Saturday, October 29, 2005

The Federal Reserve System may not be your friend

My endorsement of deflation was reckless and irresponsible from the standpoint of the Federal Reserve's interests. But not from the standpoint of working people.

Businessmen are concerned with a certain stability, or well-anchored expectations, of wages, prices and interest rates, for example. Whereas working people are concerned about job security and unemployment. The Federal Reserve System is charged with the responsibility of attending to the concerns of businessmen. As the new new chairman of the Federal Reserve, Ben S. Bernanke, said in a speech before the National Economists Club, titled "Deflation: Making Sure 'It' Doesn't Happen Here": "The Congress has given the Fed the responsibility of preserving price stability (among other objectives) which most definetly implies avoiding deflation as well as inflation." Greenspan has kept inflation low, and Bernanke promises to do the same.

Bernanke's first task, according to the NYT, is to tame inflation, that is, to make prices fall--"Airfares, haircuts, nursery school tuition, new cars, appliances and cigarettes have all become more expensive in recent months," notes David Leonhardt of the NYT. Core inflation has hit 2%. Consumer prices have risen. $50 gas-tank charges are "crimping" consumer spendin -- but deflation is not in the offing now. To tame inflation, Bernanke will have to raise interest rates, with the expectation that it will hit 4.5% by April, up from 3.75% today.

But here's the revealing truth about how most economists and the Federal Reserve think about working people in relation to the economy: the reasons inflation has not been much greater have to do with, and I quote from the same NYT article, "the weak negotiating position of American workers...Union membership has shriveled, computers have replaced many jobs and, rationally or not, many workers fear that their jobs will be sent overseas." We have avoided an "inflationary spiral" at the cost of a more "complicated life for many families." And, if Bernanke does his "task" well, more such "complications" are expected.

Whose interests are being served by the Federal Reserve? Probably not yours.


xtrachromosomeconservative said...

"Businessmen are concerned with a certain stability, or well-anchored expectations, of wages, prices and interest rates, for example. Whereas working people are concerned about job security and unemployment."

Does the Federal Reserve better serve the interests of the working man by promoting instability. I guess the question then is if prices, wages, and interest rates fluctuate wildly, will people enter the market? Will businesspeople invest in the economy, i.e. make capital expenditures and hire workers? The answer is no. If businessmen are not doing well, you can bet your bottom dollar the working person is doing yet worse.

You ascribe to monetary policy and the position of the fed the changes that have occured in the labor market. Ultimately it has some role, but obliquely. Union membership, jobs being replaced by computers, all of these things have been spurred by a greater emphasis on productivity which emanates from greater competition both domestically and internationally. Said competition has thus in many ways denuded companies of their pricing power. If a company chooses to raise their price without demonstrating additional value it is likely to cede marketshare. This is probably a greater reason as to why inflation has not been much of an issue in spite of the energy spikes we have seen (contrast this with the 70's where we had a much more closed economy and far less flexibility. When energy spikes occured inflation soared).

Invariably life will be more complicated for working class families. This, though, will also be unrelated to the Federal Reserve and Monetary Policy but yet again relates back to the increasing competitiveness of the market and also to systemic failures in our pension systems both public and private.

You may want to reevalute your premise though that the fed's role of promulgating stability is pernicious to society.

Ilya said...

You are right that in my premise which you quoted, the accent seems to fall on either stability or job security, which you read as implying that if one's interest is primarily the latter, one is also interested in price instability rather than stability. But this is not so.

Let me put this in Marxist terms. There is a certain stability that is good for capitalists, and a certain stability that is good for workers. The Federal Reserve is interested in the former, not the latter. This is an example of how the state, as Marx said, serves as the "executive committee of the bourgeoisie." The state protects the property of the capitalist classes and adopts whatever policies are in the interest of the bourgeoisie. This is the thrust of my argument as implied in the title and conclusion of the post.

And I don't buy the argument that what is good for businessmen or General Motors is good for everyone. Outsourcing, downsizing and other measures that put people out of work are not beneficial for those who are unemployed as a result.

xtrachromosomeconservative said...

If general motors does not outsource, but rather builds the car in detroit, then yes, for a period of time, some people will have their job that otherwise would not have. However, unless General Motors in essence cross subsidizes the production of this car, it will ultimately lose business and thus people their jobs. But let's say we should put a premium on those particular people's jobs, maybe subsidize it nationally, then the government is rewarding inefficiency and directing money away from industries that are efficient and can add jobs, possibly at a greater rate than those lost. That said, those jobs may not be in Detroit but rather Segundo, CA or Decatur, GA. The economy at large will contract because one job goes overseas, though. Joseph Schumpeter called this creative destruction. As one industry dies others grow and with that growth arises new employment opportunities. Ultimately this is problematic because if you are a high school educated assembly line worker and your job has been outsourced, you are probably not qualified for that new position as a database administrator or call service operator. Thus, why it is important to make more continuing education available in the form of community colleges and also to prepare people in advance for this basic instability.

You are tacitly advocating an economic model that is increasingly outdated and that will soon be dead.

xtrachromosomeconservative said...

Sorry, I meant to say the economy at large will not contract because one job goes overseas.

Ilya said...

It seems to me that we do agree on one point. As the economy is now coordinated by government to maintain a satisfactory stability of prices, this instills, as you emphasize, efficiency in production, but as I emphasize, and as you admit in stating that 'continuing education' must be made available, this does not guarantee socially acceptable distributive outcomes. Now, I don't want to suggests a way to amend the unacceptable distribution of income or consumption, etc. I only want to maintain my original claim that the Federal Reserve is not concerned with socially acceptable outcomes.

xtrachromosomeconservative said...

I agree with your original claim, the Fed's concern is not "socially acceptable outcomes" at least as you define them. It is a bank essentially. Though, in previous posts I have maintained that the Fed doesn't really directly impact the common man but rather indirectly through financial and banking institutions. This is false, the one area that the common man (or 70% of US households) is through housing. Fed control of interest rates does have a significant impact on Mortgages. Which brings me to part of one of your earlier posts: "The state protects the property of the capitalist classes and adopts whatever policies are in the interest of the bourgeoisie."

One of the unique features of American Society reaching back from the Homestead Act and more recently to the GI Bill is that it has placed an emphasis on expanding home ownership and ownership in general (through 401 ks and IRAs). Thus making most Americans property owners in some form and by extension capitalists and members of the bourgeoisie. In this regard, the Fed has the capacity to serve or not to serve the interests of the common man. That said, there is a significant minority that do not have equity in any form. But, I think it is fair to say that property ownership is more advanced and widespread in America than elsewhere.