So, now I want to talk about the post COVID economy and all of the inflation we have, and how to fix it. It's a pretty simple fix. The fed just needs to raise interest rates.
The role of the federal reserve in managing the economy and the Phillips Curve
The "Fed" gets a bad wrap for some reason. I know a lot of libertarians scream about it while advocating for the "gold standard" for whatever reason, and it seems irrational. Imagine the federal reserve as the pacemaker of the economy. The economy, allowed to act as a fully "free market", won't always give us the right result that we want for optimal growth and employment. Generally speaking, in economics, there exists a concept called the phillips curve. The phillips curve essentially hypothesizes an inverse relationship between unemployment and inflation. if inflation is high, unemployment is low, and that means that inflation is being driven by workers having more bargaining power. Workers want more money, employers have to give it to them, they raise prices, and this leads to workers wanting more money, which is basically a wage price spiral. Alternatively, if unemployment is high, worker bargaining power is low, and prices remain fairly stable, because many people can't afford anything. This is why I always say that some inflation is healthy, and that inflation can be a sign, in moderation, of workers having bargaining power and money to spend.
Generally, the federal reserve is the fulcrum through which the optimal balance of inflation and unemployment is reached. It does so by controlling interest rates on loans given to businesses, which can influence the amount of jobs created. Higher interest rates mean fewer jobs being created, meaning higher unemployment and low inflation. Lower interest rates means lower unemployment but on paper higher inflation.
If we're in a situation with high inflation but low unemployment and a "job shortage" like right now, that means we have too many jobs and not enough workers. And that's what's driving things out of whack. It's more complicated than that as the problem is one of too much money for too few goods, and there being various supply shortages, but fewer jobs means less money means lower demand means less inflation. So if the demand is high and the supply is low, you get inflation, and that's why things are out of whack right now, and this is why raising the interest rate to put a halt on job creation will solve the economic problems.
Tangent - Rebutting phillips curve skeptics
Now, if you read that article I cited above about the phillips curve, you'll see that the concept has been called into question. This is because of stagflation in the 1970s. Essentially a situation in which there was high inflation and high unemployment at the same time. But, I feel like this is very overstated to the point of being propagandistic. You see, this is a neoliberal argument against Keynesian economics Keynesian economics, ie, the left wing economics of the 1930s-1970s, relied heavily on the phillips curve. But, a lot of rich people didn't like that paradigm, so they ended up creating far right movements against it in the 1950s, 60s, and 70s, in order to counter the mainstream economic attitudes at the time. And when stagflation happened, the neoliberals screamed at the top of their lungs that this meant the downfall of keynesian economics, and this led to right wing economic schools taking over from the 1980s onward. It was kind of an ideological coup by the right to replace the new deal keynesian paradigm with the Reaganite paradigm which is a lot more hostile toward labor.
But, in reality, I don't really feel like the phillips curve was fully rebutted, it just encountered a special situation that was outside of the normal set of parameters. The big problem was that there was a supply shortage of oil at the time, and that drove the economy out of whack. OPEC, a cartel of oil rich countries, essentially drove down the supply of oil, which, combined with the Iranian mess of 1979, drove oil prices sky high. Nixon's poor monetary decisions in the early 1970s also had an impact. What ultimately solved it was alleviating the oil issues and using the fed to raise interest rates to spark the recession of 1982, which essentially served as an off/on switch for the economy. So in reality, raising the fed rate was the solution after all.
History of monetary policy from 1982-2020
So, this is going to be quick, but after the 1982 recession, the US finally reset the economy after a decade of inflation and unemployment rated problems. As I said, the issue started under Nixon due to poor policies of his, but was greatly exacerbated by the oil crisis, and wasn't fully brought under control until 1982, at which point Reagan was hailed a hero for it. This is why modern conservatism took off. Reagan framed it as his small government neoliberal ideology solving the problem, but it was really the fed. Government policies don't often influence the economy directly, it's mostly the fed that controls unemployment and inflation. And under NORMAL circumstances, the phillips curve applies.
