Whip Inflation Now!
We’re in economic territory that is new to most Americans. I was still in high school in 1974 when President Gerald Ford launched his Whip Inflation Now (WIN) campaign to stop inflation by persuading us to consume less. The best that could be said about this policy is that it was not as bad as Nixon’s attempts to enforce wage and price controls a few years earlier. It worked about as well as any of us might have expected. Inflation did fall back into single digits (from about 11% in 1974) but rose to over 13% by 1980. Only after Paul Volcker became chair of the Fed and raised the federal funds rate from 11% to 20% did inflation subside — to about 3% in 1983. Since then, with the exception of 1989–91 and 2021, it has remained below 4%. Now it’s over 7%.
Those lessons were lost by President Biden and current Fed Chair Jerome Powell, who are older than me and have an obligation to remember. In his State of the Union speech Tuesday night, the President resolved to fight inflation by investing more in manufacturing and infrastructure. In testimony yesterday, Powell said he’s “inclined” to raise the federal funds rate by 0.25% later this month. How bold.
We’re in trouble when these two men — the most powerful in the world — show so little understanding of what is happening. We all know why neither wants to raise interest rates; they’re making the same political calculation that put us in this position. Unfortunately, inaction will make matters much worse. With inflation at 7%, the real interest rate (cost of borrowing after inflation) is negative 6.75%. In other words, it pays very well to borrow as much as possible. Even if inflation does not rise and even if the Fed begins raising rates now at the rate of 0.25% every two months (the rumored plan for 2022), we will be paying borrowers of our Federal Reserve Notes until 2027. This is why real estate prices are soaring. Meanwhile, Americans are terrified that the windfall of pandemic stimulus and overdue wage increases will vanish as quickly as they appeared, and that the steady drip of earnings erosion many have become accustomed to will be replaced by an assault on our security as the cost-of-living races out of control and wages fall even further behind.
These fears are justified. When our leaders failed to avoid the financial crisis, their solution was a bailout of the banks that caused it. Desperate attempts to revive the economy by Quantitative Easing (QE) reinflated asset bubbles. For almost a decade now, every suggestion of raising rates led to a tantrum on Wall Street. Capture of national monetary policy by the banks and wealthy investors has become so complete that even as Russia invaded Ukraine, the stock market rallied because they were so confident that the Fed would shelve or delay its plan to raise rates this year. What is wrong with this picture? Loose monetary policy dilutes the value of every dollar while directing new money to those closely tied to the banks. Trillions of QE dollars funded stock buybacks and mergers that created (barely taxed) capital gains but did nothing for the working class.
What should we do? Seize this opportunity to correct decades of misguided policy by restoring the link between savings and investment. Make the banks borrow money from people who have actually saved money they earned and pay them a decent rate of interest. They in turn would make stock traders and other investors pay risk-adjusted interest rates for the privilege of betting with other people’s money. In other words, honor the legacy of Tall Paul (Volcker) by raising rates decisively — a full percentage point at a time — until real rates are at least 2%. Whip inflation now!
