Sisyphus’ Rock: Inflation vs. the Left

In Economics, History and Politics on June 3, 2009 at 7:06 pm



Although the current inflation rate is rather low (the CPI dropped like a rock for the last 5 months of 2008, and has been limping around .2% per month for the last couple of months), I’ve always believed that it’s important to take the long view, and try to think through problems before you get to them. So I think it’s important to take a second to think through inflation, not as a purely economic phenomenon or concept, but as an aspect of political economy. Why? Because inflation has always been the bête noire of left-of-center political economy, our version of Sisyphus’ rock.

Historical Background:

The unusual thing about the struggle between inflation and the Left is how far back it goes – all the way back to the 18th century, if we include conflicts over price controls on bread that cropped up during the American and French Revolution. If we look closely, we can see the voice of the Left beginning to emerge and distinguish itself from (classical) liberals (who tended to adhere to the newly-minted ideas of Adam Smith) when the Enrages, the Hebertistes, and the Babeufistes in France, Tom Paine and his Philadelphia radical circles (although Paine is a more complicated case), and the British radicals that E.P Thompson writes about in his epic Making of the English Working Class. And one of the commonalities of these groups was a belief that prices and wages should not be set only by the market, that human and moral constraints had to be constructed, and that the sovereignty of the people extended into the economic sphere.

In the United States, the most vibrant period of class politics of the 19th century focused over the issue of inflation, although ironically at that time, the position of the Left was to favor inflation over deflation The political-economic story of the last half of the 19th century in the U.S was a fight over inflation and deflation, centering over issues such as the gold standard versus greenbacks, the terms of the repayment of Civil War debt, the benefits of balanced budgets vs. a standing debt, and the alternating waves of gold standard deflation (which was the norm, as gold was gradually removed from the currency via hording, loss of coinage, and the effects of time) and inflation (an occasional event when new gold strikes expanded the circulation of gold, thereafter to be replaced by deflation). At a time when the American economy was rapidly developing there were chronic shortages of currency, especially out West, and especially among farmers and to a lesser extent industrial workers. The Civil War – especially the movement towards a national banking system, the massive Federal orders into heavy industry, and the huge amount of debt run up – accelerated an already existing problem of extreme concentration of capital in the eastern financial sector. This concentration allowed two things to happen – one was that financiers were able to extract quasi-monopoly rents on the credit requests that farmers and workers experienced on a regular basis (for farmers at the beginning of , and second, financiers encouraged deflation as a means of improving their net worth and their liquidity (as an increase in the value of cash would improve their balance sheets free of charge).

There was a massive economic policy dispute between these two groups. Farmers and workers generally preferred an inflationary economic policy, because they tended to be debtors rather than creditors, and because a scarcity of credit exacerbated their economic insecurity – hence, they liked it when during the Civil War the government printed a lot of greenbacks, the first time the Federal government had ever issued non-specie currency. There was a big fight over whether greenbacks would be continued after the war – and the financiers won, and the greenbacks were discontinued in favor of gold, which had a big deflationary impact. Similarly, workers and farmers preferred the Civil War debt to be paid off gradually, as this would keep taxes lower and prevent money from being sucked out of the economy – again, they lost; Civil War debt was to be paid at face value (which resulted in a huge payout for speculators) and in gold, which again massively deflated the currency.

This turn of events was a major impetus behind the Greenback Party and the Populist Party towards the end of the 19th century, because farmers workers felt that they were being screwed over by bankers and other big holders of capital (like corporations), and that they were being made to pay the price twice over (first in having to pay the taxes for all of this, and second in getting the worst of resulting boom and bust cycles). When you try to understand why American politics used to revolve around something as boring and abstract as the minting of gold or silver or the tariff versus the income tax, all you need to understand is that what’s really going on under the surface of such policies is the desire to a desire to inflate the currency or otherwise pry money out of the hands of bankers and get it circulating among the working people of America.

As a result, many of the most fundamental policy institutions in the United States – the progressive income tax, the Federal Reserve, the introduction of paper currency, the idea of the sub-treasury or the “ever-normal granary” (the basis for the future AAA and America’s current system of agricultural subsidies) – emerged out of this conflict.

