The Brooklyn Rail


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JULY/AUG 2023 Issue
Field Notes

Editor’s Note

Universities still keep teaching economics and governments and the press continue to consult the resulting PhDs. Yet according to economics Nobelist Paul Krugman, trying to figure out the future trajectory of American inflation, “Don’t ask economists. … My own view? I don’t know.” Economists as a group, says Krugman, can tell us neither where the inflation rate is going nor where it should go—2 percent? 3 percent? 4 percent?—for a healthy economy. In this last opinion he leans towards joining what the Financial Times’s John Plunder identifies as “a growing chorus arguing for raising inflation targets …” This is not unreasonable “if, as former Bank of England chief economist Andy Haldane has argued, we are witnessing a shift upwards in the global equilibrium price level”1—i.e., if higher prices are just here to stay.

This is a good example of the view of economists consulted by the Financial Times who “caution that the public should focus less on whether or not projections prove to be correct,” something “impossible to predict,” than on “whether the projections say something insightful about the economy at this point in time.”2 Unlike in other sciences, that is, predictions in economics tell us nothing definite about the future but only about what people think is happening now. Just yesterday nearly all the experts, including Krugman, agreed on the need for higher interest rates to “cool off” an “overheated” economy, lowering the rate of price increases by creating business failures and unemployment. But now the Times’s eminent pundit worries that the Fed will “put the economy through the wringer to achieve an inflation target … based on old simulations that turned out to be wrong.”3

Why the worry? Despite constant assurances from officials that the economy is going just great, signs of trouble abound. To take a random sampling: it was just estimated that some 160,000 people are about to be evicted from their apartments in New York; defaults on junk bonds—which provide critical financing for many companies—are surging above 2021 and 2022 levels in response to rising interest rates; New York, San Francisco, Chicago, and other business centers are facing a likely collapse of the commercial real estate market, imperiling mortgage-holding regional banks while destroying local economies dependent on downtowns filled with office workers, many of whom are now working from home or recently fired; arcane indicators like the market for RVs, sensitive to downturns as an expensive discretionary purchase, are falling as before earlier recessions; while unemployment is rising significantly in over a dozen states. And that’s just the United States: Germany gives every sign of entering a recession, while the Chinese recovery expected when the government finally decided to join the rest of the developed world in pretending that COVID isn’t real is not making a convincing appearance.

So, to return to the decision about interest rates facing not just the Fed but central banks the world over, the outlook with regard to the proverbial “hard landing” is not so good. This would explain why even while raising rates to fight inflation, traditionally explained as due to excess demand produced by easy credit and government spending, the authorities have poured out money to rescue a banking system in trouble in part because of those very rising interest rates. Lawrence Summers, back teaching economics at Harvard after serving in the Clinton and Obama administrations, cheerfully opined from his villa in Bermuda that 10 percent unemployment would be a fair price to pay to control inflation, but also called for a complete bailout of Silicon Valley Bank’s depositors: “I don’t think this is a time for moral-hazard lectures or for talk about teaching people lessons,” he said. “We have enough strains and challenges in the economy without adding the collateral consequences of a breakdown in an important sector of the economy.”4 In this he was only sharing the view of the approximately a thousand tech businesspeople who met even while the bank was collapsing with Joshua Frost, assistant secretary of the Treasury for financial markets, to demand that all SVB deposits be insured because of the account owners’ centrality to American economic dynamism. Shortly thereafter, the FDIC proposed expanded insurance coverage for business bank deposits generally (though maintaining the existing limit for personal accounts).5 Meanwhile, bank borrowing from the Federal Reserve soared in 2023 to about three-quarters of the super-high level reached after the 2008 crisis.6 Similarly, when a depositors’ run on Credit Suisse (on top of its loss of 5.5 billion dollars when Archegos Capital failed in 2021) led to a forced merger with its rival UBS, the Swiss National Bank provided a liquidity backup line of SFr 100 billion.

Hence the problem posed by reporters for NPR’s Planet Money program: “As the Fed grapples with the ongoing fallout from the SVB meltdown, it could be forced into a position where it has to choose between financial stability and taming inflation.”7 This is the dilemma faced by fiscal and monetary authorities everywhere, who have so far failed to achieve either stability or a satisfactory decrease in inflation. As clearly stated by hedge fund manager and Financial Times columnist Ruchir Sharma:

More than low interest rates, the easy money era was shaped by an increasingly automatic state reflex … to rescue the economy from disappointing growth even during recoveries, to rescue not only banks and other companies but also households, industries, financial markets and foreign governments in times of crisis.

The latest bank runs show that the easy money era is not over. Inflation is back so central banks are tightening, but the rescue reflex is still gaining strength. The stronger it grows, the less dynamic capitalism becomes … Government intervention eases the pain of crises but over time lowers productivity, economic growth and living standards.8

Sharma is no Marxist, so far as I know; he probably means the last sentence to evoke some sort of Schumpeterian “creative destruction” revival of a stagnant capitalism. But what he says also accords with Marx’s view of depressions, resulting from a decline in the profitability of capital, as creating the conditions for a revival of profit-making investment. From this point of view, it is the expansion of state-financed economic activity since the Second World War, and especially since the 1970s, that has both prevented a downturn on the scale of the 1929 depression and thereby also hindered a new upsurge in growth of the world economy. By the same token, the role of the state—and the deficits that pay for it—cannot be cut back without provoking an economic and social crisis that the world’s rulers are not eager to face. This is why, despite their histrionics, the Republicans were bound to agree to suspending the federal debt limit.

The continuing inadequacy of profit, which has led to a global slowdown in capital investment noted by all observers, means that the bailing out of financially stressed institutions and businesses must be accompanied by attempts to increase profits by lowering wages—whether through inflation or the increase in unemployment sought by the central bank effort to slow inflation—and by cutting state spending on education, health, and welfare of all sorts. At the end of the debt limit drama, the Democrats were not unwilling to throw some number of oldsters off food stamps or cheap out on college loans, small beer in any case compared to the French government’s “reform” of the pension system. Government spending is now not an alternative but a companion to austerity. The increasing crudeness with which policy serves social inequality can only hasten the erosion of the economic belief system.

For an outstanding study of capitalism’s current predicament, readers can look forward to the publication in 2024 of Jamie Merchant’s synthesis of economic information and analysis, Endgame: Economic Nationalism and Global Decline, to be published by Reaktion in the Field Notes series. The article that follows, meanwhile, provides an invaluable account of the most recent state of political-economic play.

  1. “Inflation Targets Have left Central Banks in a Bind,” Financial Times, March 29, 2023.
  2. “Central Bank Forecasts Suffer from Inflation Blind Spot,” Financial Times, May 19, 2023.
  3. P. Krugman, “Wonking Out: How Low Must Inflation Go?”, New York Times, June 9, 2023.
  5. “F.D.I.C. Recommends that Congress Broaden Bank Insurance for Business,” New Work Times, May 1, 2023.
  6. See ”Jerome Powell’s Big problem Just Got Even More Complicated,” Wall Street Journal, June 12, 2023.
  8. R. Sharma, “The Unstoppable Rise of Government Bailouts,” Financial Times, March 27, 2023.

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