A while ago, I discussed how 'fiscal conservatism'--that is, radical deficit reductionism--is an extremist ideology, not a moderate one, and that radical deficit reductionism has real-world consequences for people's lives. Steve Rhodes generalizes the problem by describing the discussion we are not allowed to have:
We are not allowed to discuss an economic structure that keeps those on the bottom at the bottom - on purpose.When the unemployment rate, for example, gets "too low," the Federal Reserve raises interest rates to slow down the economy.
In other words, the Federal Reserve - at the behest of policymakers and elected officials from the White House on down - purposely keeps those at the bottom out of work to prevent inflation from eroding the assets of those at the top.
Economists also talk about the importance of a flexible labor market; by this they mean a labor market that keeps a certain number of potential workers unemployed or partially employed to put downward pressure on the wages of those who are fully employed. They also mean that it's important under our system to have a flexible labor pool that can be dipped into when needed and set aside when not.
This is not a discussion we are allowed to have. The discussion we are allowed to have is one about morals and character and personal responsibility - of the poor, not the wealthy, even though it's always the wealthy who plunge our nation into economic disaster.
While not everything is zero-sum, much of what is seen as 'sensible' policy has underlying assumptions, that when clearly stated, are awful. Consider healthcare: legislation that reduces coverage or increases individual cost relative to a strong public option means that people will go bankrupt, will become sick, will die needlessly.
But this must never be said.
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It should be obvious that any economic system which relies on production of goods and services as the means of personal wealth is driven by inequality. If wealth, however defined, is distributed relatively equally there is no motive to acquire, or contribute to the means of producing wealth or even to work.
The Soviets learned that under their own system of substituted incentives. That is providing incentives that could not be acquired by purchase with money. They learned that most people did just enough to get by; and nurse their resentment against the achievers who for whatever reason wanted to contribute and produce.
Health care in America is crippled by medical monopolies that set prices and with hold production. Because the health care professions have great political clout and means, there is no discussion about that. And that is the discussion that is needed.
"When the unemployment rate, for example, gets "too low," the Federal Reserve raises interest rates to slow down the economy."
I think this is a dangerously misleading simplification. One of the main tasks of any central bank (including the Fed) is to keep inflation under control. Unemployment dropping below the "natural" level is a sign of economy "overheating", which can result in various instabilities:
- exports over imports, leading to currency exchange deficit
- demand over supply, leading to inflation.
It may turn out that the correct reaction to unusually low unemployment rate as a *symptom* of an economical problem is to increase the interest rates. Central banks really do not raise interest rates just to make the Average Joe's life more miserable.
Btw, if Greenspan didn't keep the interest rates so low after 2001... probably the credit crunch wouldn't happen.
Hmmm I guess I missed the memo that fiscal conservative automatically equals radical debt reduction. I agree that radical debt reduction is generally an extremist position, but Keynes described his economics as moderately conservative and he thought there were times governments needed to go into debt.
@1
Hmm. On the one hand:
Quite the budding Randian! But on the other:
Oh the resentment against those acheivers and producers in health care! Those damn doctors and their years and years of hard study! Why won't society simply recognise the inherent worth of ubermenchen like Mr RFM?
@2 "One of the main tasks of any central bank (including the Fed) is to keep inflation under control."
I think the debate that we aren't allowed to have isn't whether to control inflation or not, it's the question of exactly what level of inflation requires "control". Nobody wants the rampant inflation one sometimes sees in the third world where you have to bring a suitcase of money to buy dinner.
But it is true that more modest amounts of inflation affects those at the top who have amassed piles of money much more than it does those at the bottom who haven't, (or who have amassed debt instead).
And banks have already been building in hedges against inflation for decades anyway with adjustable rate mortgages. Funny how those got really popular with banks not too long after all the inflation during the Ford administration.
It's not a question of whether to control inflation or not, it's a question of whose comfort the thermostat gets set for.