After one moves from a developing country to a developed industrial country, however, the politics shift again. Inflation becomes the enemy of the Left, because the only solution that presents itself to demand-based inflation is to attack wages, when one of the fundamental concerns of the Left is the elevation of workers’ living standards/ This forces the Left into either throwing away its own victories or to risk a massive backlash from the middle class (for whom inflation poses a much greater threat than it does for the working class, in that it damages the value of their savings, and because salaried employees’ wages tend not to drift upwards as fast as hourly wages). While theoretically, the battle over inflation versus deflation is a form of class war between those who have no money (and thus favor inflation) and those who have money (and thus favor deflation), the result is more that we see a class war between those who have nothing and those who have little – allowing the working-class/middle-class coalition to be split apart. For much more on this than I could ever say, see Meg Jacobs’ amazing book, Pocketbook Politics.

Internationally, the issue of inflation has played a very peculiar role in the development of the Left. As scholars have noted, when Socialist or Social-Democratic or Labor governments first came to power in the early 20th century, they inexplicably chose to enforce economic orthodoxy at a time when their constituents (and the actual economic situation) cried out for heterodoxy.  When the German Social Democrats came to power in 1928, it pushed through deflationary measures (fearing a return of the hyper-inflation of  1923-4); when in 1932 the Social Democrats were struggling with the question of how to deal with the Great Depression, they flat out turned down a proposal (named the WTB Plan) by leading trade unionists to establish large-scale, counter-cyclical, deficit-financed public works  in favor of continued deflation, on the grounds that public works were un-Marxist. Both of the first two Labour governments in the U.K (1923-4, 1929-1931) saw the Labour government reject proposals for public works and expanded social spending in favor of balanced budgets and the maintenance of the gold standard as a means of warding off inflation – even when doing so meant abandoning their party’s own platform and dooming the Labour Party to remain out of leadership until 1945. Likewise in France’s Popular Front government, even though Leon Blum (an admirer of FDR and the New Deal) wanted to do public works, an expansion of unemployment insurance, and other pro-purchasing power policies, he chose to protect the franc and the gold standard instead. As a result, at the very point that the public was at its most radicalized, the Left in the major powers of Europe blew their chance to show that economic planning could work, that government could be used to help working people, and that one doesn’t have to rely on the market for the necessities of life. Their next chance wouldn’t come around for more than 15 years, in which time all of Europe was destroyed.  Ironically, the only two Lefts that escaped this political calamity were the Swedish Social Democrats (who broke with economic orthodoxy and embraced public works and Keynesian economic planning early on), and the Democratic Party in the U.S (who hadn’t been in power in 1929, and who did make a successful commitment to public works and Keynesianism gradually between 1933-1942).

In the 1970s, we saw a similar moment where inflation crushed the hopes of the Left in Europe and in the United States. Inflation forced conflicts between parties of the Left and the labor movement, as workers fought to keep their wages ahead of prices, while the governments they elected tried to keep wage growth in check; in the U.S, we saw the Carter Administration and Fed Chair Volker plunge the U.S into the working class into a recession that ripped the guts out of the American labor movement, and in the U.K, we saw the “Winter of Discontent,” where  the British labor movement arguably brought down the Labour Government and aided in the rise of Margaret Thatcher to power. Inflation was also used to legitimize a turn away from the expansion of the welfare state, both in the U.S and Europe – in the U.S case, efforts to deal with mass unemployment through creating the right to a job or through a guaranteed minimum income were defeated as declaring them too inflationary; as Joshua Freeman notes, bankers used the financial crisis in New York as a lever to attack gains made in social welfare, public higher education, and unionization. On an intellectual level, the crisis in Keynesianism caused by the simultaneous existence of inflation and recession (called stagflation) led to the dominance of right-wing economic theories that called for increasing interest rates, deregulating the economy, and slashing corporate taxation, and a broader posture of favoring price stability over high employment. In every case, the influence of those who favored the welfare state, economic planning, the abolition of poverty, the right to organize, and social justice more broadly conceived was curtailed, and the political authority of bankers was expanded.

The Situation Today:

So what does any of this have to do with the current day? Well, we’re already seeing pundits on the right (especially in business-friendly institutions like the Wall Street Journal or CNBC) arguing that further stimulus legislation, or further public investment, or universal health care,  let alone something as “radical” as creating a new WPA are exploding the debt and the deficit, and thus boosting inflation. If all of this seems highly suspicious, given the fact that these same pundits didn’t seem to have much of a problem proposing trillions of dollars in bailout money, well, now you’re starting to see how “class legislation” works in American politics – when the corporate elite want something, it’s vital to our economic future; when it could actually help poor and working class Americans, it’s dangerously inflationary.

The long-term policy and political situation before us is, how do we deal with (future) inflation without sacrificing progressive objectives?

