Following the inflationary period of the Covid-19 pandemic, inflation is largely down and currently at 2.1% in the U.S. Bob Pollin, economist, and Co-Director at the Political Economy Research Institute (PERI), explains the causes of inflation, including demand-side and supply-side factors. He illustrates how the economic models used to tackle inflation are essentially tools to chip away at workers’ bargaining power. Pollin recounts the history of policies of inflation control, tracing their development to the era of globalization and neoliberalism championed by former U.S. President Bill Clinton and former chairman of the U.S. Federal Reserve Alan Greenspan.
Who Owns America’s Debt? – Bob Pollin Pt. 2/2
Talia Baroncelli
Hi, you’re watching theAnalysis.news, and I’m Talia Baroncelli. Today, I’ll be speaking to economist Bob Pollin. We’ll be doing a deep dive into the causes of inflation.
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I’m very happy to be joined by Professor Bob Pollin. He’s an economist and professor at the University of Massachusetts, Amherst, and he’s the co-director of the Political Economy Research Institute, or PERI. He served as a consultant to the Department of Energy during the first Obama administration, and he also advised Bernie Sanders, as well as progressive Democrat, Pramila Jayapal, on their Medicare for All policies. He co-authored the book Climate Crisis and the Global Green New Deal with Noam Chomsky.
Thanks so much for joining us again, Bob. It’s great to have you.
Bob Pollin
Very happy to be on. Thank you, Talia.
Talia Baroncelli
Last time we were speaking about inflation, I think it’s probably good to drill down on it once more and to get rid of some of the misconceptions around inflation. Million-dollar question: what are the drivers of inflation? If we speak about how oil influences inflation, does it really matter if the country in question is an oil-importing or oil-exporting country?
Bob Pollin
If we’re just talking about inflation in general, under all circumstances, we can divide the broad factors causing inflation into two categories, and it’ll sound like the typical economist’s answer. You can talk about demand factors and you can talk about supply.
Demand factors are the ones on which most economists focus most of their time and around which inflation control policies, mainstream inflation control policies, are almost entirely focused. When I say demand factors, we can really boil it down to one thing, and that is the idea that giving workers too much bargaining power enables them. Bargaining power enables them to drive up their wages. When you drive up wages, then businesses will attempt to pass on their increased costs, and that means higher prices. That is the really core idea in terms of what most mainstream economics is about with respect to inflation control and, for that matter, macroeconomic policy in general.
That’s why when we talk about this concept, the so-called natural rate of unemployment, what’s the natural rate of unemployment? The idea is that you try to figure out the rate of unemployment that you need in order to prevent workers from getting excessive bargaining power. You could even envision, let’s say, 0% unemployment or very, very low unemployment, and that being sustainable as long as workers don’t get any more bargaining power.
Way back when, in debates around this issue, this great economist, Michał Kalecki, made the point around this in the 1940s, saying, “Well, if you have a fascist government, you can have really low unemployment rate as long as you can repress workers.” That’s the first central idea and the area of focus around which mainstream economics always addresses first the question of causes of inflation.
I should just add this idea of capitalism requiring workers not having bargaining power, of having a high enough unemployment rate such that workers do not have bargaining power; the real originator of that idea was this German economist by the name of Karl Marx. It’s right there in volume one of Capital. It’s, in my opinion, one of his greatest insights. It really has been basically picked up in contemporary economics without acknowledging that the idea comes from Marx. Now, Marx wasn’t saying it was good. Marx was saying that’s how capitalism works.
So that’s the demand side. Very simple. The demand side is if workers get too much bargaining power, it’s going to push up wages and businesses will respond by pushing up prices. Therefore, we have to operate capitalism with a high enough unemployment rate to prevent workers from getting bargaining power. That’s the demand side.
Now, let’s shift. What about the supply side, which is usually referenced as supply shocks? We have these things that shock the overall economic system and, therefore, exceed the pressures on prices coming from the demand side. The one big one that is basically always present is oil prices, period. If we have to trace all episodes in the U.S. and throughout the world in terms of rapid increases in prices, in other words, inflation, rapid increases in inflation, it is not coming from the demand side. It is not coming from workers having too much bargaining power. It is coming from these so-called supply shocks. It is coming from instances where oil prices rise quickly.
When would oil prices rise quickly? What kinds of situations would result in rapid oil price increases? Well, the 1970s was the classic case. The 1970s was really the first instance in which you had rapid inflation in settings other than war. That was because the OPEC, the oil-producing countries, imposed a three-fold increase in their oil prices in 1973, and then they did it again in 1979. So you did have, over the 1970s, this huge spike in inflation, and that was tied to these oil price increases.