Anyway, as you can read in the book "End of Loser Liberalism", the Fed is what really controls the economy. And since the 1980s, the Fed has generally been very inflation conscious, traumatized from the 1970s experience of stagflation. So, in order to keep inflation under control, the fed has always erred on the side of higher unemployment. Which is what income inequality is so high and why our economy for much of my lifetime has been screwed. Because they feared inflation so much, they ended up just keeping workers down for 40 years.
And in 2008, the bottom really fell out. We had the great recession. Interest rates plummetted as low as they could possibly go to like 0.5%, and we even needed to start giving money to businesses in order to keep the economy stable. You might have heard of quantitative easing and the massive amounts of money we gave to banks to keep the economy stable. When the interest rates get low enough, you gotta literally keep pumping money into the economy just to keep it going because you have no other choice. So this is why you have stimulus, and why you have things like quantitative easing. But like always, the economy largely benefitted the rich, and inflation was kept very low throughout the 2010s. And this is where I actually ended up growing my current ideology. Some aspects of which I'll be discussing later on either at the end of this article as an appendix or in a separate article. But generally speaking, unemployment high, inflation low, workers struggling. Living standards stagnating, slow growth, yeah.
And of course by 2016, the democrats claimed the economy "recovered", which I guess from a raw numbers perspective it did, but man lots of people were struggling. Anyway, interest rates were rather low all the way to 2020, where the bubble finally burst again and we once again were wracked by recession.
The 2020 COVID induced heart attack
COVID really screwed up the economy. We faced a deadly disease, and suddenly, we needed to offload a lot of jobs and FAST. So, we basically shut the economy down. Unemployment skyrocketed to 14.6% or something like that. The highest we've seen since the great recession. Millions were out of work. Millions of jobs destroyed overnight. And our economy had to work overtime in using safety nets to provide for people. This recession was completely artificial. We HAD to do it, because if we didn't, hundreds of thousands, if not millions of people could have died, more than actually did. But, it ended up causing a shock, that ended up wrecking the economy overnight. It's like the economy hit a brick wall at 60 miles per hour.
The second heart attack of 2021
However, in 2021, Biden came in, he did some stimulus and unemployment, and then suddenly, the vaccine came out. And we just opened up the economy all at once. We basically turned the economy off and on again, and the well oiled machine was suddenly not so well oiled. Everything was out of whack. The economy had adjusted to the 2020 "new normal" and suddenly we faced supply shortages of many essential goods and raw resources. And this drove prices up. And suddenly, the economy opened up all at once and everyone was hiring. but, there wasn't enough workers to fill the roles. Because now there's TOO MANY JOBS. And it seems like Biden was hoping this would be a short term thing and he could get people back to work quickly, and his build back better plan was intended to do that by offering things like free daycare and preschool to parents who couldn't work due to watching kids, so it seems like it never materialized. People wonder if Biden's policies like stimulus and unemployment play a role, but they don't seem to be the major driving factors. Again, the key problems are too many jobs for too few workers, and too much pent up demand vs not enough stuff available. Basically, we had a shock in 2020, a heart attack if you will, and then reopening the economy caused more shocks, ie, another heart attack. While the 1982 turned the economy off and on again in a way that fixed it, 2020-present has done the opposite. It took a well oiled economy, threw it against the wall at 60 miles per hour, and then started it again. And now nothing is in place.
Once again, the solution is, IMO, raising interest rates
If we raise the fed's interest rates, it could drive us back toward a recession. But that might be necessary to fix the economy. What did 1982 do? It caused a recession, and then we could cautiously reopen the economy and allow it to grow in a controlled fashion that doesn't cause the dynamics of supply and demand to get out of whack. While I believe the post 1982 philosophy was too cautious against inflation, we do need to control it somewhat when we reach like 7-8% like we're doing now. I think the fed normally aims for 2%, my ideal would probably be closer to 3%. So, we need a robust economy that gives people money and allows them to live well, but we also need to make sure things don't get too unbalanced where inflation spirals out of control. I mean, when you hit 5%+, you need to hit the breaks a bit, and given the problem seems to not just be temporary reopening issues, but larger structural issues post covid with the old benchmarks of supply and demand no longer being met adequately, I think the fed should step in here.
