Inflation has been on the rise since mid-2020. The average price has risen at a faster pace than it has since 1980s. In January 2022, prices increased by 7.5% compared with January 2021. Now, it looks like the U.S. might be stuck with higher inflation through 2022 and beyond.
Why are prices increasing so rapidly? Are we headed towards double-digit inflation Can there be anything done to reduce inflation? What does inflation do to growth and unemployment? Robert Pollin, a renowned progressive economist, offers comprehensive answers to these questions in this exclusive interview Truthout These are his words. Pollin is an eminent professor of economics and codirector of the Political Economy Research Institute at University of Massachusetts at Amherst.
C.J. Polychroniou: Back in the 1970s, inflation was the word that was on everybody’s lips. It was the longest period of inflation the United States had ever seen and it seems to have been caused in part by an increase in oil prices. Since then, we’ve had a couple of other brief inflationary episodes, one in the late 1980s and another one in mid-2008, both of which were also caused by skyrocketing gas prices. Inflation returned with a vengeance in 2021, causing a lot of anxiety, and it’s quite possible that we could be stuck with it throughout 2022. What’s causing this inflation surge, and how likely is it that we could see a return to 1970s levels of inflation?
Robert Pollin: Inflation in the U.S. economy was at 5% for the 12-month period ended January 2017. 7.5 percent. This is the highest U.S.-based inflation rate since 1981, when it was at 10.3 per cent. The average U.S. inflation rate over the 30-year period 1991-2020 was 2.2 percent. 2020’s inflation rate was 1.2 percent. The COVID-induced depression has seen the U.S. economy emerge from its recession and some new forces have emerged.
To understand these new forces, let’s first be clear on what exactly we mean by the term “inflation.” The 7.5 percent increase in inflation is measuring the average rise in prices for a broad basket of goods and services that a typical household will purchase over the course of a year. At least in principle, this includes everything — food, rent, medical expenses, child care, auto purchases and upkeep, gasoline, home heating fuel, phone services, internet connections and Netflix subscriptions.
However, prices for individual items within this overall basket have not increased at the same 7.5 percent average rate. The 7.5 percent average figure does not include large price differences among individual components of the overall basket.
Energy prices are the biggest factor behind the rise in inflation. Over the past year, energy prices increased by 27 percent. Within the overall energy category gasoline rose by 40% and heating oil rose by 46 percent. This has led to an increase in heating oil and gasoline prices that has affected almost all businesses. These businesses require gasoline and heating oil in order to function. Businesses attempt to offset the higher gasoline and heating oil prices by increasing their prices.
The second factor is automobile prices. This includes used cars. The average price for used cars has increased by 41% over the past 12 months. However, high auto prices also impact the costs of other businesses.
Wage increases are the third major factor. The average wage rose by 4.0% over the past year. Businesses will attempt to offset the higher wage costs by increasing prices for consumers. We need to be clear about the wage increases. First, the average worker’s 4.0 percent wage rise is 3.5 percentage below the 7.5% increase in average consumer basket prices. This tells us that, due to the 7.5 percent inflation rate, the workers’ 4.0 percent wage increase ends up amounting to a 3.5 percent Reduce your payAfter taking into account what workers can buy with their wages,
Second, not all workers have received the average wage increase of 4.0 percent. Some workers have received more while others have received less. The largest wage increases were for workers in restaurants and hotels (8.4% raises) and nursing home facilities (6% raises). These workers were particularly hard hit by the COVID pandemic, which saw dangerous conditions in nursing homes, and full-scale lockdowns at restaurants and hotels. Financial industry employees also received big raises at 8.1 percent. However, this is not enough to offset hardships from the previous year. These raises rather reflect the dizzying rise of the U.S. stock market during COVID and after, all fueled by the Federal Reserve’s $4 trillion bailoutWall Street’s reaction to the crisis.
What are the key factors that underlie the overall rise in inflation?
Let’s consider car prices, energy prices and wages in turn:
Cars: The widely discussed breakdown of global supply chains, and particularly the sharp, is what is driving up these prices. fall in the supply of computer chipsThey are required for the manufacture of new cars. The supply chain breakdownIt is much more widespread than the computer chip industry. However, the most significant impact on overall inflation has been in auto manufacturing. This is because used car buyers soared when global production lines closed.
The computer chip supply will replenish and car prices will begin to fall. This may not be the case. several more months. The demand for car ownership can be decreased in the short- and long-term. This is possible by increasing the availability and quality for public transportation. People can also carpool to work and bike or walk when it is feasible. All these measures will help reduce our dependence on private vehicles. However, they will also help to lower gasoline demand. And let’s not forget that when we burn less gasoline, we will then also reduce carbon dioxide emissions that are the primary cause of climate change.
Energy: Because burning gasoline, heating oil, or other fossil fuel energy sources is the main cause of climate change, we need to reduce our dependence on fossil fuels. It is important to note that pushing down fossil fuel prices will not help in addressing climate change because it would encourage more fossil fuel consumption.
Government policy must now be committed to keeping fossil fuel energy prices high and protecting energy consumers from the negative effects of high fossil fuel prices. This will require large investments in energy efficiency in all areas, including buildings, transportation, and industrial activity. One place to start is expanding public transportation. It is also important to provide large subsidies for retrofitting homes with low cost LED lights, improved insulation, and high efficiency electric heat pumps to replace inefficient heating systems. The government must then massively accelerate the production and distribution of clean renewable energy sources to replace our existing fossil fuel energy infrastructure. It is already the reality that the costsOf generating electricitySolar and wind power are comparable or lower than fossil fuels. These investments in energy efficiency, renewable energy and other energy sources will not have an immediate effect. To offset the effects of temporary increases in energy prices, the government should offer energy tax rebates to people for the short term.
