that these oligopolies were causing, and they took political risks to break their power. Presidents Ford, Carter, Reagan, Congress, and the courts opened up these areas to more competition in the 1970s and 1980s essentially eliminating inflation as a matter of 1983 through 2020. While these pro-competitive changes greatly reduced the risk of inflation, The story around them has not replaced the critical narrative prevalent today. This narrative gives Paul Volcker, chairman of the Federal Reserve Board from 1979 to 1987, all of the credit for lowering inflation after 1983 by raising interest rates to very high levels. This exaggeration is a precondition for great faith in federal monetary policy today.
When monetary policy is seen as the only tool for dealing with inflation, corporate America gets away with it. Petty debates about whether, when and how often to raise rates by 0.5 or 0.75 percent, shying away from the problematic decisions of corporate leaders to rush abroad in search of low wages, rely on weak supply chains, and promote financialization at the expense of domestic production and research, favor a focus on Self-serve on shareholder value, selling cutting-edge technologies like digitally controlled machine tools to companies in Japan, Taiwan and Germany whose leaders have taken a longer view. These decisions made by corporate leaders and laws pushed by their allies through Congress and the courts give these deep-pocketed leaders enormous leverage. They escape public and media scrutiny because monetary policy creates a smokescreen behind which they can hide.
No interest rate hikes or cuts in government spending are needed in early 2023 to slow inflation. Prices are already leveling off and falling in many sectors. The December 2022 Consumer Price Index (CPI) showed only price increases 0.1 percent between October and November. Post-COVID bottlenecks have been removed and pent-up demand is being worked on. Gasoline prices have fallen below last year’s levels. Shipping rates are Below pre-COVID levels. High-tech companies, fearing a Fed-induced recession, are laying off thousands of employees. The Wall Street Journal and other publications are full of stories about price adjustments, rents, and hiring. Although the Fed is intent on slowing growth further, so it is promising additional rate hikes in the new year. Its pernicious interest in rising wages is essentially where the inflation-inflation story always ends.
If growth in the United States slows because of higher interest rates and public utilities and industries in China continue to modernize faster than ours, the blame must be placed squarely on the inflated role of the Federal Reserve. The US needs an alternative narrative of rapid growth to deal with inflation that should center around investment in modern infrastructure and more competition in areas where everyone must recognize that “the fix is in”. If the Fed’s monetary narrative continues to dominate US politics, the US will pay a heavy price.
Paul A. London, Ph. D., was a senior policy advisor and deputy under-secretary of commerce for economics and statistics in the 1990s, assistant deputy director at the Federal Energy Administration and Energy Administration, and a visiting fellow at the American Enterprise Institute. A legislative aide to Sen. Walter Mondale (D-Minnesota) in the 1970s, he was a foreign service staffer in Paris and Vietnam and the author of two books, including Resolving Competition: The Bipartisan Secret Behind American Prosperity (2005).