Shower thoughts: can we ever have a perfect economy?
So....if we have this weird inverse relationship between inflation and unemployment, can we ever truly have a perfect capitalist economy? In short, no. Either you'll have unemployment at 4%+ and poverty at 10%+, or you end up with tons of inflation. As I said when I made this blog back in 2016, the economy is like a game of musical chairs. it doesn't function when everyone has a chair, and the economy doesn't function when everyone has a job.
This realization is actually the foundation of my anti work pro UBI perspective. I understand that the economy is just a numbers game balancing inflation with unemployment while pursuing maximal growth, and that it structurally will never meet peoples' needs perfectly. You need a basic income to fill in the gaps. To ensure no one actually lives in poverty, and to increase worker bargaining power in ways that can't happen under a coercive traditional capitalist economy.
But won't UBI just cause inflation?
If not implemented in a controlled environment, yes. If tons of people quit their jobs, then what's going to happen is you're going to get a wage price spiral. Some would say we shouldn't have a UBI then. But if we don't have a UBI people are COERCED to work, and people are struggling to find jobs to work that aren't there, and this seems very cruel to me. Our economy simply isn't designed to meet everyone's needs as it is and the UBI is necessary.
But if UBI itself causes inflation, what is the answer? Well, once again, it goes back to the fed. The fed can just raise interest rates to more tightly control the supply of jobs. If everyone has a UBI, and no one is COERCED to work, the fed can just restrict job creation in the aggregate to levels where the new supply meets the new demand. ANd that will be the new normal. It should be noted that this would lead to a situation where there is lower overall growth and living standards, but I'm going to be honest, do you feel that GDP growth? And to go back to my work week discussions, would you even notice a difference in practice? Work reductions would likely be around 10-15% max, so that's a 1/8th contraction of the economy. Or going from $72000 GDP back to $63000. If we implemented it over time, we might not even notice such a shift.
The fact is, while a UBI would require a little restructuring here and there, we could control for inflation and unemployment using the fed, and create a new society with a new economy, where everyone has their basic needs met, while still keeping supply and demand in the job market in check. And this might cause some changes to the overall job market, with some jobs paying more, others being automated, and others being priced out of this new economy, a new equilibrium would eventually be reached, and it would be better than the status quo.
So, I still believe in UBI, even knowing that there could be some negative impacts to the economy. The fact is if it's implemented over a period of years, and with the fed working with the government to get it implemented properly, we could reach a new normal where my ideas actually work without many drawbacks. We can do all kinds things with the economy, you just don't want to cause shocks. Shocks are the problem. other than that we can pursue different balances between inflation and unemployment, we can implement UBI, choose to work more and have higher growth, work less and have lower growth, etc. We just have to do it over a long enough period of time to avoid causing a shock.
I just wanted to address this since I knew some might have this objection to my ideas here.
Conclusion
Generally speaking, our economy is at a point where, post COVID, supply and demand are out of whack. Turning the economy and off and on again have caused things to go haywire as the once finely tuned economy reopens and there's too many jobs and too much demand relative to the supply of goods, services, and workers. If the economy cannot expand to meet these demands, then the fed is going to have to raise interest rates to cut back on job creation, which will raise unemployment and potentially cause a short recession, but might be necessary to bring inflation under control.
The real question is whether Biden's administration will pursue this. He might not. He might see the risks of another recession as disastrous to the 2022 midterms and his reelection in 2024. At the same time, if he does nothing, we might be stuck with inflation for a while if things don't level out. And that would also be a disaster as republicans are already conjuring up images of the 2020s being the Jimmy Carter years all over again. So Biden is darned if he does, and darned if he doesn't. Maybe he genuinely expects things to return to normal, I don't know, but I don't see inflation levelling off, so I'm getting a bit concerned. And understanding this could be disastrous for him, I think taking some steps to get the economy under control would be a good idea.
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