Yves here. I can’t recall Jomo Kwame Sundaram getting this agitated. But as we’ve written, emerging economies, which are often if not entirely accurately called the Global South, are whipsawed by hot money inflows and outflows when the Fed and other large economy central banks jack up interest rates. And do not forget that even though more and more workers are suffering from inflation in fuel, food, cars, and construction goods, those are all due to specific factors outside the Fed’s control, like crappy harvests and staff shortages at food processing plants. Raising interest rates hits a lot of innocent bystanders while not doing much to address the really painful price increases.
However, there is a real risk that inflation will give Larry Summers a new lease on life. His wreckage of the Harvard endowment, his not punishing Andrei Shleiffer, a Harvard economist buddy who took while giving Russia dreadful neoliberal advice that paved the way for the rise of America’s public enemy #1, Putin, and of course the wee sin of nearly destroying the world financial system, should make him a permanent exile. Summers has been screeching that inflation is here to stay. He may be right for all the wrong reasons, as was Milton Friedman with the 1970s inflation.
By Anis Chowdhury, Adjunct Professor at Western Sydney University and University of New South Wales (Australia), who held senior United Nations positions in New York and Bangkok and Jomo Kwame Sundaram, a former economics professor, who was United Nations Assistant Secretary-General for Economic Development, and received the Wassily Leontief Prize for Advancing the Frontiers of Economic Thought. Originally published at Jomo Kwame Sundaram’s website
Calls, even screams, to fight inflation above all else are getting shriller. Thankfully, even The Economist (5 Feb. 2022) reminds all, Fighting inflation could put the world in a slump.
No Inflation Consensus
International Monetary Fund (IMF) Managing Director Kristalina Georgieva doubts the world faces a runaway inflation threat. She urges policymakers to carefully calibrate fiscal and monetary policies, with more “specificity”, as not ‘one size fits all’.
Widespread reversal of COVID-19 spending and low interest rates threaten recovery. Similarly, Bank of England chief economist Huw Pill stressed the central bank was not going all out to tighten monetary policy.
Instead, like Georgieva, he advocates a more nuanced approach, reasoning, “As the pandemic recedes and the level and composition of global demand and supply normalise, these inflationary pressures should subside”.
US Inflation Phobia
Inflation hawk Larry Summers – Clinton’s last Treasury Secretary and Director of the National Economic Council during Obama’s first two years – claims it is “wishful thinking” that current inflationary pressures will subside.
He insists, “The painful lesson of the 1960s, 1970s and the 1982 recession is that excessive demand stimulus leads not just to inflation, but to stagflation and ultimately recession, as inflation must eventually be brought under control”. But Summers’ economic history is partial, tendentious and misleading.
Draconian policy prescriptions supposedly inflict ‘short-term pain for long-term gain’, but care little for their ramifications. Summers has nothing to say about how the early 1980s’ interest rate hikes pushed nations into default, triggering debt crises, and over a decade of stagnation in much of the global South.
Most governments can do little to tackle rising commodity, especially fuel and food prices. Conventional monetary tightening reduces overall inflation, typically by inflicting much unemployment, without affecting international sources of inflation.
Recent US Wage Growth
The recent US wages growth that Summers is obsessed with is actually very different in cause and consequence from the pay rises in the decades he decries. Europeans have also been quick to point out how different inflation on their continent has been.
First, recent wages growth is not due to workers’ collective bargaining, as in the 1960s. Or ‘wage-indexation’, linking wage growth to inflation during the 1970s.
Workers’ bargaining power has declined greatly since the 1980s, with labour market deregulation increasing casualization.
Meanwhile, foreign direct investment has accelerated offshoring, while technological changes have reduced labour needs. Many have changed to self-employment, informal work and other ‘off-the-books labour’. By 2020, there were more than two billion in informal work, mostly in developing countries.
The pandemic has greatly increased ‘gig work’, especially in higher income countries. More piecework remuneration and illusions of independence barely compensate for less bargaining power, and greater labour, work and income insecurity. Working from home increases unpaid overtime work as ‘wage theft’ becomes more widespread.
