This is Richard Wolff from Democracy At Work, responding to another “Ask Prof. Wolff'' question
from our Patreon community. This one comes from Fred Gliena and it refers
to an article by Christopher Leonard in the June 11th edition of The New York Times.
In his article, Christopher Leonard makes an argument that is both fresh and about
today's inflation, but also a very old idea re-dressed in the current language
that is common. I want to talk about this argument and about Mr. Leonard's working with it.
Here's the basic argument. The inflation we're suffering right now is the fault of the Federal
Reserve. We shouldn't blame Mr. Biden because all he can do, his hands being effectively tied,
I guess, in Mr. Leonard's mind, is to turn it all over to Mr. Powell over at the Federal Reserve.
Mr. Powell is deciding to raise interest rates as the way to stop the inflation,
and that's scary because it means a recession is coming down the pike, and after a pandemic and
a crash and an inflation, offering the American people another crash – in effect, an engineered
recession – seems an awful package to unload on the mass of the people. It is not at all uncommon,
when masses of people are subjected to this kind of year-in and year-out oppression (because let's
call it what it is: economic oppression), to come up with scapegoats – somebody to blame that
prevents us from looking at the system itself. A very old candidate for scapegoat is the monetary
system – the lenders, the creditors, the bankers, the hustlers in the money area. They have been
denounced for centuries for causing every kind of economic mayhem. To go back far enough in history,
angry mobs would burn down the bank, angry mobs would string up the banker, angry people would be
enraged. Even in Western movies here in the United States, the banker was typically a big victimizer.
So Mr. Leonard modernizes the argument. It's the Federal Reserve, you see, and then here
comes the plausibility argument. They pumped a lot of money into the economy (which is true)
over the last umpteen years (which is true), and so he draws the conclusion that the
Federal Reserve put in money, too much, over too long or short a period of time,
and bang! Here we have it, the terrible inflation. The Federal Reserve screwed up.
This argument is not very original, and it is not new, and it is mostly not true, either.
Let me explain – because that's the key issue here.
Yes the Federal Reserve pumps money into the economy. It's been doing it for the last twenty
years, basically in response to the crash, the so-called dot-com crash of capitalism in
the year 2000. It ratcheted up the pumping of money after the Great Recession, as we called
it, of 2008 and 2009. And now it has done it again with the pandemic and the crash of 2020.
Here's the interesting fact: for most of those twenty years – in fact, for all of them except
the last year and a half – there was no inflation, which would make it a little dubious to say that
when you increase the money supply the way the Fed did, then you get an inflation. No, you didn't.
You didn't for twenty years, and therefore that argument has to be shaken. But that's
not even the major thing that shows that the argument is weak and probably wrong.
Here's the big important point: why does the Federal Reserve do what it does?
The answer is not some notion in the Federal Reserve that it's a good idea
(“Let's pump money!”). No, the Federal Reserve is doing what it was called upon to do,
trying to cope with an underlying problem, which is that capitalism as an economic system
is unstable. It is cyclical, It's a boom-bust system, It's got crisis after crisis.
We're living through one after another as I speak to you. And one of the things that is done,
particularly when the economy tanks down as it did in 2000 and 2008 and 2020, was to have
the Federal Reserve come in and pump in money. That's why they do it, that's when they do it,
and the logic is, “Oh my goodness! Our economy is falling apart! Pump in a lot of money!”
That's what they do, and when you do that – pile in a lot of money – a risk arises which no one
wants to talk about when they're pumping the money in. The risk is that with all that extra money,
will there be extra goods for that money to be exchanged for? If there are extra goods produced
then they will soak up that money. We will spend the extra money and there will be goods
for us to buy, and no inflation. But if the excess of money isn't met by an increase in production,
because the capitalists who control production don't increase it, well, then – yes, there'll be
too much money chasing too few goods. But it isn't the Federal Reserve that's the issue here. It's an
unstable economic system coupled together with an institution – the Federal Reserve – which can't do
the kinds of things that could stop the inflation, without all this monetary risk that we're talking
about. But the Federal Reserve isn't allowed to do all the things it could to stop an inflation
or anything else. It's only allowed to do the things that don't challenge, change, or undermine
capitalism, because reproducing this system – that's its number one objective.
Let me give you, in closing, a simple example. We have an inflation. Everybody agrees on that. We
don't want it. Nearly everybody agrees on that. Well, here's something the Federal Reserve could
do: put a cap on prices. Announce that as of tomorrow morning, no prices can be raised.
That would do the job. That's what President Nixon, a conservative Republican, did back in
1971. We know how to do it. We've done it. We know whether or not it works. It worked. Did it
have problems? Of course it did. Any policy does, but it did the job. Why are we not discussing it?
Because that infringes on – you got it – free enterprise, the capitalist desire to be free
to do what he wants, when he wants it. Raise the price, lower the price, increase investment,
lay off workers – whatever it is, that has to be protected. And so we go through this charade
of making believe that the poor Federal Reserve either hasn't got the tools (for some reason no
one suspects), or did a terrible job. It's an argument that doesn't hold.
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