We can now think about other supply shocks, which follow more or less the same pattern. That is, most recently, the COVID lockdown and the reopening, post-COVID lockdown. During the COVID lockdown, you had a slowdown in production, and you had, at the same time, an increase in demand buildup because people weren’t spending as much money. So when the COVID lockdown was lifted, you had shortages. You had shortages of oil and other things as well, i.e., cars, and that meant that you had increased demand because we reopened after the COVID crisis, and you had supply shortages. That created a supply shock. That supply shock was then exacerbated due to the Ukraine war, which meant that you had shortages of oil coming from Russia and food coming from Ukraine. So you had supply shortages and demand expansion. So, that is a variation on this idea of a supply shock.
Talia Baroncelli
Given that countries are so interconnected in terms of their economy, does it really matter? I think this goes back to my initial side question: does it really matter if a country is primarily oil-importing or oil-exporting? It’s like the U.S.; for example, the United States produces a lot of oil and gas, but they also import a bit more, if I’m not mistaken. How would that factor of importing more play into how oil shocks prices?
Bob Pollin
Well, the oil price is basically a global price. In other words, you’ll see at least the same wholesale price everywhere. Therefore, yes, the fact is the U.S. is, at this point in time, the biggest producer of fossil fuels in the world. I don’t know where Trump and Vance come off saying, “Oh, we’re not producing enough.” We are the biggest producer, and yet, you’re right, we do also import because we’re also the biggest consumer.
I, at certain times, have done consulting with governments in sub-Saharan Africa, oil importers, and some that have done some exports. They faced the same issues with respect to the global oil price. All countries basically operate within this global market for fossil fuels, oil in particular, and the inflationary pressures that result are comparable.
Talia Baroncelli
Another question would be how financial speculation on the futures markets, for example, drives the price of oil and how that feeds into inflation.
Bob Pollin
We have two sets of markets for oil and food, and other commodities, but those are the two big ones. We have the so-called spot market, which is the market to buy things today. Then, we have the futures market. The futures market, as the term suggests, is, by definition, speculating on what’s going to happen in the future. If you think the price of oil today is going to go up relative to today, and you are a speculator in the futures market, then you are going to buy up as much oil shares as you can in today’s price because you expect the price to go up. Whether it really does or not, you expect it to go up. The mere fact of the speculation, and here, I myself have studied this with respect to food prices. The speculation on the market itself can become a driver because if you say, “Well, we think the price is going to go up by 30% in the future, so we’re going to buy now, and then we can sell 30% higher in six months,” the mere fact that you’re spending more now, buying more oil futures now, drives up the current price now, drives up the spot price, the current price. That becomes another source exacerbating inflationary pressures to have this speculative pressure.
Talia Baroncelli
Earlier, you were saying that a lot of the economic theories, or at least this inflation target of 2% is fashioned in such a way to break up labor power and to break up workers’ bargaining power. One of the main fundamental curves or analytics that economists refer to, at least economists at the Fed refer to when they’re talking about inflation, is the Phillips curve. I was wondering if you could just briefly explain what that is and whether you think it’s a reflection of reality or if it’s just another tool to crush bargaining power.
Bob Pollin
In a way, it’s both. The Phillips curve is pretty much what I just explained with respect to the demand side. The Phillips curve is a variant of this same simple idea that there is a trade-off between unemployment and inflation. That if you have higher unemployment, you’ll have lower inflation because workers have less bargaining power. When you have low unemployment, you’ll have higher inflation because workers will have more bargaining power.
It’s called the Phillips curve because it was Professor Phillips who articulated this in some empirical research. But again, the basic idea can be easily traced back to Karl Marx and then Kalecki. Yes, central banks are really built around this idea of preventing workers from getting too much bargaining power. Now, if you look at the United States, for example, in the 1990s, we had generally low measured unemployment rates and low inflation. And that was considered a mystery, a conundrum.
Alan Greenspan, the then head of the Federal Reserve, himself said, “How can we understand this within what we know about mainstream economic theory?” And then Greenspan, the head of the Federal Reserve, he himself came up with an explanation that is fully consistent with what I’m telling you. He himself said that the reason that this is happening is that workers feel insecure. He effectively is saying, “The reason, even at 2-3% unemployment, 3.5% unemployment, relatively low, we aren’t getting inflationary pressures because workers are not fighting to raise their bargaining.” That’s really an outcome of neoliberalism.
