Inflation and Debt
A Moral Economy #4. Part II: What do we have? (continued)
This continues a three part series of excerpts from Social Security Basic Income: A Safety Net for All Americans, which I published in March 2020. Part I: What would it look like? concluded with #2. Part III is How do we get from here to there? This essay includes text from Chapter 2 What’s the Problem? Refer to #1 in the series for a brief introduction of my purpose and perspective on this subject.
Inflation — a tax on wages
US monetary policy is a plague on citizens with lower- and middle-class incomes. Artificially low interest rates have inflated the value of assets at the expense of real wages. This has clearly aided the wealthy, but it has impoverished the 90 percent of Americans whose wages are not keeping up with inflation of housing, education, and health expenses.
House prices have more than tripled over the last 30 years. The affordable housing “crisis” that has stricken many US cities is a result of inflated real estate prices, courtesy of loose monetary policy. Many large and growing cities have experienced gentrification — new and richer residents replacing poorer residents. Federal monetary policies that inherently favor wealthy individuals force local governments into policies that make it even more difficult to attract and retain residents. Tax policy is another factor — specifically, the mortgage interest deduction, which lowers after tax monthly payments for homeowners and encourages borrowing that bids up home sale prices.
Over the last 30 years, college costs rose 50 percent faster than the overall cost of living — a troubling development when we consider that a degree is essential to enter or stay in the middle class. Rising costs have already led to the student loan crisis and are putting postsecondary education out of reach for lower income citizens. In heated competition to join the ranks of college graduates, students are paying whatever it takes to get a degree. According to Ellen Ruppel Shell (The Job: Work and its Future in a Time of Radical Change, 2018), degree requirements no longer reflect actual needs; they exclude those unable to afford one. And failure to graduate can actually reduce lifetime earnings. We are not helping young people when we encourage unrealistic expectations that are often accompanied by crippling debt.
Over the last 30 years, per capita total national health care expenditures in the US rose by about $7000. Over the same period, the median US household income increased by just $12,000.[1] This trend is clearly not sustainable. We waste a lot of money by making employer-paid health insurance premiums exempt from income tax. Employers have very little leverage because spending decisions are made by employees who pay, on average, 18 percent of the premium for single coverage and 29 percent of the premium for family coverage. Providers have leverage over patients and plenty of incentive to encourage (over)consumption of health care services.
The central bank and our elected officials may or may not understand what their policy choices are doing to average Americans, but they undoubtedly understand what pleases Wall Street. Stock markets benefit from cheap leverage and less competition from bonds with low yields. Those with access to capital prosper while the working class settles for virtually zero interest on their savings accounts. Older workers are being forced to feed the stock market casino, because they cannot work long enough or save enough of their wages to provide a decent retirement income without taking more risk than they might like.
In a free market for money, bankers would be the ones at risk. They would not be able to control their cost of supply through Fed policy; rather, they would have to borrow at interest rates consistent with loan demand that fully compensates savers for their risk and inconvenience. Asset prices would reflect use value instead of artificially inflated collateral value (sources of funds for speculation). Debt would fund investment instead of consumption.
[1] Both figures are inflation adjusted.
Money for nothing
As indicated in the preceding section, those who stand to gain from increases in the supply of money have managed to make it the law of the land. Metrics like Gross Domestic Product (GDP) are inflated even with flatlined production, creating the illusion of real growth. Overexpansion of the financial sector in the last several decades has misallocated capital, created booms and busts in the markets, and deterred real economic growth. Wall Street, which once upon a time actually helped direct savings toward their best use, has become a casino that uses other people’s money to transfer wealth between traders. This ruins our economy by shifting financial and human resources from productive businesses to inflate assets such as stocks and real estate.
Keynesian stimulus isn’t working because it’s based on the false premise of insufficient demand. Demand is not insufficient when supply is an artifice of loose monetary policies, nor is it insufficient when prices are inflexible. Today’s one-two punch of monetary and fiscal policies that favor capital turn Say’s law upside down by creating debt to produce things, then creating even more debt to buy those things. Jean-Baptiste Say was an early 19th century economist who postulated that supply creates its own demand. This is the basis of trade; production (that is not consumed) is the means of obtaining something else. By pretending that modern economies work differently, we invite a global deflationary recession in which we cannot service the debt needed to maintain consumption, never mind increase it to match government growth targets.
