Thursday, April 28, 2011

Why Worry About Inflation And Not Unemployment?

On one hand politics is a mess, a chaotic war all based on greed, fear, desire to do good and egotism. And other emotions. It's like a gigantic daytime television show but we are not allowed to call it that so we use sport and war metaphors to make it look properly serious.

But on the other hand some types of politics are extremely easy to interpret. For instance, almost all the political pressure right now is in the direction of protecting the rich: The famous Ryan budget proposal which slashes away at the heads of the poor and the elderly but offers tax cuts to the rich, and also the recent statements by Ben Bernanke, the Federal Reserve chairman:
The Federal Reserve has two jobs, which is often referred to as a dual mandate. One is to maximize employment. Bernanke has testified that there are things the Federal Reserve can do, like buying assets through quantitative easing, that will result in job creation.
However, the Federal Reserve's other job is to maintain price stability and not let inflation spin out of control. The Federal Reserve does that through selecting an inflation rate -- what it calls targeting -- and doing what it takes to maintain that rate. The commodities that are increasing in price, especially oil for gasoline, are being driven by fundamentals, notably demand from China and emerging markets, which are out of the Fed's control. There is very low core inflation, which is inflation on everything other than commodities like oil and food. This core inflation rate is what the Federal Reserve targets, and right now it is lower than what the Fed has targeted.

So the Fed is doing neither of its two jobs. Unemployment is too high, and inflation too low, so it should be doing whatever it takes to stimulate the economy. The natural question that puts pressure on Ben Bernanke is: "Are you worrying too little about unemployment? And are you worrying too much about inflation?"
But if you got all your sense of the world from the questions that were asked during the press conference, you would expect that unemployment wasn't a major problem and crushing inflation was just around the corner.


Bernanke himself reflected these priorities. He cited keeping the financial sector from collapsing as the extraordinary measure the Federal Reserve has accomplished. He discussed current Federal Reserve efforts as something that will prevent a slow down rather than promote a faster recovery towards the long-term trend of growth. He seemed far more worried about inflation than about the current level of unemployment, and more worried about the Federal government's deficit than putting fiscal policy into play.
Why is the government worrying about the deficit, worrying about the future governments (over which it has no control) and why is the Federal Reserve worrying about non-existing high inflation? Why is nobody worrying about unemployment enough?

The easiest and most obvious explanation is not that we have somehow slipped into an alternative reality or that politicians are extremely incompetent but that they are doing what those with power wish them to do.

Unemployment does not hurt the well-off but inflation does, because it affects the value of fixed income sources, including interest income. The focus on government deficits instead of the current high unemployment stops looking so inexplicable when one understands that such deficits might require future tax increases which would affect the higher earners more. Unless government budgets could be cut.

But not defense! Because that's the one part the rich want to be kept as private armies are still too inefficient and inexpensive. Hence the cuts need to be in Medicare, Medicaid and Social Security, all programs which neither the wealthy nor most of the politicans will ever really need for themselves or their families.

I'm waging a class war here, all by myself! No, I'm not. And neither am I arguing that all wealthy people are evil or that all poor people are saints or that all the wealthy would agree on the pro-rich policies or that all the poor would be opposed to them. But if you strip the policy proposals to their bare bones, take out the bits which are technically required and the bits which are neutral, then what remains IS something very class-tinged. And it is a good explanation of the events I cannot otherwise decode.