Second, apparent wage rises may be a statistical anomaly. An estimated third of the total US non-farm workforce, many low-paid – quit their jobs in 2021 for health and safety reasons while better paid workers remained in employment.
IMF research also found labour supply declined in the US and the UK as older workers and mothers with young children quit due to pandemic related challenges. This changing composition of employment has raised the average wage.
Consider a job market with three workers – A, B and C, with hourly wages of $10, $20 and $60 respectively. The average hourly wage is $30. If worker A quits, the average hourly wage – for workers B and C – will be $40. This raises the average hourly wage by $10 – not due to wage growth, but the changing workforce composition.
The higher reported US wages reflect the one-time impact of increased minimum pay, especially when paid by major employers with a nationwide presence such as Target, Southwest Airlines, CVS Health and Walgreens.
The IMF’s October 2021 World Economic Outlook saw bleak prospects for low-skilled and young workers. This seems consistent with why low paid workers are reluctant to work for a pittance at great personal risk to themselves.
Many younger workers face special difficulties, e.g., parents of young children due to inadequate childcare facilities and pandemic school disruptions. The mismatch between available jobs and what people want has also grown.
Current inflationary pressure resembles the post-World War Two situation, with pent-up demand for consumer goods unleashed before war-disrupted supplies were restored. Inflation reached nearly 20% in 1947 before collapsing.
Current consumption demand still faces supply chain disruptions due to the pandemic. But such situations are very unlike the episodes Summers cites to make his alarmist case for prioritizing inflation.
Conventional anti-inflationary policies – e.g., fiscal austerity, raising interest rates and credit tightening – are not only inappropriate for dealing with current inflationary pressures, but can be very harmful – as the IMF chief warns.
The pandemic has triggered large price increases – notably for food, clothing, fuel and communications. The mismatch between labour supply and demand in some sectors has also become more acute.
Meanwhile, US government data show US non-financial corporations raked in their largest profits ever since 1950 in the second half of 2021 despite rising labour costs. But Summers denies that monopolistic corporate behaviour has contributed to price increases.
Overall corporate profits rose 37% from the previous year while employee compensation only increased 12%, despite “the second year of a pandemic which began by wiping out 20 million jobs”.
US Senator Sherrod Brown (Democrat-Ohio) has asserted that “prices are high because corporations are raising them – so they can keep paying themselves with ever-larger executive bonuses and stock buybacks”.
Rising house prices and accommodation rentals are also raising living costs. Following the 2008-2009 global financial crisis (GFC), governments ill-advisedly abandoned fiscal recovery efforts early. Unconventional monetary policies became the main policy tool since.
This has encouraged real estate and financial asset speculation, instead of investing in productive capacity. Fiscal austerity and continued reliance on market solutions also deter government actions to address key supply chain bottlenecks.
Lack of effective coordination between fiscal and monetary authorities – e.g., in responding to the pandemic – has exacerbated such situations. Instead, commodity and real estate speculation has been much enabled.
Such perverse incentives have undermined needed investments in information and communications technology (ICT), renewable energy, sustainable agriculture, healthcare and education. Businesses have even paid out dividends and bonuses with COVID relief funds. Thus, billionaires got billions more.
Nuance and Specificity
Effective coordination between fiscal and monetary authorities is vital for a nuanced approach to ensure sustainable, inclusive and resilient recovery. Fiscal-monetary policy coordination is also needed for a range of long-overdue reforms to address structural factors exacerbating inflationary tendencies and pressures.
But earlier reforms to ensure central bank independence and strict ‘fiscal rules’ in favour of market solutions have undermined government fiscal and monetary capacities to act effectively. Thus, such policies and related ones – e.g., inflation-targeting – must be irreversibly consigned to the policy garbage bin.
Knee-jerk responses to fear mongering by inflation hawks will derail global recovery which the IMF deems “disruptive”. The Fund is also concerned about “divergent” recoveries between rich and poor nations.
Instead of the new Cold War preference for economic sanctions at the slightest pretext, much better and more sustained international cooperation and policy coordination are needed. They must address global supply chain disruptions, stabilize international commodity prices and minimize harmful policy spill overs.