U.S. inflation is nearing levels not seen since the 1970s and early 1980s, at 7.5 percent year-over-year as of January, the largest rise in four decades. While inflation will likely decelerate from here, it will remain well above 5 percent for most if not all of 2022.
A prior article outlined how the misguided and poorly constructed stimulus bills in 2020 and 2021 jumpstarted the current inflation, which redistributes wealth from the working and middle class to the oligarchy. Yet this inflation is now here to stay in some form regardless of whether Congress passes more stimulus bills, meaning deeper issues are now at work.
The purpose of this article is to offer pro-America candidates and politicians a concrete plan to fix the root causes of inflation. These include bad monetary policy, rampant monopolization, and a manufacturing base that is offshored to China. Unfortunately, America’s existing approach to inflation benefits capital over labor and over those living paycheck to paycheck. A set of policy changes can cure inflation and America’s long-term economic rot.
Inflation and Monopolization
Objectively, America has a monopoly problem. Corporate profits relative to labor’s share of national income are abnormally high relative to history, and profit margins in all major U.S. industries save manufacturing show evidence of a lack of serious competition.
Manufacturing only faces stiff competition from overseas, because this industry is uniquely subject to existing free trade agreements. Other measures of concentrated corporate power, such as monopsony power—where a firm is the primary buyer of goods or labor—show a sharp increase in large firms’ bargaining power versus suppliers, including suppliers of labor.
Several things led to this problem. Antitrust law was de-fanged since the 1980s. That is largely blamed on conservative justices but leftist justices like Stephen Breyer have an equal legacy of not challenging business mergers.
But the largest factor is ever-lower interest rates, which have incentivized massive financial engineering. A greatly reduced corporate cost of borrowing meant that firms had a larger incentive to either buy back their own shares or buy another company instead of innovating internally. Indeed, studies show periods of low real interest rates have always corresponded with an increase of cartelization and monopoly power.
The right should care about these issues and realize they stem far beyond big tech. Everything from banking, to defense contracting, to meatpacking is subject to monopoly or monopsony power. Breaking up concentrated power doesn’t break free-market rules when government largess often led to the concentrated power in the first place.
Also, even if government didn’t directly cause the problem, trust-busting shouldn’t be a sacred cow for Republicans because most trusts are far-left epicenters directly opposed to Republican voters’ interests. That Republicans don’t have a concrete vision of antitrust legislation that would serve their voters shows just how disorganized and corporatist the party remains.
Worse, the corporate concentration in America is fueling inflation. Matt Stoller, a populist (and honest) liberal routinely and correctly points out the link between outsized post-lockdown corporate profits and inflation. Just because the Biden administration—which is more right on antitrust than anything else and much better than the Obama administration on the issue—is pointing this out too doesn’t mean they are wrong. Instead, Republicans should have their own, better antitrust plan that serves the complete interests of the working and middle class—their base.
Inflation and Foreign Supply Chains
Right now, America’s reliance on production overseas means that America is subject to the varying coronavirus policies of foreign governments. Going forward, we face the strong realization that any sort of disruption to the supply chain—even after Covid—can throw the economy for a loop.
America’s economy should never be subjected to the whims of China. A massive reshoring effort is in order.
The criminal part of it all is how American policymakers allowed so many essential goods and components to get offshored in the first place. For example, Taiwan makes a huge chunk of the global semiconductor supply. If the coronavirus or the Taiwanese government decides to produce fewer semiconductors, American manufacturers like automakers grind to a halt. The dirty little secret about why America cares so much about Taiwan is that it holds much of the globe’s semiconductor production capacity.
Semiconductors must be re-shored, and the current facility to do this is only a step in the right direction. The reshoring of many other production lines is required. One solution is a flat tariff to pay for manufacturing and supply chain-oriented infrastructure. The tariff could also pay for a tax break to businesses that re-shore labor—the tax would be forever forgiven unless that same firm later off-shored those jobs, at which point the firm would owe the unpaid taxes plus a penalty.
Finally, onshoring and de-globalization are forces that will keep inflation elevated, boost real U.S. wages, and reduce debt in real times with higher nominal GDP. The structurally higher inflation is a very small cost to pay for reducing our reliance on unfriendly nations overseas that could cause large price spikes in times of conflict.
