[We need to greatly expand the role of fiscal policy relative to
monetary policy and address inflation while also promoting low
unemployment, needed new investments, decent wages and a much fairer
distribution of income and wealth.]
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THE LEFT, INFLATION AND MONETARY POLICY  
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Andrew Jackson
July 29, 2022
Canadian Dimension
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_ We need to greatly expand the role of fiscal policy relative to
monetary policy and address inflation while also promoting low
unemployment, needed new investments, decent wages and a much fairer
distribution of income and wealth. _

Banksy mural in Midwood, Brooklyn, photo by Joshua Geyer.

 

The return of high inflation after the global pandemic poses a major
political and analytical challenge for labour and the left. On top of
cuts to real wages resulting from the wide gap between inflation and
pay, high and rising inflation has led central banks, including the
Bank of Canada, to hike interest rates sharply. This is raising the
debt servicing costs of households, businesses and governments and
making new borrowing more expensive.

If and as interest rates result in slowing economic growth and a
possible recession, unemployment will rise, poverty will increase, and
the squeeze on wages will intensify. Workers are being made to pay
through inflation the cost of the pandemic which could have been
financed through a wealth tax
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The International Monetary Fund is already forecasting
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unemployment and stalled growth in the major advanced economies and
China, while calling for tough monetary policy to deal with inflation.

Many economists and conservative pundits are calling on governments to
cut spending so as to offset the rising cost of serving public debt.
Already inadequate public and private investments to deal with the
climate crisis and the affordable housing crisis will likely be
reduced and postponed.

High inflation, followed by high unemployment

As in the 1920s and 1930s in Germany, high inflation accompanied and
followed by high unemployment may fuel the rise of the far-right. In
Canada in the 1980s, high inflation plus high unemployment
(stagflation) set the stage for the rise of neoliberal economics,
fiscal austerity, the rise in precarious unemployment, and a frontal
attack on labour.

In response, the left has understandably attacked the turn toward
contractionary monetary policy as damaging and even worse than the
underlying disease of inflation. While this is warranted, we also need
a major re-thinking of macro-economic and especially monetary policy.

As Sam Gindin has argued
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we must also reflect on how to rebuild the left and the labour
movement in the context of a new economic and social crisis caused in
part by labour’s long-standing weaknesses. The fight to maintain
working class living standards must be informed by the development of
an alternative to neoliberalism.

The current inflation surge

As many on the left as well as more mainstream economists and even
central banks have argued, the recent increase in inflation is mainly
due, not to too much demand in the economy, but to reduced supply.
Interrupted supply chains and shifts in the composition of demand due
to the pandemic were recently exacerbated by high energy and commodity
prices, particularly in the wake of the war in Ukraine
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Some of these factors may be transitory.

It would appear that many major companies with some market power have
opportunistically boosted prices and profits and caused profit-driven
inflation (though it is unclear why they did not exercise such power
earlier). As the left has strenuously argued, rising inflation to date
has been driven much more by higher profits than by higher wages and
workers will and should seek to maintain real wages.

That said, central banks are tightening monetary policy, not because
wages are rising rapidly, but because they fear a wage-price spiral
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to that of the 1970s. They are acting preemptively, hoping to slow the
economy just enough to bring inflation back to pre-pandemic levels
(the target rate of two percent in the case of Canada). They are,
however, seemingly prepared to inflict a serious recession if they
deem it to be necessary.

Central banks believe that there is a trade off between inflation and
unemployment (the so-called Phillips curve) such that higher
unemployment will reduce inflation, mainly through a squeeze on wages.
They think that the precise trade-off varies and is not known
precisely, but is influenced above all by the bargaining power of
labour set by the unionization rate, the degree of centralization of
collective bargaining, labour militancy, unemployment benefits, the
minimum wage, and other factors influencing the labour market. Milton
Friedman explicitly argued that unemployment should not be allowed to
fall below the so-called natural rate in order to achieve low and
stable inflation.

Monetary policy made by an independent central bank to maintain low
inflation has been a central plank of the entire neoliberal economic
agenda. It has made macro-economic management a seemingly technical
issue and relatively side-lined fiscal policy which involves
inherently political debates over distributional issues and the
composition of government spending.

Today, it is unlikely that a major recession will be ‘needed’ to
bring inflation back to pre-pandemic levels given the continued
weakness of labour and the strong deflationary pressures continuing to
arise from global economic integration and unregulated international
capital flows.

That said, central banks are concerned that fiscal measures to fight
the pandemic and demographic factors (the retirement of the baby
boomers) have resulted in low unemployment and some tentative signs of
a revival of the labour movement, especially in the United States.

Left Keynesian economists in the tradition of Kalecki would broadly
agree that there is indeed a trade-off between inflation and
unemployment determined by the relative bargaining power of capital
and labour
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a capitalist economy. They argue that some level of unemployment and
slack in the job market is needed _within the context of
capitalism_ to discipline labour and to maintain profitability.

A profit squeeze induced by a rising wage share will limit business
investment and undermine ‘confidence.’ Capitalist control of the
investment process thus largely constrains central banks to privilege
low and stable inflation over the goal of low or full employment. This
is explicitly the case in Canada where the central bank has only one
goal, to achieve the inflation target, but still true of countries
such as the United States which give central banks a somewhat broader
mandate.

Left Keynesians argue that full employment and stable inflation could
and should be maintained mainly through fiscal policy, that is,
changes to government spending and taxes, and ultimately by
socializing the investment process. This entails not just a major
increase in public sector investment as a share of the economy, but
also expanded public ownership, especially of the financial sector and
large firms.

