Inflation! The Battle Between Creditors and Workers

Fix, Blair Working Paper Inflation! The Battle Between Creditors and Workers Provided in Cooperation with: The Bichler & Nitzan Archives Suggested Citation: Fix, Blair (2023) : Inflation! The Battle Between Creditors and Workers, Economics from the Top Down, Toronto, https://economicsfromthetopdown.com/2023/03/23/inflation-the-battle-between-creditors-and- workers/ , https://bnarchives.yorku.ca/775/ This Version is available at: https://hdl.handle.net/10419/270852 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in EconStor may be saved and copied for your personal and scholarly purposes. You are not to copy documents for public or commercial purposes, to exhibit the documents publicly, to make them publicly available on the internet, or to distribute or otherwise use the documents in public. If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. http://creativecommons.org/licenses/by-nc-nd/4.0/ Inflation! The Battle Between Creditors and Workers Blair Fix March 26, 2023 I’ve been writing about inflation for the better part of three months. It’s been exhausting. Most of my time has been spent debunking misconceptions promoted by mainstream economists. Fortunately, I’m ready to move on. What’s interesting about inflation is not the fact that prices rise. What matters is that prices rise at different rates. In other words, inflation creates winners and losers — it redistributes income. In this post, I’ll dive into the redistribution dynamics between wage workers and creditors. 1 When inflation rears its head, both groups try to bolster their income. But they rarely have equal success. Looking at over two centuries of US price history, I find (perhaps surprisingly) that inflation tended to benefit workers at the expense of creditors. Since the 1970s, however, the reverse has been true; inflation has systematically benefited creditors at the expense of workers. So what changed? Two things. First, the US labor movement was crushed. Second (and far less discussed), US policy makers adopted a new way to ‘fight’ rising prices. When inflation reared its head, central banks attempted to quell it by aggressively hiking interest rates. Today, it’s received wisdom that this policy ‘works’. 1 I’ll define ‘creditor’ as any investor who earns interest. That obviously includes banks, which are sometimes called ‘lenders’. It includes credit card companies. It also includes investors who own bonds. Finally, it includes anyone with a bank account — people commonly referred to as ‘savers’. But let’s not kid ourselves; if you give money to your bank, you haven’t ‘saved’ your cash; you’ve ‘invested’ it. Blair Fix Economics from the Top Down Of course, the policy does work — but not for its stated goal. Never mind ‘fighting inflation’. When you raise interest rates, you give creditors a raise. Framed in this light, it’s unsurprising that inflation has recently become a boon for US creditors. Backed by monetarist ideology, the government is now dedicated to preserving the return on credit. When it comes to class struggle, there’s nothing like having the sledgehammer of the state to back you up. With credit returns in mind, here’s the road ahead. Before diving into the dynamics of class struggle, I’ll take a quick look at the language used to describe rising prices. Next, I’ll quantify the price struggle between creditors and workers. Finally, I’ll measure how this struggle has changed over time, and how it relates to the ideological currents of the period. Inflation and the English language To start our journey into income redistribution, let’s talk about terminology. The word inflation . .. what does it describe? To many people, ‘inflation’ refers to a decrease in the value of money. While this thinking is not wrong per se, it is needlessly abstract. We cannot measure the ‘value of money’. Instead, we measure price increases. 2 Speaking of the phrase ‘price increases’, this language is also indirect. After all, prices don’t raise themselves. If prices go up, it’s because someone raised them. To bolster my profit, I raise prices. My point here is that there are different ways to talk about the phenomenon of ‘inflation’. And paradoxically, the word ‘inflation’ is itself quite opaque. When ‘inflation’ rears its head, what’s actually going on is that groups of people compete to ‘raise prices’. Now, if English writers cared about accuracy, you’d think that they would favor terms that are clear. And yet when it comes to price hikes, the opposite is true. 2 To quantify ‘inflation’, we take a group of commodities and measure their average increase in price. Now, because price change is differential, there is no such thing as the rate of inflation. There’s just an average that, by convention, we define to be the general rate of price increase. (More on this can of worms here.) 2 Blair Fix Economics from the Top Down Figure 1: Burying the lede; talking about ‘inflation’ without ‘raising prices’ Using the Google English corpus, this figure measures the frequency of three different ways of describing ‘inflation’. Most frequent is the word ‘inflation’ itself — a term that is ubiquitous yet surprisingly abstract. Less frequent is the more concrete term ‘price increases’, which better describes what’s going on (prices are rising). And buried in obscurity is the action phrase ‘raise prices’,which requires a subject to make sense. In other words, if prices increase, it is because someone raised them. Sources and methods Figure 1runs the numbers. Here, I’ve plotted the frequency (in the Google English corpus) of three different phrases which describe the same phenomenon: ‘inflation’, ‘price increases’, and ‘raise prices’. The opaque term ‘inflation’ is ubiquitous. The more descriptive term ‘price increases’ is about 10 times more rare. And the action phrase ‘raise prices’ is vanishingly scarce. Why do English writers avoid plain talk about ‘raising prices’? Well, a feature of plain language is that it’s easy to understand. But as George Orwell observed, sometimes people want to be misunderstood. 