The “solution” to imported inflation – more unemployment!
An example of the Bank of England`s reaction in March 2008 to an increase in non-labour costs has been given already. Another example of the role of central bankers being ready to use increased unemployment to deal with price shocks was revealed with remarkable frankness and a notable absence of criticism in an article published on the website of Bloomberg News on August 21, 2006 (Bernanke, Trichet Have to Sacrifice More Jobs to Curb Inflation) which reported from the annual gathering of central bankers at the luxury resort of Jackson Hole, Wyoming:
“As the world’s economy becomes increasingly interdependent, central bankers can do little about price rises that originate with developments on the other side of the globe, such as increasing wages and environmental-cleanup costs in China. That means when inflation does pick up, Trichet, Fed Chairman Bernanke and their counterparts are hitting the brakes harder on the only economies they can influence: their own.”
“Meeting at their annual conference, the bankers will hear in research papers and panel discussions that the cost of fighting inflation in terms of lost jobs and growth — what economists call the “sacrifice ratio” — is higher than it’s ever been, and rising worldwide.”
For those unfamiliar with the sociopathic lexicon of mainstream economists the article provided an explanation of the term “sacrifice ratio”;
“The sacrifice ratio measures how much unemployment has to increase to bring inflation down by 1 percentage point. In the U.S., the ratio has risen to 4 percent from 2 to 3 percent during the mid-1980s, according to Fed economists.”
The article described the efforts the Federal Reserve`s Chairman had made to ensure that an unwitting sacrifice was made by labour for the sake of capital:
“In the U.S., inflation is still above what Bernanke calls his “comfort zone,” even after the string of 17 consecutive interest-rate increases, the longest since the 1970s, that ended this month. Fed policy makers held rates steady at their last meeting Aug. 8, waiting to see if the effect of their previous work will tame prices without their having to slow the economy any more.”
The intended effect of the interest rate rises was then described, but the writers seemed to have forgotten who was actually making the sacrifice!
“Recent readings on the U.S. economy suggest Bernanke’s Fed may already have paid the higher price demanded by its sacrifice ratio and can afford to wait. Housing, consumer spending on durable goods and business investment in equipment all contracted last quarter, and unemployment rose in July for the first time since February. A government report last week showed consumer prices rose at the slowest pace in five months in July.”
One of the conference delegates who wasn`t a central banker, Richard Berner, chief U.S. economist at Morgan Stanley in New York, injected a brief note of sanity by pointing out that there are limits on what the elites can do to the people:
“Inflation is still relatively low, and the Fed will find it hard to explain to Congress and the public why it should put a million people out of work for two years to reduce inflation by half a point”
Apart from the last sentence, the tone of this article exemplifies the confidence with which governments and their agents in central banks feel able to pursue the interest of the few over the many. Workers in the US and Europe (and elsewhere in the developed world) had already suffered mass unemployment when manufacturing jobs began to be outsourced to China in the 1980s.
Now that production costs in China are increasing, central bankers in the West want wages to fall so that distribution and retail costs can be reduced in a bid to sustain profitability – unemployment is the mechanism by which this is being achieved.
The concern that the Fed will have difficulty explaining to “Congress and the public” the need for more unemployment is arguably overdone. Way back in 1979 the Chairman of the Federal Reserve, Paul Volcker explained the policy of very high interest rates in testimony to Congress by saying that “The standard of living of the average American has to decline”.
US economist Dean Baker has written that “The public is very poorly informed about what the Fed does and how it affects them”, adding that “No one understands……that an agency of the government (the Fed) would deliberately raise the unemployment rate”. This naivety is a tribute to role of the mainstream media who have ensured that our rulers are perceived to have honourable motives whatever misery they inflict on us, for what we are led to believe is some greater good.
For more on how unemployment is implemented in democracies see “Hiding the policy from the public (with the occasional glimpse of the truth)”
Comparing imported inflation in the 1970s and now
The outstanding historical example of imported inflation in industrialised countries occurred in the 1970s, when the dollar price of oil rose by a factor of almost 10. In January 1970 a barrel of oil cost $3.35, by the end of the decade after two periods when steep price increases were applied by major oil producing countries, the price of a barrel reached $32.50.
When manufacturers responded to increased non-labour costs by jacking up prices to preserve their profit margin, workers rightly saw no reason why an investor`s unearned dividends should be preserved from the ravages of inflation at the expense of workers` ability to provide for their families. At that time strong trade unions and a post-war tradition of low unemployment meant governments were well aware that cost of living wage increases would be fought for. Incomes policies were imposed, with wages ostensibly indexed to prices, conveniently leaving profits gained through productivity increases to flow to owners, not workers.
In September 2011 mainstream labour economist Steve Nickell spoke about the 1970s at a seminar and pointed out that in 1972 monetarist economist Milton Friedman “was very strongly recommending that wage indexation was an excellent policy”. Nickell, who was appointed to the Monetary Policy Committee of the Bank of England by Chancellor Gordon Brown in 1998, went on to criticise wage indexation:
“anyone who knows anything about how the world works will recognise that, if you have an oil shock, this [wage indexation] is absolutely disastrous, because real wages relative to the retail price index have to fall if there’s an oil shock.”
In his eyes the present situation is better because:
“now, for example, we can have real wages falling as they are at today without any great difficulty. Real wages, of necessity, have to fall again because of the huge rise in oil prices”
In expressing such views Nickell was demonstrating the mentality of a mainstream economist, i.e. reflexive loyalty to the interests of capitalists over those of workers. He clearly regards himself as one of those who knows “how the world works”, and policy prescriptions flow from the recognition that the interests of the powerful have to be served by a mere technocrat like himself. All of the economists appointed to the Monetary Policy Committee understand “how the world works”, and their views on interest rate changes reflect this consensus on whose interests they are there to serve – any differences are those of degree, not direction.
In a paper published in 2000, Nickell, who describes himself as a “natural rate man”, expressed the difference between the “equilibrium level” (i.e. the natural rate) of unemployment in the 1970s and the preceeding decade. For him, the inflation of the 1970s was simply a matter of insufficient unemployment, to the tune of 1.5%:
“in the 1960s unemployment fluctuated around an equilibrium level of around 2.5%. In the 1970s equilibrium unemployment started to rise as unions became stronger and workers attempted to maintain their living standards after the first oil shock. Until 1980 unemployment, at around 6%, was sustained below the equilibrium rate of around 7.5% at the cost of rising inflation”