Economists tell us that the market can remain irrational longer than we can remain solvent, but how long can economists remain irrational? Judging from the inflation scare we just lived through, the answer appears to be “longer than you can remain solvent.”
Experts of all description are prone to enduring folly in which the failure of some cherished intervention triggers more of that intervention. This is the famed “doing the same thing but expecting different results” and it’s a grand American tradition.
Take bloodletting, a therapy that does not work and that only makes things worse, but which nevertheless served as the first recourse for “doctors” for centuries. Patients who worsened after a bloodletting were presumed to be undertreated, so their doctors would bleed them again, and again. Every turn for the worse was evidence of the need for more bleeding.
If you grew up in America, you doubtless learned a lot about George Washington — even apocryphal stories about his boyhood, like the cherry-tree incident:
You know all about Washington, from his wooden teeth to his military victories. Lin-Manuel Miranda’s ballad made Washington’s dream of a life spent “under his own vine and fig-tree” famous:
But it’s very unlikely that you heard about how George Washington died. After eating dinner in cold, wet clothes, he developed a vicious cold. A succession of doctors attended Washington, each one bleeding him, until more than half of Washington’s blood had been extracted, whereupon the country’s father died:
Today, a different kind of quack is given free rein to bleed another Washington: central bankers like Jerome Powell sit in DC, bleeding the economy with interest rate hikes, in the name of preventing inflation:
The theory goes: the government gave the poors too much money in the form of covid relief. That made working people lazy and feckless. The proles’ fat cash cushions let them demand unrealistically high wages, and this is driving up the price of goods. To solve this, we need to destroy lots of jobs, so workers will bid against each other for the remaining, scarce gigs, until wages go down.
Even a cursory examination of the facts revealed this theory’s hollowness. Even as the Fed was cranking up interest rates in October 2022, real wages were 2.3% lower than they’d been a year before:
Prices did rise, of course, but there was no evidence that they rose because of greedy workers. Some of that price-rise was due to covid shocks — a drop in the ability to make things because of lockdowns. Some was due to war-shocks — disruptions to energy and food supplies following from Russia’s invasion of Ukraine. Some was due to changes in what we wanted to buy (high demand for work-from-home equipment, changes to the rental market as people moved out of cities).
But one undeniable factor was price-gouging. The CEOs of large companies have spent the past two years boasting to shareholders on their earnings calls about how all the scare-talk about inflation let them hike prices and blame the Biden administration:
It takes a deliberate act of will to see energy companies hiking prices and raising prices and decide that the real problem is workers have too much money, and that the solution cannot under any circumstances involve a tax of those “windfall” profits:
Or breaking up monopolies:
But some people want to see workers suffer. Well, at least one person wants workers to suffer. Larry Summers, the Clintonite ghoul who led the charge on punishing workers to fight inflation:
Summers is a man who is wrong about a lot of things. Like, when he was president of Harvard, he was wrong about women’s natural incapacity to do science:
That had a lot of consequences, as did Summers’ economic guidance when he served as Treasury Secretary under Bill Clinton. But the fully operational battle station version of Larry Summers emerged when he became a talking head, helping to sabotage the Biden Administration’s ability to continue providing relief during the pandemic.
Summers’ pitch went like this: inflation is caused by workers having too much money, and anyone who disagrees with me is a sentimental lackwit who doesn’t understand the Science of Economics:
Summers’ confident pronouncements about the enduring, structural nature of inflation were used as ammo for all kinds of cuts in the Biden agenda, and were used to argue against student debt cancellation. According to Summers, we just can’t have nice things, and if we do, we risk hyperinflation and the collapse of the US dollar:
Not only was Summers wrong, but his prescriptions also scuttled wildly popular moves that could turn out voters for larger Dem majorities in the Senate and retaking the House, enabling even more muscular action.
Summers’ argument fails on its own terms, too. If inflation is “too many dollars chasing too few goods,” then one way to solve inflation is to increase America’s capacity to fulfill demand. You know, by educating people, investing in infrastructure, re-shoring critical manufacturing, and so on:
Some of the steepest inflation Americans experienced came from nondiscretionary spending: on healthcare, childcare, long-term care, rehab, etc. This is “care inflation,” and you don’t reduce demand for it by hurting workers:
The price of care labor has outpaced the CPI every year since 1978. As the price of goes up, working-age adults are taken out of the workforce so they can care for their kids, parents, spouses, and other family members:
This reduces America’s capacity, removing skilled workers from the workforce. In other words, to increase its capacity, America needs to increase social spending, not reduce it.
Instead, we’re allowing private equity funds to “roll up” (that is, monopolize) the care sector, raising prices and slashing wages. The quality of care goes down, and the price goes up. You know — inflation:
Larry Summers was wrong about inflation. Don’t take it from me: just ask Larry Summers! He’s now saying that inflation is over, it was “transitory” and it was caused by supply chain problems, not giving the poors too much money:
As David Dayen writes for The American Prospect, Larry Summers’ latest pronouncements conspicuously fail to reckon with Larry Summers’ greatest detractor: Larry Summers, who spent years calling covid relief “the least responsible economic policy in 40 years”:
Summers’ delusion was anything but harmless. He and his fellow interest-rate hawks provided cover for the Feds’ brutal rate-hikes, which led to steep cuts to planned solar, geothermal, wind, and grid investments. Alternative energy companies went from profitable to unprofitable overnight:
Giant offshore wind projects were canceled. This is the cancel culture no one is talking about:
Heat-pump retrofitting is behind schedule:
As Dayen says, “The Inflation Reduction Act is effectively being offset by interest costs.”
If you’d like an essay-formatted version of this post to read or share, here’s a link to it on pluralistic.net, my surveillance-free, ad-free, tracker-free blog:
Chatham House (modified)