3 Blair Fix Economics from the Top Down Those people tend to be the powerful, and their goal is to distract you from their actions. On that front, talk of ‘raising prices’ highlights the folks doing the raising. Who is raising the price of food? That would be grocery retailers. If you want to downplay your price-raising culpability, start by removing the subject (you). Talk instead about ‘price increases’, as if prices raise themselves. Or better yet, speak about ‘inflation’. By doing so, you’ll take the focus off of prices and put it onto vague problems with the money supply. The struggle to raise prices Now to the science of inflation, which starts with concrete language. I define ‘inflation’ as the general struggle to raise prices. This inflationary struggle involves everyone. Firms play the price-raising game. But so do landlords, proprietors, wage workers and creditors. Because of this generality, the struggle to raise prices is best thought of as a herd competition. Everybody plays. But not everybody wins. I see your price hike, and I raise my wage Diving into the struggle to raise prices, lets look at how US workers play the game. When firms raise prices, the cost of living goes up. Unsurprisingly, workers respond by seeking higher wages. The result is a tit for tat between commodity prices and wages. When one goes up, so does the other. Figure 2shows the pattern in the United States. The blue curve plots the annual change in the consumer price index. The red curve shows the annual growth rate of wages. Over more than two centuries, the two series are tightly coupled. Looking Figure 2, what’s interesting is that for most of the last two centuries, wage growth exceeded price growth. (The red curve lies above the blue curve.) In other words, from 1770 to 1970, workers saw their purchasing power grow. But what’s ominous is that after 1970, workers took a beating. For the last fifty years, wages have barely kept up with rising prices. Sear this stagnation into your memory, as we’ll return to it later. But right now we’ll move on to another tit for tat. 4 Blair Fix Economics from the Top Down Figure 2: In the United States, wage growth is tightly coupled to rising commodity prices This figure illustrates the long-term connection between wage growth and the growth of commodity prices. The red curve shows the annual growth rate for the wages of unskilled US workers. The blue curve shows the annual change in the US consumer price index — a common measure of inflation. To highlight the long-term pattern, I’ve smoothed both series using a 10-year trailing average. Sources and methods I see your price hike, and I raise my return on capital When it comes to raising prices, capitalists play the same game as workers. The main difference is that capitalists don’t receive a ‘wage’; they receive a ‘return on investment’. Like the various flavors of labor income (wages, salaries, commission, etc.), there are different flavors of capitalist investment. The two most important are equity and debt. Each flavor comes with its own category of income. If I invest in equity, I earn ‘profit’. But if I invest in debt, I earn ‘interest’.3 When faced with inflation, these investment flavors require different strategies for preserving income. Let’s start with equity. When you buy equity, you purchase the legal command of a firm (or at least part of it). So when your competitors raise prices, you tell your firm to do the same. Profits preserved. 3 Investors can also earn ‘capital gains’ when their property appreciates in value. But I’ll ignore this income here. 5 Blair Fix Economics from the Top Down Figure 3: In the United States, the growth rate of bond yields is coupled to rising commodity prices This figure illustrates the long-term connection between bond yields and the growth of commodity prices. The blue curve shows the annual change in the US consumer price index. The red curve shows the annual growth rate of US bond yields. (Note that I do mean growth rate, not percentage point change. So if the bond yield changes from 5% to 6%, that counts as a 20% increase.) To highlight the long-term pattern, I’ve smoothed both series using a 10-year trailing average. Sources and methods If you purchase debt, however, you have no formal say in the debtor’s decisions, and no right to their bolstered profits. 4 Instead, your investment return is fixed. It is set at the purchase date by the rate of interest. So if you are a creditor (meaning you own debt), the obvious response to inflation is to raise the rate of interest. Because of this income-preserving behavior, interest rates tend to rise and fall with other commodity prices. Figure 3shows the pattern in the United States. Some things to note about the data in Figure 3. First, I’ve proxied the rate of interest using the yield on long-term bonds. 5 Second, the vertical axis shows the growth rate of bond yields, not the percentage point change. So if the 4 Creditors are not ‘owners’, and therefore have no formal right to command a firm. But as every mafia boss knows, when someone owes you a lot of money, it’s quite easy to influence their actions. For an excellent discussion of the power involved in debt, see Tim Di Muzio Richard Robbins’ book Debt as Power. 