The government could take over the U.S.’s fossil fuel industry. This would be a simpler solution. The necessary phase-out from fossil fuels can be done in a controlled manner with a nationalized fossil fuel sector. The government could then determine fossil fuel energy prices to meet the needs of both consumers as well as the imperatives of the clean-energy transition. At present, the U.S. government could purchase controlling interest in the three dominant U.S. oil and gas companies — ExxonMobil, Chevron and Conoco — for about $350 billion. This would be less that 10 percentThe $4 trillion that Wall Street received from the Federal Reserve during the COVID crisis. More generally, these costs should be understood as trivial because nationalization would end these corporations’ relentless campaign of sabotagingThe clean energy transition.
Wages: It is vital to understand the historical context in which these wage increases are being made. The average wage for U.S. workers has stagnated for the past 50 year (after taking into account inflation). Accordingly, the average U.S. worker’s wage was stagnant as of January 2021. average wageNonsupervisory workers earned $25.18 an hr, while the figure for 1972 was adjusted for inflation to $25.28 an hr. This is while average labor productivity — the average amount each worker produces over the course of a day — has increased nearly 2.5-foldBetween 1972 and 2021. Thus, if average wages had risen in step with productivity gains, and no more, between 1972 and today, the average worker’s wage last year would have been $61.94, not $25.18.
Indeed, a major factor keeping inflation low for the previous 30 years was the fact that workers didn’t have the clout to bargain up their wages. This was clearly acknowledged by Alan Greenspan, who was the Federal Reserve’s chair from 1987 through 2006. He acknowledged it explicitly. observed in 1995 that, even at low unemployment rates, U.S. workers had become “traumatized” by the loss of bargaining strength, resulting primarily from global outsourcing that pitted U.S. workers against those in relatively low-wage economies, such as China and Mexico. Greenspan was effectively describing what Karl Marx termed the “reserve army of labor,” in Volume 1 of Capital,Except that the reserve arm now operates on a worldwide scale.
This perspective shows that we don’t want to reduce inflation by denying workers the wage increases they deserve. This is the core idea behind the approach. advocatedBy a large group of orthodox economists like Lawrence Summers. Their proposals would see the Federal Reserve raising interest rates significantly with the goal of reducing economic spending. It will also make it more expensive to borrow money. The unemployment rate will rise as a result of spending cuts. Higher unemployment will lead to workers being exposed to more trauma. In turn, wage demands will fall.
This program will accomplish the exact opposite of what the Biden administration promises in terms of delivering higher well-being to U.S. employees post-COVID.
Is there another way to stop the Fed from raising interest rates in an effort to control inflation?
Since March 2020, when the COVID pandemic began, the Federal Reserve has kept the short-term rate it controls at almost zero. In the six years following the Great Recession and Wall Street collapse of 2007-2009, the Fed maintained this interest rate near zero for six more years. It should be possible for interest rate to rise above zero without causing economic collapse. In this case, interest rates could rise slowly and gradually. But this is different than the Fed imposing large interest rate increases for the purpose of raising the unemployment rate and, thereby, decimating workers’ bargaining strength.
Alternative programs to address current inflationary pressures include:
- The full range of immediate supply-chain problems must be addressed, starting with the computer chip shortages. Expand public transportation and subsidize ridesharing to reduce demand for used cars.
- Energy tax rebates and large-scale energy efficiency investments can help consumers protect themselves from high energy prices.
- Supporting wage increases indefinitely. Businesses will have some difficulty absorbing the increased labor costs. As a result, their profit margins will fall modestly. U.S. businesses cannot assume that wage stagnation will continue to be a feature in American capitalism for 50 more years, even though labor productivity continues to rise steadily. Big corporations in particular try to push higher labor costs onto consumers by raising prices. The Biden administration should aggressively enforce antitrust (i.e. monopoly) policies to reduce these price marks-ups over labor cost. They have already begun to do so.
These measures taken as a whole are unlikely to lower the inflation rate below the 2 percent range experienced by the U.S. between 1990 and 2020. Inflation control will require more decades of traumatized workers, and wage stagnation. But by itself, an average inflation rate in the range of 3-4 percent, as opposed to 1-2 percent, is not a serious problem, as long as that somewhat higher inflation rate results from increased wages and a more equal distribution of the economy’s overall income pie.
What are the effects of persistent inflation on economic growth?
Inflation, economic growth and unemployment are not necessarily in a linear relationship. Instead, we should be focusing on high-income countries (i.e. those that make up the Organisation for Economic Co-operation and Development). Since the 1960s, periods of high inflation, even at 10 percent, have been associated with periods when there has been little economic growth. both high growth and low growthDepending on the particular circumstances.
Inflation rates were higher in the 1960s because of strong economic growth and supply bottlenecks like we are now. Workers were also generally more able to bargain up wages and gain an increased share of the economy’s overall income pie. But it is better to face such problems than an economy that is experiencing zero inflation and is also stuck in recession. President Lyndon Johnson exemplified this. noted after U.S. inflation had arisen from 1.5 percent in 1965 to 3 percent in 1966, “If rising prices are a problem, they’re a lot better than a stagnant economy and high unemployment.” On the other hand, when high inflation resulted from the oil-producing countries (OPEC members) and the private oil corporations such as Exxon exercising monopoly power to quadruple oil prices in 1973, and then to double prices in 1979, the resulting overall inflation was associated with recession and high unemployment.
The rise of neoliberalism in the 1970s was also a precursor to the election of Margaret Thatcher in Britain and Ronald Reagan in the U.S. in 1980.
