Thursday, August 25, 2011

The Quiet War of the Rich on the Poor

Here is a post by Dean Baker on his Beat the Press blog that gives some insight into how the war of the rich is waged against the poor. The marching orders come from the elite via "no more inflation" directives:
The Washington Post and Robert Samuelson did their part in publicly passing along the marching orders from the rich and powerful to Ben Bernanke and the Federal Reserve Board. The word from these folks is "No Inflation!" If that means millions more people will suffer unemployment for a few more years, that's a price that the Post and Samuelson are willing to pay.

Of course the rich and powerful have numerous channels for making their concerns known to the Fed, they don't need the Post and Samuelson to put them into print. So, this really is a public service.

What's neat about this picture is that there is little dispute about the basic facts surrounding inflation. Inflation is a problem that stems from an overheated economy. Apart from war or political collapse there are no instances of inflation just shooting up from low levels into Weimar type hyper-inflation. This means that if we are going to have a problem with inflation, it will arise gradually and we will first have to get back to something near full employment. It will not just creep on us overnight when we are sleeping. (There can be supply induced inflation. Suppose Saudi Arabia's oil fields are blown up and the price of oil goes to $400 a barrel. This would cause inflation, but the Fed's actions are not going to affect this outcome.)

The other basic fact is that moderate rates of inflation do very little harm. The economy operates every bit as well with 4-5 percent inflation as it does with 1-2 percent inflation. This is a heavily researched topic and the overwhelming majority of this research has found little or no negative effect from moderate rates of inflation (e.g. here and here).

Yet, both the Post edit board and Samuelson argue strongly that Bernanke should not risk higher inflation to try to reduce the unemployment rate. The edit told readers:
"the core rate of inflation (price increases excluding food and energy costs) has crept up to within striking distance of the Fed’s 2 percent target. Printing more money might push it above that, unleashing dangerous inflationary expectations."
Ooooooh, dangerous inflationary expectations. That's really scary. Since the core inflation rate has been above 2.0 percent for most of the last 50 years, it's hard to see what anyone would be worried about.

But then the Post gets to the substance of the matter:
"The Fed recently promised to continue making funds available to the financial system at nearly zero percent interest. While perhaps necessary in the short run, this policy amounts to a penalty on prudent savers and a reward to over-leveraged debtors."
Yep, we should really be worried about rewarding those over-leveraged debtors -- lazy bums, many of them are not even working. And the "prudent savers?" Yes, that woud include all those wealthy people with large amounts of money to invest. But hey, no class issues here.

Robert Samuelson also notes how more expansionary policy has the effect of transfering wealth from creditors to debtors in the context of discussing a proposal by Harvard economist to deliberately target 6 percent inflation for a couple of years:
"To be sure, higher inflation represents a wealth transfer to debtors (who repay in cheaper dollars) from creditors (who receive cheaper dollars). That’s unfair, Rogoff says, but it may be less unfair and disruptive than outright defaults by overborrowed debtors."
Samuelson concludes that the risks of inflation are just too great and then wrong tells readers:
"Remember: The economy’s basic problem is poor confidence spawned by pervasive uncertainties."
As noted in today's lesson on accounting identities, the share of GDP devoted to investment in equipment and software is almost back to its pre-crisis level. And, the saving rate is still below its post-war average, meaning that consumption is high, not low. The economy's basic problem is that the dollar is too high, which is causing a large trade deficit.

When we think about the trade-offs between inflation and unemployment it is important to remember that the tens of millions of people who are unemployed or underemployed today did not do anything wrong. It was people like Alan Greenspan and Ben Bernanke who messed up. And of course other actors in national policy debates, who were too obsessed with budget deficits to notice an $8 trillion housing bubble did not help either.
The cruel irony is that if the rich would only share the economic pie with the poor, both would be better off in absolute terms. But the rich don't like losing a bit of ground relatively. The top 1% are used to having 35% of all the wealth, i.e. equal to the bottom 95% of the population (see here). Letting the poor get wealthier would erode that relative position.

Click to Enlarge

Having a 5% inflation rate would mean that somebody who is 25% underwater on a $200,000 house (i.e. $50K) with a $50K/year salary could expect their salary to rise $81K in 10 years. Their debt would slip from being 100% of their salary to being only 61% of their salary. The debt burden would be slowly washed away by inflation.

That is a heck of a better solution than to give trillions to the Wall Street banks and watch them hand out multi-million dollar bonuses to their staff. Especially when it was these banks that created the economic crash! Enough of "trickle down" economics. Assistance needs to go to those in greatest need. Surprisingly, that will give the "biggest bang for the buck" in healing the economy.

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