The Troubled Asset Relief Program (TARP), Quantitative Easing (QE), and Tax Cut and Jobs Act (TCJA) debacles were desperate attempts to prolong organized pillage of America’s workers. In each case, our rich and powerful countrymen united behind the boldest of lies to justify policies that would save their skins at our expense. The engine for this corruption is the banking system’s power to create money. Since money is essential to virtually every transaction in our economy, this is an enormous advantage. Through the Federal Reserve System, bankers determine the quantity of money and its cost (interest rate). It also means that because the Fed controls the value of our currency, it controls the value of our labor. It should come as no surprise that their biggest customers — people who have lots of money — call the shots on lending practices. That’s how we wound up with Too Big to Fail policies.
The bottom line is that money creation benefits the rich at others’ expense. New money is inflationary; it dilutes the value of existing earnings and wealth through the law of supply and demand. What is commonly referred to as inflation — the rate of price increases — is a function of not just monetary policy but interaction of many forces in the economy — especially productivity. If supply and demand for goods and services remain constant, an increase in the money supply would produce higher prices, because money would be relatively plentiful. However, technological progress enables production of more goods and services with the same inputs, offsetting the otherwise inflationary impact of an increase in the money supply. With a constant money supply, an increase in productivity would reduce prices. This would benefit consumers, yet it has been all but outlawed by the Fed’s commitment to inflation targets (2 percent currently). Workers get to pay more for basic needs so bankers and their cronies have access to cheap credit and capture the benefits of any reduction in unit costs.
Legacy of debt
We the People have been negligent in our constitutional duty to “secure the Blessings of Liberty to ourselves and our Posterity.” I deplore the argument that national debt is money “we” owe ourselves. First of all, the we who spend is not the we who pay, even in the short term. That may be justifiable if spending and taxation policies reflect a fair and open democratic process in which all parties have the opportunity to make their cases, pro and con. It’s another story entirely if those who pay aren’t eligible to vote or aren’t even alive. “We” who authorize spending the money can all conveniently agree upon “investments” that will create jobs and profits today and may benefit future generations. But good intentions don’t secure the blessings of liberty, do they? Tomorrow’s workers, who may pay directly (by taxation) or indirectly (through inflation) will find their fiscal options limited thanks to our profligacy.
We commonly think of taxes as payment for services, and most of us do not quibble about whether we have real choice in the matter or whether we’re getting value. The thing is, taxes have not always emerged as solutions to public problems, such as how to provide roads and schools. Sometimes the taxes are imposed to fund rulers’ ambitions. As David Graeber says in Debt: The First 5,000 Years (2014), “Governments demand taxes because they wish to get their hands on people’s money.” Markets did not emerge spontaneously to replace barter and then lead to creation of money; rather, rulers created money to facilitate taxation, and they needed markets to provision their armies. People were taught to work for wages so they could pay taxes. They were also taught to consume goods they did not necessarily need.
It’s common knowledge that Congress no longer pretends to worry about balancing budgets. Monetary and fiscal policies present a classic chicken/egg dilemma. Given the free money option, of course we are going to borrow; we spend more because we can, and the pressure to spend more and tax less is overwhelming and relentless. In fiscal year 2018, servicing our enormous debt cost over half a trillion dollars per year, which is almost 18 percent of estimated revenue. The burden is sure to grow as interest rates rise. US spending deficits are so large that they would not be possible without intervention by the Fed to keep interest rates low. The mainstream view is that this is an advantage of central banking. But who actually benefits from deficit spending? The one percent, of course. The rest of us share the debt that was created to benefit special interests.
Deficit spending avoids the politically suicidal tax question entirely. Monetization of the debt devalues the currency and thereby harms many (especially poor) consumers who would not have paid the taxes needed for a balanced budget. As noted by Thomas Piketty in Capital in the Twenty-first Century (2017), “From the standpoint of the general interest, it is normally preferable to tax the wealthy rather than borrow from them.” It is telling that for the last 40 years, people sworn to protect our interests have consistently chosen to borrow. Public debt is created by those who get to spend the money and thereby benefit directly; in one form or another future spending is thereby reduced and this cost is distributed among an entirely different set of individuals.
Capitalists do not value work; they value profit, which in today’s economy does not require investment in production of goods and services for consumers. The banks, which thanks to repeal of Glass-Steagall can use the money for just about anything, have vastly expanded use of financial instruments. Purely financial transactions are more liquid and less transparent — meaning profits or losses can be taken quickly and without all the muss and fuss of businesses that serve consumers (such as hiring workers). The Fed’s (low interest rate) subsidy of debt-driven financial speculation has simultaneously increased the price of assets and reduced demand for labor (hence wages). No wonder the middle class is struggling.
The next essay in this series will continue Part II What do we have? It will include text from Chapter 3 Nothing to Lose but Shackles.