Federal Reserve Policy Screws the Working Class
The Federal Reserve sowed the seeds for much of these underlying problems. The Fed enabled the aforementioned stimulus overspending via a decade of money printing to buy Treasury bonds, subsidizing the cost of federal government borrowing. The Fed also provided the cheap corporate credit that increased monopolization, and the Fed-induced financial engineering played a role in indebted companies—only after a decade of financial engineering—looking to cut costs by moving jobs overseas.
The Fed has also caused massive asset price inflation. This doesn’t threaten inflation, it actually threatens a deflationary shock and financial instability because when asset prices fall sharply companies go bankrupt, unemployment increases, and the economy grinds to a halt.
While the Fed’s money printing to buy Treasury bonds and other securities wasn’t inflationary to consumer prices—the money printed is largely locked in banks’ reserve accounts at the Fed and doesn’t touch the real economy—the program dubbed quantitative easing did punish savers and cause massive risk-taking via greater credit (debt) creation on Wall Street.
This sparked bidding up of financial assets to ridiculous levels only justified if the Fed continued to pump the market. The result is a massive bubble economy. The latest example is metaverse mortgages, but even assets of value have been inflated as investors either feel they have no other alternative, or tell themselves stories about what will happen ten or even 20 years from now to justify sky-high valuations.
In response to the 2020 lockdowns, the Fed upped its bond-buying to epic levels, causing the Fed’s balance sheet (the Treasury securities the Fed bought with printed dollars) to move from an already high $4.3 trillion pre-pandemic to almost $9 trillion at the start of 2022. Meanwhile, the Fed lowered interest rates from an already low level back to zero.
In real terms, after inflation, interest rates set or influenced by the Fed are now deeply negative, punishing savers and rewarding speculators. The Fed’s intervention directly flowed to asset prices, and is the reason stocks at the end of 2021 were up over 50 percent while the economy only improved 3 percent.
To wit, Bank of America estimates that corporate earnings used to explain half of equity market returns up to the financial crisis of 2008 and before the start of the Fed’s money printing to buy government bonds. But since then, they explain only 21 percent, while changes to the Fed’s balance sheet explain 52 percent of market returns since 2010—the year the Fed started large-scale quantitative easing, or long-term bond buying.
While the Fed certainly causes this asset price inflation, the Fed’s deeply negative real interest rate is also probably a large contributor to continuing our current inflation, especially the components of inflation related to shelter.
The Fed now faces bipartisan pressure to fight current inflation, which requires it to pull back programs that have been supporting asset prices. Here, the Fed’s chief concern is that inflation gets built into wage expectations, which could cause the current inflation to be a repeating and self-fulfilling process that feeds on itself. Yet the Fed is also concerned because pulling back support risks assets falling sharply (which is already happening). That could eventually breed financial instability.
But step back a second. The Fed has no problem when its actions cause asset price inflation of capital owned overwhelmingly by the rich. But only when the Fed’s actions start to cause wage pressures does it begin to act to quell the inflation.
Worse, Fed officials have hinted at slowing interest rate increases because they are worried about the effects of these increases on asset prices, which as noted above are already up massively since the pandemic started. On top of this, the Fed is reacting in the interests of corporations, which are experiencing record corporate profits but are concerned about the impact of wage increases on historically elevated profit margins.
This smacks of oligarchy. Keep in mind this is the same Fed whose officials were engulfed in scandal because of trades made based on actions the Fed was about to take.
What to Do
Fighting America’s inflation problem and long-run economic rot starts at the Federal Reserve. A massive house cleaning is in order.
Of course the Fed should fight inflation now, but the Fed should have been fighting inflation last year when it was already affecting working Americans, before wage pressures started to increase. Today, the Fed finds itself between a rock and a hard place—it must reduce inflation but reducing inflation will likely cause financial assets to fall.
Here, the Fed must carefully prioritize stable prices before the oligarchic urge to support financial assets. Even if a crash occurs, the Federal Reserve needs to stand firm and reduce the massive pro-wealthy interventions in the market it has pursued over the last 34 years.
Beyond this, force the Fed to focus on asset price inflation and too much credit creation, not just a one-sided view of protecting financial assets from falling, wage pressures, and consumer price inflation. The next Republican president must appoint outsiders to the Fed and consider fundamental reforms of its practices. A model for Fed appointees is former Fed governor Tom Hoenig, famous for his votes against Bernanke and against quantitative easing in the early 2010s.