5 Here’s the difference between a ‘bond yield’ and the rate of interest. Think of a bond as a term deposit. Like a bank term deposit, a bond pays a rate of interest that is determined at the date of issue. Also like a term deposit, the bond has a maturity date, at which point 6 Blair Fix Economics from the Top Down bond yield jumps from 5% to 6%, that counts as a growth rate of 20%. The idea is that we’re measuring the growth rate of simple interest earned on a fixed quantity of credit. Looking at Figure 3, it’s clear that bond yields rise and fall with commodity prices. But then again, it would be astounding if they didn’t. When faced with inflation, creditors bolster their income ... just like everyone else. The struggle between creditors and workers To summarize the evidence so far, we know that during bouts of inflation, both US workers and US creditors raise their prices. Now we’ll see how these two groups fare against each other. The way I’ll do that is by measuring the growth gap between bond yields and wages: bond-wage growth gap =bond-yield growth −wage growth The idea here is that the bond-wage growth gap quantifies the price struggle between creditors and workers. When bond yields grow faster than wages, it signals that creditors are winning the struggle. But when bond yields grow slower than wages, it signals that workers are winning the battle.6 you’re paid back your principle, plus the interest earned. Unlike a term deposit, however, bondholders can sell their asset before it is mature. The catch is that the market value of this sale can be different from the book value of the bond (i.e. the principle you invested). To calculate a bond yield, we take the interest payments (sometimes called the ‘coupon payment’) and divide them by the market value of the bond. Now, since the market value of a bond changes with time, if you sell your bond early, your yield can be different from the rate of interest attached to your bond. For example, suppose you buy a 30-year bond that pays 1% interest. Next, suppose that interest rates rise to 5%. If you sell your bond early, you have to compete with newly issued bonds that pay a higher rate of interest. In other words, you’ll have to lower your selling price below the book value. So your bond yield will rise, even though the coupon payment stays the same. What’s this yield got to do with the rate of interest? In practice, investors use the rate of interest when pricing bonds. As a result, bond yields are tightly linked to the current rate of interest. 6 Note that the bond-wage growth gap takes a narrow view of creditor income because it assumes simple interest on a static amount of capital. Obviously, real-world creditors reinvest some (or all) of their returns, and therefore earn compound interest. But we’ll ignore that complexity here. 7 Blair Fix Economics from the Top Down Figure 4: The bond-wage growth gap in the United States This figure illustrates the history of what I call the ‘bond-wage growth gap’. This gap is the difference between the growth rate of bond yields (Figure 3) and the growth rate of wages (Figure 2). Because the bond-wage growth gap is quite volatile, I’ve smoothed the trend with a 30-year trailing average. Sources and methods Figure 4shows the history of the bond-wage growth gap in the United States. Note that the growth gap is quite volatile, so I’ve smoothed it with a 30-year trailing average. Looking at Figure 4, let’s note some important features. First, the bond-wage growth gap is mostly negative, meaning US bond yields tended to grow more slowly than US wages. That’s expected. Over the last two centuries, US wages grew exponentially; bond yields did not. Second, the bond-wage growth gap saw some major swings — a stark decline in the early 20th century, followed by a reversal after 1970. These swings — and how they relate to inflation — will be the focus of our story. 8 Blair Fix Economics from the Top Down Figure 6: As monetarist ideology spread, inflation began to benefit US creditors at the expense of workers This figure replots (from Figure 5) the rolling correlation between the inflation rate and the bond-wage growth gap. Beneath the curve, the grey region illustrates the rise of monetarist ideology, as measured by the frequency of the word ‘monetarism’ in the Google English corpus. Darker grey indicates higher frequency. Evidently the spread of monetarist ideology helped creditors bolster their income during bouts of inflation. Sources and methods The rise and fall of the labor movement Perhaps the main legacy of monetarism is that it put the focus on limiting the rate of inflation rather than dealing with the redistributional consequences of the price war. Here’s a case in point. Today, workers assume that inflation is ‘bad’. After all, it erodes their purchasing power. But what many workers don’t realize is that this erosion is not a feature of inflation; it’s a feature of class struggle. Wage erosion signals that today, when firms start raising prices, workers lack 15 Blair Fix Economics from the Top Down the power to bolster their income. Historically, however, this lack of power was not the norm. As the labor movement was heating up in the early 20th century, wage growth far outstripped inflation. The path to achieving this ‘living wage’ was difficult to implement, but conceptually straightforward. Workers used the sledgehammer of government to raise their income. In the US, the battle came to a head in 1912, after textile workers mounted a tumultuous strike which prompted the first minimum wage legislation (passed in Massachusetts). A decade later, 15 states had minimum wage laws.12 Now, just as the Fed’s monetary policy can change, wage legislation can be bolstered or clawed back, depending on who’s influencing government. So the real story of the labor movement isn’t legislation per se, but the cultural transition that came with it. On that front, we can see the cultural impact of the labor movement by charting the frequency of the phrase ‘labor movement’. It rose during the early 20th century, and fell from the 1970s onward. Unsurprisingly, that’s the same period during which inflation benefited workers at the expense of creditors. Figure 7tells the story. 