The high costs of the 1970s anti-inflation turn

In the late 1970s, the Volcker squeeze
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echoed in Canada in the early 1980s, brought down inflation from
double digit levels at the cost of a deep recession and very high
unemployment which seems to have more or less permanently reduced the
bargaining power of labour. Interest rates eventually fell in line
with lower inflation in the 1990s and 2000s, but central banks
deliberately maintained some slack in the economy to contain any
inflationary pressures.

That experience demonstrated that monetary policy can indeed control
inflation, albeit at high economic and social costs.

Most progressive economists argued that the strong emphasis of central
banks on achieving and then maintaining low and stable inflation in
the neoliberal era limited potential economic growth, led to stagnant
real wages and a shift in national income from wages to profits, and
helped fuel rising income and wealth inequality. A broader political
economy perspective would reference the failure of the labour movement
and the left to fight back against tight monetary and fiscal policy,
maintain bargaining power in the workplace, and make the case for much
greater public control of investment.

During the so-called ‘great moderation’ of the 1990s and 2000s,
there was an extended, recession free period of low interest rates,
steady though not spectacular growth, and low and stable inflation.
Unemployment fell from the very high levels of the early 1980s, but
real wages stagnated through much of the 1980s and 1990s and there was
a marked rise in more precarious forms of work. Fine-tuning ups and
downs in the economy through monetary policy seemed to ‘work’ and
mainstream economists largely dismissed the need for fiscal policy.

That period came to an end with the global financial crisis and Great
Recession of 2008 when governments rescued the banks and the entire
global financial system through major injections of capital and fought
a global downturn and fast-rising unemployment by increasing
government deficits and debt. In the United States and Europe, central
banks resorted to ‘quantitative easing,’ creating new money to
lower both short- and long-term interest rates. Unfortunately, fiscal
stimulus was abandoned prematurely in favour of austerity. But
governments once again turned to fiscal stimulus and extraordinary
monetary measures to fight the new global slump caused by the pandemic
in 2020.

While loose and exceptional monetary policies have now kept interest
rates at low levels for more than two decades and have played a role
in keeping unemployment at bay, they have had important negative
effects. These must be taken into account by the left.

As noted, monetary policy and central bank independence serves to
depoliticize economic policy making. Cheap credit combined with
financial deregulation has helped finance all kinds of speculative
activities, from housing bubbles such as that preceding the 2008
crisis, to frothy stock markets, to the exponential growth of the
financial sector, to mergers.

Corporations have used cheap credit to finance share buy backs and
large dividend payouts, benefiting corporate insiders and shareholders
and fuelling income and wealth inequality. Low interest rates have,
however, not noticeably raised the level of real business investment
in line with a rising profit share of national income.

Low interest rates in combination with weak growth of real wages have
also fuelled a huge rise in household debt, even more so in Canada
than in the United States. Investment in housing has been a major
factor in economic growth, but over-inflated house prices now pose a
major threat to financial stability. Cheap consumer credit has also
artificially maintained the living standards of ordinary working
families as well as the excessive consumption of the very affluent.

Alternatives to monetary policy and austerity

Monetary policy is a poor tool for fighting inflation. The key problem
is that central banks rely almost exclusively upon a single tool, the
interest rate. Higher rates impact negatively on business and public
investment which we need, and not just on financial speculation and
asset price inflation. They work against the compelling need to invest
more rather than less to fight the climate crisis and to build
affordable housing.

The federal government should and can ensure that financing costs for
the needed energy transition as well as affordable housing are
cushioned from higher interest rates. We should expand public
investment banks like the Export Development Corporation and create
new ones to extend low-cost credit and/or equity to desired productive
investments. These banks could be financed in part by the Bank of
Canada subject to agreements between the Bank and the federal
government.

There should effectively be a sliding scale of interest rates
manipulated by the federal government and the Bank of Canada to
maintain a reasonably low inflation rate while protecting and
promoting essential investments.

Further, we need to expand credit controls and regulations to limit
flows of capital to low priority purposes. We already impose some
conditions such as minimum down-payments and maximum debt servicing
costs on home mortgage lending and borrowing, but do not adequately
regulate corporate borrowing.

While governments do monitor bank lending to the corporate sector, the
dominant assumption is that it is up to private financial institutions
rather than the state to assess and assume risks, let alone look at
criteria other than risk-adjusted rates of return.

On top of these measures impacting on financing costs of new
investment, the federal government should cushion the impact of
inflation on lower income families by increasing tax credits such as
the GST credit, financed by taxes on excess corporate profits and
wealth. Interest rates on credit cards should be reduced and
regulated. Total borrowing for consumption can be lowered without
hurting ordinary working families.

There is also a case to be made for selective price controls on key
commodities such as energy where there is strong evidence of excess
profits and damaging speculation. However, broader price controls
would be very strongly resisted by employers if they did not also
cover wages.

The central point is that it is not enough for the left just to oppose
higher interest rates. We need to greatly expand the role of fiscal
policy relative to monetary policy and address inflation while also
promoting low unemployment, needed new investments, decent wages and a
much fairer distribution of income and wealth.

_Andrew Jackson is the former Director of Social and Economic Policy
at the Canadian Labour Congress and author of the recent book, The
Fire and the Ashes: Rekindling Democratic Socialism
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Lines, 2021)._

_Founded in 1963, Canadian Dimension is a forum for debate on
important issues facing the Canadian Left today, and a source for
analysis of national and regional politics, labour, economics, world
affairs and art.  More than 75% of our operating budget comes to us
in the form of donations from our readers. These donations help to pay
our bills, and honorariums for some of our writers, photographers and
graphic artists. Our supporters are part of everything we
do.  DONATE NOW [[link removed]]_

* inflation
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* interest rates
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* monetary policy
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* wealth tax
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* unemployment
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