While it’s not written about much, and it’s certainly not talked about much, there actually are ways to fight inflation that don’t kneecap the working class and that advance progressive interests and objectives:

  • John Meynard Keynes’ Solution = Bonds! While those economists who followed the ideas of Keynes often collapsed inflation down to the famous/infamous IS/LM model (which suggested a direct tradeoff between inflation and employment), Keynes himself actually had a more sophisticated idea for how to deal with inflation. When World War II broke out, Keynes naturally went into government service, and one of the first questions that he had to deal with was how to keep inflation under wraps in an environment of full employment. Keynes’ solution was forced savings through the purchase of bonds – in his book, How to Pay for the War: A Radical Plan, Keynes argued that rather than cutting wages, the government should simply act to push future spending into the future, deferring the inflation until after the war, when the sudden increase in spending would be a helpful force, counter-acting the negative side-effects of demobilization. In the modern context, I could see a plan by which wage increases over a certain percentage would be required to be paid in bonds that wouldn’t mature for a few years, thus allowing a short-term decrease in spending without a long-term negative impact on income. If you wanted to get even more creative, you could do a progressive matching scheme, whereby bonds could be cashed in for things like a full college tutition, or a first home, or a small business loan, or a retirement annuity – helping working class Americans and expanding economic opportunity.
  • Price Controls – the OPA Experience. Most people don’t know that between 1942 and 1945, the U.S successfully controlled prices and wages for the entire national economy. It’s certainly a story that conservatives don’t want you to know. But the Office of Price Administration (OPA) was at its time one of the most popular government institutions in America -graced by leading economic minds like  John Kenneth Galbraith, Leon Henderson, and even Milton Friedman, the OPA was supported by tens of thousands of American women who served on local OPA price-watchdog boards, and was wildly popular throughout and even after the war. In part, this popularity stemmed from the fact that the OPA successfully brought down inflation from a high of 11% in 1942 down to 6% in 1943, 1.64% in 1944, and 2.27% in 1945 – at a time of full employment.  While I’m not advocating a return to the OPA model necessarily, it is important to note that it is possible to achieve full employment, rising wages, and low inflation through government action.

So while there is a huge amount to do in terms of discovering progressive ways to deal with inflation, history shows us that it is possible, that we don’t have to surrender the economic interests of working people in favor of the interests of bankers and markets.

– Steven Attewell

  1. […] Sisyphus’ Rock: Inflation vs. the Left […]

  2. A nice post! Would you mind elaborating on why it would be beneficial to go Bonds way vs OPA way in fighting inflation? And what are the more common (and serious) objections to both plans from the right?

  3. Well, the Keynes method and the OPA method have different advantages and disadvantages. The Keynes method more directly affects “demand-driven inflation” (i.e, when demand for goods shoots up faster than supply), it doesn’t actually decrease income over the long haul (because you get bonds), and it’s easier to administer. However, it only addresses demand-driven inflation, not supply-driven inflation (when the supply of a good is suddenly decreased), which means it might not be as effective for all forms of inflation or all intensities of inflation. The OPA method affects both demand and supply-driven inflation, and could probably handle more severe inflation, but it has the disadvantage of being hard to do right (it was done right in WWII, but Nixon didn’t do such a good job of it in the 1970s) and the wage free element has the potential to decrease incomes in the long run.

    From the right, the objection to the Keynes method from a technical standpoint would be that it has the potential to not actually decrease inflation, but just to shove it off into the future when those bonds come due, and that it might distort the informational aspect of supply and demand, by artificially shaping the balance between saving and spending. The ideological objection would be that it’s a massive invasion of the free market and individual economic liberty, by literally forcing people to take bonds instead of wages.

    Regarding the OPA, the technical argument would be that it’s very difficult if not impossible for a few central planners to accurately predict future economic behavior and shape policy accordingly, that artificial wage and price freezes might create sudden disincentives to work or produce, and that the free market already does what the OPA is supposed to do (this comes straight of Hayek). The ideological case is that the OPA’s central planning of wages and prices is a giant step towards socialism.

  4. […] trying to do both at once is like trying to push and pull a door at the same time. However, as I have noted, there are many historical examples of countries achieving full employment or something close to it […]

  5. […] intellectually-daunting objections to full employment is the fear that it would create unstoppable inflation. But contrary to arguments that proponents of Keynesianism and full employment policies have no way […]

  6. […] stimulate the economy in a recession, or to expand state provision of goods and services, or to use inflation to ease the burden of public and private debt. A government that violated the status quo would face a capital flight, attack on its currency, and […]

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s

%d bloggers like this: