Defending Middle-Class Consumer-Culture on the Backs of the Poor

The bottom dollar: cutting interests rates instead of fighting inflation hurts the economy's most vulnerable.
The economic news of the week: US inflation is now the highest it's been since 1981. In many sectors of the economy — food, energy, healthcare -- it's now running at double-digits, and the dollar's value against the euro has plummeted through the $1.50 barrier.

Faced with stagflation in the 1970s, politicians taking lessons from the monetarist school of economists decided to get a handle on inflation at whatever the cost. And so, in the years following Thatcher's election in 1979 and Reagan's in 1980, they shrank the money supply, sending interest rates sky high, deliberately raising short-term unemployment (remember the three million unemployed in the early years of Thatcher's premiership in the UK), all to the mantra of "it's for your own good."

If your measure of decent policy is "how does this effect the poorest sections of society?" -- which is as good a measure as I can think of for ethical decision-making — then the monetarists were wrong, not because inflation wasn't a huge problem (clearly it was), but because the shock tactics they used to tackle it hurt the poor, the least job-secure, the most. The only way to rein in inflation as rapidly as the monetarists wanted, during a period in which trade unions had considerable muscles to flex, was to send interest rates soaring at the same time as the government worked to shatter organised labor and use the spectre of mass unemployment to drive down real wages. Inflation was tamed - but at the cost of tremendous societal dislocation.

Today, however, when labor is utterly quiescent in the US, not reining in inflation hurts the poor the most. The reason for this is that unemployment (which, while rising, is still only 5 percent) isn't the pre-eminent concern here. Rather the bigger, broader, concern is staggeringly low wages for the working poor. Quite simply, a tremendous number of people are working for remuneration that isn't keeping up with price increases. Since poor people spend most of their disposable income on necessities, when the price of those necessities goes up, as it has for several years now, the purchasing power of the poor is hit first and hit hardest.

A moderate dose of monetarism — not of a scale to trigger the unemployment of the early 1980s, but enough to at least curb some of the inflationary pressures in the economy — combined with some smart, targeted, federal subsidies and mortgage-relief interventions would probably benefit the poor in 2008 rather than hurt them. After all, when the Federal Reserve lowers interest rates, poor people who already can't afford mortgages and can't afford mass consumption lifestyles don't really benefit — these are reliefs for the middle classes and stock owners rather than the invisible poor. But when prices of staple goods rise as a result of inflation, the people at the bottom of the economic barrel, those without the bargaining power to be able to push their wages up, suffer most.

In the past couple years, I've interviewed men and women in remote rural regions who literally have to borrow money (from family or from credit card companies) to put gas in their cars to drive to work. While a dollar extra per gallon of gas might not seem noticeable to a middle-class denizen of New York or Los Angeles, the extra $20 or $30 a week poor residents of locations such as Siskiyou County, California, are spending on gas works out to nearly 10 percent more of their total income going to filling up their cars than used to be the case. It's not uncommon these days to find working men and women who spend upwards of one quarter of their meagre paychecks on gas for their commutes.

I've also interviewed people in California, Oregon, Idaho and elsewhere who work two jobs but - faced with soaring energy and food costs - come the end of the month they no longer have money to feed their families. They end up on food lines outside church pantries and other charities, the boxes of cereal, canned soup, bread and pasta given out by these institutions the difference between full and empty bellies for them and their children.

Today, America is facing a two-fold inflation threat. The first, in a global economy it has relatively little control over, upward pressures on energy prices, surging demand for food products and increased competition for mineral and metal resources with China, as well as labor costs rising in China, are all going to feed through into global inflation. That's why food and energy prices, as well as prices of Chinese-made toys and clothes, are rising lockstep in America, India, Africa, Europe and pretty much everywhere else.

The second, however, is a made-in-the-USA problem.

The Bush government has presided over an extraordinary hollowing-out of the US economy, relying on borrowing money from overseas to shore up its spending, cutting taxes without any regard for what it will do to the budget deficit, refusing to in any way, shape or form, structure policies that favour saving over instant consumption. All of these policies help create inflationary cycles. They are squashing the value of the dollar against almost every other major currency - meaning imports cost more and any commodity priced in dollars (oil and gold, to name but two) soars in price. That's why America's 7 percent inflation rate this year is far outstripping that of Western Europe. It's why America's inflation rate will continue to outstrip that of our peer nations over coming years. Which means, over time, America's standard of living vis-à-vis our competitors and peers is steadily, dramatically, eroding.

How to rein in this cycle? Well, one sensible step would be to moderately raise interest rates — or at least not lower them — to take a partial lesson from the monetarists a generation ago. It would encourage more savings, would slow borrowing-based consumption, would put the brakes on the dollar collapse, and, in the long-run, ought to help America gets its economic house in order again.

But that's not politically palatable because it would slow down the economy right at the moment when the housing crisis and rising energy costs have already put a crimp in spending. And it would risk at least temporarily exacerbating an already awful housing slump and foreclosure crisis (though that might be an exaggerated risk, given that the Feds' recent interest-rate cuts have utterly failed to reverse the housing collapse).

The alternative -- raising interest rates, but crafting very specific federal programmes and local/state grants to help families in imminent risk of losing their homes, or even community service plans that would allow families to trade community service for temporary mortgage assistance -- won't fly because this administration can't abide the notion of an interventionist, public works-favouring federal government. And no Democrat is going to risk going into election season opposing interest-rate cuts if it leaves them open to GOP charges that they don't care about the hurt experienced by consumers facing higher car payments or credit card charges.

So we have a spectacle of the world's wealthiest nation heading in exactly the wrong direction so as to provide short-term shots of adrenaline to a faltering mass consumption economy. That's not just cynical politics, it's also deeply destructive. What it means is the rot at the centre of this economic mess will continue to spread, making it that much harder for the next administration to cut it out.

Lower interest rates might help the middle class maintain their lifestyles for a few years, but unless inflation starts to be taken seriously again an awful lot more poor Americans are going to be standing in food lines or borrowing money to buy the gas to drive to work during those same years.

If this were any other country in the world, lowering interest rates in the face of inflation numbers such as were released this week would result in condemnation from the International Monetary Fund, in financial powerbrokers strong-arming politicians to do the sensible thing and reverse course. But we're the biggest, strongest, most unilateralist nation on earth. So that's not going to happen. Nobody will strong-arm the Fed to raise rates, and, to subsidise the nation's current reckless consumption patterns, the poor will continue to see their already-shrivelled purchasing power decline.