Neoliberalism, in which you have a weakening of union organizing and union power, you have the integration or globalization of the labor market. You have this idea of a credible threat coming from business. If workers say, “Oh, we deserve a raise because our productivity has gone up,” and the businesses say, “You’d like a raise? Well, okay, then we’ll just import from Mexico, where workers get 15% of what you make,” that acted as certainly a deterrent to workers getting bargaining power. As I said, this came right from the mouth of Alan Greenspan and many, many other people.
Talia Baroncelli
Well, if you look at Alan Greenspan, would you say that he’s part of that Bill Clinton early ’90s era, which advocated for rolling back social security? Because obviously, you saw this whole impetus to deregulate under Reagan. But I feel like it was actually Clinton that solidified that ideology in the early ’90s and made it more, I guess, treating it more as a common sense thing when it was actually an ideology that fed into globalization but also rolling back social security.
Bob Pollin
Absolutely. I even read a whole book about that. Chapter one of the book, if I could get the title exactly, was called Neoliberal Consensus: Reagan, Clinton, Greenspan. So yes, though obviously there are differences in detail, the underlying premise was, yes, we’re going to run capitalism in a way that is much more aggressively pro-business, and that is going to inhibit workers from gaining bargaining power.
There are variants of capitalism, country to country in history. The variant of capitalism that came out of World War II was significantly more egalitarian. The idea is that wages and working-class incomes could rise, and we would have a gradual increase in equality. And that actually prevailed for about 25 years, roughly, from the end of World War II till the early 1970s in the U.S. and throughout the advanced capitalist economies.
Starting in the late 1970s, you have this reversal based on the premises of neoliberalism, in which we then subsequently see this massive increase of inequality, which has continued largely to the present. That coincides with deregulation, with opening up to so-called free trade, NAFTA, which was so instrumental in preventing U.S. workers from exerting bargaining power.
If you listen to working people reflecting on why they don’t like the Democrats anymore, it’s not illogical. They trace it back to NAFTA. They trace it back to the fact that the forms of support that were associated with, say, the New Deal were dismantled. The idea of inflation control and how you control inflation, dead center, that’s exactly where they were and what that theory of the Phillips curve and the so-called natural rate of unemployment, that’s where that really hits the conditions for working people.
Talia Baroncelli
Before we get into the issue of the Democrats and their economic policy with Kamala Harris, can you maybe just explain what your views are on the Bretton Woods consensus and also Reagan’s policy? Sorry, I think it was Nixon’s policy in the 1970s when it came to fixed interest rates and how that played into stagflation and whether you would reverse the current economic order to reverse it to what it was before the early 1970s.
Bob Pollin
Let’s say we trace broadly economic policy in the U.S. and other high-income countries, as I said, coming out of that period, it was largely, you could call it social democratic of various kinds or Keynesian. It didn’t really matter that much if it was a Democrat or Republican who was in power.
If you go back to the 1950s, Dwight Eisenhower was President and Republican. Dwight Eisenhower was quite explicitly supportive of unions. He said, “Anyone who is against unions is living in the 19th century.” I can’t remember the exact quote, but that was the essence of what a Republican president was saying. When he was President in the 1950s, the highest marginal tax rate was 90%. You could be rich, but at a certain point, that’s enough, and the government’s going to take the rest and use it to support whatever the government does.
Richard Nixon was in power in 1968. Nixon was a despicable person in many ways. But if you look at the essence of his economic policies, they were broadly to the left of Obama in substance. Nixon, as a result of the rise in inflationary pressures, did attempt to institute price controls. He didn’t want to simply use the power of the Federal Reserve to raise unemployment.
His predecessor, Johnson, Lyndon Johnson, who was also despicable on the war in Vietnam, when we started to see inflationary pressures at that point, he said, “Okay, well, so we have inflation that goes up from 2% to 3% to 3.5%. You know what? It’s not the worst problem in the world. It would be much worse to see unemployment go up.” That was the official position of both parties. That shifted dramatically.
Part of the shift was indeed the high inflation that came from the supply shock in the 1970s of the oil price increases. The supply shock was due to supply. But it then got translated into, well, then how do we control inflation? The way we control inflation is by raising unemployment.
Talia Baroncelli
You’ve just been watching part one of my discussion with economist Bob Pollin. In part two, we continue to analyze the factors that drive inflation and also discuss U.S. debt, as well as try and answer the question of why the price of eggs went up so much in the post-COVID era. Thanks for watching, and see you next time.
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Robert Pollin is an American economist and professor at the University of Massachusetts Amherst, where he is also founding co-director of its Political Economy Research Institute. Pollin received his PhD in economics from the New School for Social Research in 1982.