12 It’s worth remembering that the early 20th century, the US Supreme court was openly hostile to workers and consistently ruled that minimum wages were unconstitutional. In 1935, the court overruled Roosevelt’s first attempt at a federal minimum wage. It took until 1941 for the court to deem a federal minimum wage constitutional. 16 Blair Fix Economics from the Top Down Figure 7: As the labor movement spread, inflation began to benefit US workers at the expense of creditors This figure replots (from Figure 5) the rolling correlation between the inflation rate and the bond-wage growth gap. Beneath the curve, the grey region illustrates the rise of the labor movement, as measured by the frequency of the term ‘labor movement’ in the Google English corpus. Darker grey indicates higher frequency. Sources and methods The freedom to invest Looking at the tight relation between the outcome of the worker-creditor class struggle and changes in the social climate, I can’t help but think of Milton Friedman’s apologetics. When evidence for his monetary policy didn’t turn up, it was no problem. The failure simply indicated that his policies worked with considerable delays: There is much evidence that monetary changes have their effect only after a considerable lag and over a long period and that the lag is rather variable. (Milton Friedman, 1960) 17 Blair Fix Economics from the Top Down Given Friedman’s equivocation, it’s ironic that his policies did work — and immediately so — but for reasons that he preferred to leave unstated. On that front, Friedman’s ideas were part of the wider rise of neoliberal ideology — a movement that professed a faith in ‘free markets’, yet demanded that the sledgehammer of government be used to crush workers. And so over the last fifty years, we got a Federal Reserve that, in the face of inflation, acted ‘independently’ to bolster the return on credit. Tellingly, we didn’t get an ‘independent’ Department of Labor that bolstered labor income by hiking the minimum wage. It’s almost as if the Fed’s ‘independence’ was code for ‘regulatory capture’. In short, when Friedman proselytized ‘freedom’, he had in mind the freedom to invest. And that, Nitzan and Bichler remind us, is code for the “freedom to impose and capitalize power”. An imaginary blessing Let’s wrap up our story. Because we (modern humans) are immersed in prices, we tend to forget that these numbers are conventions for quantifying our social relations. In other words, we misunderstand the social system which we have created. In this regard, we are in good company. A basic feature of all ideologies is that they distract people from what’s right in front of them. Take the example of divine kings. By evoking the will of god, the king distracts people from the hand of power. And so as the tribute flows in, the king’s subjects see a reciprocal flow of divine blessing. The return on credit operates the same way. When creditors hike the rate of interest, the effect is that their income rises. But to the masses, the move comes in the name of an imaginary blessing — a ‘fight against inflation’. It’s a testament to our indoctrination that many people believe these claims. And yet it was not always so. Today’s inflation-fighting rhetoric is a recent invention, cooked up at a moment when US workers were winning the price battle and creditors were losing. On that front, here’s a way to inoculate yourself against monetarist bullshit. Define ‘inflation’ as a general struggle to raise prices. In this light, the ‘medicine’ of higher interest rates is self-evident poison — a price hike that 18 Blair Fix Economics from the Top Down bolsters the income of the powerful at the expense of everyone else. It’s divine kingship in a new form: a real windfall in the name of an imaginary blessing. Support this blog Economics from the Top Down is where I share my ideas for how to create a better economics. If you liked this post, consider becoming a patron. You’ll help me continue my research, and continue to share it with readers like you. Sources and methods US wages •Wage data for US unskilled workers is from MeasuringWorth.com US consumer price index • Consumer price index from 1774 to 1912: Historical Statistics of the United States, series Cc1. • Consumer price index from 1913 to 2021: Bureau of Labor Statistics, series CUUR0000SA0. US bond yields • Bond yields from 1798 to 1959: Historical Statistics of the United States, Table Cj1192-1197 (long-term bond yields). This table contains several series for bond yields, each of which covers a different period of time. To construct the long-term index, I calculate the average (the unweighted mean) of the reported data in each year. • Bond yields from 1960 to 2022: FRED series IRLTLT01USM156N, longterm government bond yields, 10-year. 19 Blair Fix Economics from the Top Down Google English corpus I accessed Google’s word frequency data using the excellent R package ngramr. Further reading Di Muzio, T. (2022). Do interest rate hikes worsen inflation? Strange Matters. https://strangematters.coop/interest-rate-hikes-worsen-inflation-vol cker-shock/ Nitzan, J., & Bichler, S. (2009). Capital as power: A study of order and creorder. New York: Routledge. Robbins, R. H., & Di Muzio, T. (2016). Debt as power. Manchester University Press. 20