>Yes, it is. Whoever said it should read the first couple of chapters of
>Created Unequal, by Galbraith Jr. They make it clear that he understands
>very well who the Fed works for.
Then why did he forget all this in writing his Nation editorial? (It's not on their website; I scanned it and it's appended below.) No, let me refine that, he didn't forget it. He acknowledges whom the Fed works for only to act as if that didn't really matter. Why should such a small, special-interest constituency matter in this great democracy?
So in this edit he argues there's "no logic" to the Fed's imminent interest-rate rise. Workers in short supply? Just raise wages! Anyone who disagrees is part of a lunatic fringe, "dim, incoherent and despicable."
Despicable yes, but not dim or incoherent. The Fed and other major central banks are run by sophisticated people who do a fine job for the bourgeoisie, and it's a serious mistake to underestimate them. In recent months, Greenspan has publicly offered several rationales for a tightening: the "diminishing pool of available workers," overheated asset markets (stocks and housing) contributing to excessive levels of consumption, and growing U.S. foreign debts. These are all serious reasons for a central banker to worry. It may be easy for an economics professor to say "raise wages!," but that's not very pleasing to capitalists, financiers, and their servants in government.
Galbraith's claim that the lunatic fringe doesn't like "the grubby business of small-scale, low-margin, retail mortgages to lower-income people. Much better the flashy hedge fund, the Internet start-up, the real estate investment trust! Raise interest rates and squeeze out the little guy!" is pretty damn odd. This expansion has been powered in large part by easy credit to "little guys" - low-income households are the fastest-growing segment of the credit card market, and no-money-down mortgages have been extended with great vigor. As far as I can tell, there's no shortage of credit for hedge funds, Internet startups, or REITs either. Higher rates will have a quicker, nastier effect on hedge funds, IPOs, and REITs than they will on low-income borrowers, too. So that argument strikes me as pretty weird.
No, Max, I don't think that Galbraith is the enemy. But his refusal to put "pejorative labels" (as he put it in the email I forwarded) on things confuses this issue very badly.
Doug
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The Nation - July 12, 1999
Jobs, Not Interest Rates
By all accounts, the Fed is poised to raise interest rates, in a wholly symbolic anti-inflation gesture. If the logic of this escapes you, don't worry, there isn't one. The move is just a concession to the Fed's internal lobby of right-wing economists and pleaders for the banks and bondholders, who always want higher interest rates and who like to invent inflation threats to justify them.
Yet the blather over inflation obscures something important. We are enjoying, these days, full employment. Americans have jobs like rarely before in peacetime. They are making good money, and, with a higher minimum wage and rapidly growing earnedincome tax credits, even low-income working families are doing well. So are minorities. Black male joblessness has fallen to about 7.8 percentstill about double white rates but lower than at any time in thirty years.
And so, welfare rolls are down-partly because of welfare cuts, surely, but also because there is decent work to be had. Crime rates are way down, too-could there be a connection? Tax receipts are up; cities and states have money in the bank for the first time in decades. Even the inner city is coming back in some places, as small businesses in low-income neighborhoods prosper and expand.
There is genius in the way things are fitting together. With full employment, jobs are easy to find. With a higher minimum wage, people hold on to jobs they might otherwise leave within a few months. With the earned-income tax credit, a steady, low-wage job yields a nonpoverty income. With low interest rates, families in this situation qualify for credit, for mortgages, for cars and homes. What isn't there to love about this system? It is progressive, democratic, equalizing, inclusive and integrating.
And at the larger social level, full employment makes problems small enough to manage. The budget deficit? Gone. The alleged Social Security financial crisis? It has receded and will disappear entirely if this keeps up. The productivity slump? Amazing what a little labor shortage will do to encourage labor-saving by firms. Poverty and the underclass? Not gone, but the fewer poor and alienated people there are, the easier (and cheaper) it becomes to lend them a hand.
And the costs? What costs? Inflation remains a dead flat zero. Profits are strong, the market is high, and even the rich are doing all right. The worst gripe one hears from businesses these days is that they can't find enough good workers. Well, too bad - let them raise wages. Which brings us to the real reasons that the tiny fringe of wealth and power, so heavily overrepresented on the Fed's Open Market Committee, is pressing for higher interest rates. This group does not like full employment. It does not like the grubby business of small-scale, low-margin, retail mortgages to lower-income people. Much better the flashy hedge fund, the Internet start-up, the real estate investment trust! Raise interest rates and squeeze out the little guy! High returns, high risksthat's where the sizzle is in the financial markets.
This is, or ought to be, a battle - a battle with almost the whole population on one side, alongside every social, economic and public interest. And with just a handful of people on the other - wealthy and powerful perhaps, but also dim, incoherent and despicable. The battle for sustained full employment is not a battle we should lose. And the fight should start - now - over that first one-quarter of a percent on the interest rate.
JAMES K. GALBRAITH
James K. Galbraith is the author of Created Unequal: The Crisis in American Pay.