The Fed usually keeps it set for the fur coat crowd.
@5
I think the wealthy are much less affected by inflation than the poor, because they have access to investment and hedging opportunities the poor do not have, and can prevent their assets' value from deteroriating due to inflation much more effectively than the poor.
In an inflationary environment, the poor will not have access to cheap fixed rate mortgage deals. They will have to take variable rate deals, which will skyrocket in periods of high inflation regardless whether the Fed raises the rates or not. So while the principal value of their debt goes down, their interest payments will increase dramatially.
As for the cui bono question, google for "citigroup plutonomy report" ;-)
Someone look up the NAIRU - Non-accelerating Inflation Rate of Unemployment. The gist of the story is that if unemployment gets too low, the upward pressure on wages results in a higher rate of inflation that then gets built into expectations, leading workers to demand still higher wages, and the inflation rate to accelerate. Krugman and others have written about it for popular audiences in their non-textbook books and elsewhere.
Simply put, cut the unemployment rate too low, and not only will inflation increase, but will KEEP increasing.
Most of the comments proceed with a fundamental false assumption that we live in a world with no nation-state boundaries without nation-state meddling into economic activities for strategic advantage..Yet that's a paradox because the very premise of the article is how the Federal Reserve (of the united states) interferes with finance to create favorable conditions for the rich or the economy (depending how you look at it).
@Darren NAIRU is flawed and dead wrong: Eg. Nations like FInland have higher wages per capita then lets say India; yet Finland's inflation has not gone out of control due to upward pressure of increasing wages. Meanwhile Zimbabwe's inflation has been astronomical yet there is no lack of labor available there. If you think Zimbabwe is a special case then what about other poor developing nations who have suffered the effects of inflation.
@Roman "wealthy are much less affected by inflation than the poor, because they have access to investment and hedging opportunities the poor do not have, and can prevent their assets' value from deteroriating due to inflation much more effectively than the poor.."
You forgot to mention that dollar for dollar; a wealthier person pays not much more for the basic necessities of life:fuel, food, phone and electricity bills etc.. if the price of these go up he (or she) would never feel the pinch since he (or she) doesn't eat more or drive more than a poorer person . Chekov was right when he said that the rich bleed as much as the poor when cut; yet the poor are cut more deeply and more often.
@Dalani With all due respect, I don't think you addressed the NAIRU. The NAIRU has to do with the unemployment rate, it does not mean a low unemployment rate is the only reason for inflation. Nor does it mean that high wages relative to another country will result in inflation. Higher wages relative to the recent past, companied with rising prices relative to current wages, is the instigating culprit. It could be wrong, but I don't think you addressed it.
How low would an acceptable unemployment rate be? There are constantly, even in good times, plenty of people that are fired for cause, temporary jobs or limited contract positions end, or companies go out of business while others start up, with an associated level of people who are unwillingly out of a job and looking for work. For policy-makers to target a lower unemployment rate than what results from this - whether or not it's coincident with historical estimates of the NAIRU - would put upward pressure on wages economy-wide, not just on the low end of the income scale.
@Darren I would qualify NAIRU's concern over too low an unemployment rate as over the top and neither here nor there: . Even in the best of times, the upward price wage pressure may never happen because a global economy prevents that (serving as a pressure relief valve-if you will) by shifting jobs overseas from no better incentive or motivation than profit. If you're referring to changes in local economies- with sudden or gradual lowering of unemployment rate- again global economies prevents that by effectually incentivizing higher immigration to fill the void to foil any upward wage pressure.
So needless to say, that is my point exactly: The paradox is some countries like Finland have effectively high per capita wages and lower unemployment rates yet manage to avoid runaway inflation. A paradox until you realize their government meddle to their population's advantage with better access to education and healthcare hence better and more competitive labor force. Their government doesn't try to sell them out by catering to free market ideologues or promoting fiscal arrangements that reduce people to the level of disposable peons.