September 16, 2022
I have had many people ask me if there is not a better way to fight inflation than the current route of Federal Reserve Board rate hikes. Just to remind people, this route fights inflation by slowing the economy, throwing people out of work, and then forcing workers to take pay cuts.
The people who are most likely to lose jobs are the ones who already face the most discrimination in the labor market: Blacks, Hispanics, people with less education, and people with criminal records. Not only will millions of these workers lose jobs, tens of millions of workers at the bottom half of the wage distribution will be forced to take pay cuts. They are the ones whose bargaining power is most sensitive to the level of unemployment in the economy, not doctors and lawyers.
It seems more than a bit absurd, that when we have all these various public and private initiatives that are supposed to improve the lot of disadvantaged groups, we can have an arm of the government, the Federal Reserve Board, just swamp these efforts by creating a tidal wave of unemployment. I don’t want to disparage well-meaning efforts to help the disadvantaged, but they can’t come to close to offsetting the impact of a three or four percentage point rise in the unemployment rate for Blacks or Hispanics. And, the hit could be much larger.
So, it seems like a good idea to think of an alternative path to lowering the rate of inflation. When I want to reduce inflationary pressures I naturally think of the ways in which we have structured the market to redistribute income upward, as discussed in Rigged [it’s free].
We can look to reduce some of the waste in the financial sector that makes some Wall Street types very rich at the expense of the rest of us. My toolbox includes a financial transactions tax, universal accounts at the Fed (eliminates tens of billions in annual bank fees), getting pension funds to stop throwing money away making private equity partners rich, and getting universities to stop making hedge fund partners rich managing their endowments.
These are all great things to do, but not the sorts of policies that can be implemented overnight to stem current inflation. We can maybe get a foot in the door, but even in a best-case scenario the benefits will only be felt several years down the road.
Then there is the plan to end the protectionism that benefits highly paid professionals, like doctors and dentists. If our doctors got paid roughly the same as their counterparts in Germany or Canada, it would save us around $100 billion a year, or $900 per family. This would mean setting up international standards to ensure quality, and then many years of foreign doctors coming to the U.S., as well as increased competition from nurse practitioners and other health care professionals, to bring our physicians’ pay structure into balance. Again, great policy, but not the sort of thing that will have a big effect in the immediate future.
Next, we have reducing the corruption in the corporate governance structure. As it is, the corporate boards, who are supposed to keep a lid on CEO pay, don’t even see this as part of their job description. They see their jobs as helping the CEO and other top management.
We can look to change the incentive structure for directors, so they actually do take an interest in putting a check on CEO pay. As I point out, this matters not just for the CEO, but bloated CEO pay affects pay structures at the top more generally, taking huge amounts of money out of the pockets of ordinary workers.
My favorite tool is to put some teeth in the “say on pay” votes by shareholders on CEO pay. I would have the directors lose their pay when a CEO pay package is voted down. That seems like a great way to get their attention, but again, a change that will take years to have an impact, not something that could address the current inflation.
The last item in my market restructuring has more promise. This is the system of government granted patent and copyright monopolies, which has allowed Bill Gates and many others to get ridiculously rich. I have argued for radically downsizing the importance of these monopolies, by increasing the role of public funding for research and creative work.
While the full agenda calls for largely replacing patents as a source of funding for innovation in the case of prescription drugs and medical equipment, and reducing their importance elsewhere, there are intermediate steps which can be taken to both reduce costs and get us further down this road. One is simply the sort of price controls on prescription drugs that were part of the Inflation Reduction Act.
These don’t begin to take effect until 2026 and only apply to a limited number of drugs, but we could in principle go much further. We will spend over $500 billion this year (almost $4,000 per family), for drugs that would likely sell for less than $100 billion in a free market. In other words, there is lots of room for inflation reduction here.
If we don’t like the government setting prices, even when government-granted monopolies made prices high in the first place, there is also the option of weakening the monopoly. We can require drug and medical equipment companies to issue compulsory licenses.
This means that anyone could produce a patented drug or medical device, but they would have to pay a modest licensing fee (say 5 percent) to the holder of the patent. This can be put in place now under the Defense Production Act, but going forward we can require companies to agree to this condition as a requirement for anyone benefiting from the fruits of government funded research.
All of these routes to curbing inflation involve more time than just having the Fed raise interest rates, but it seems much fairer to make those who benefited from the upward redistribution of the last four decades pay the price for reducing inflation than those who have been the victims. It is also worth keeping in mind that the pandemic inflation may not a one-time story.
We know that climate change is going to lead to more and larger weather disasters in the years ahead. If we see a major industry or agricultural crop knocked out by flooding, fires, or extreme heat or alternatively, if millions of people must be relocated due to such events, it will impose a serious strain on the economy. The supply-side impact could lead to another bout of inflation like we are seeing now.
It hardly seems fair that we again tell the Fed to throw the must vulnerable people out of work to get inflation under control. We can use other routes, if we plan ahead.
I know that this program has pretty much zero chance in Washington. It means challenging the Great Big Lie, that inequality just happened, but we can still talk about these sorts of alternatives. And progressives who actually want to see less inequality will push them.