Purchasing power

Almost everything is more expensive. Prices in Chicago have risen 7.7 percent over the past year. We’re paying more for basic needs like food, rent, and transportation. Some of the highest increases have been in utilities and gasoline. 

Despite the recent minimum wage increase, Chicagoans’ wages haven’t kept up with the rising cost of living. Yet, mainstream commentators have mostly blamed workers for the cost of living crisis by claiming  demands for higher wages and increased spending from pandemic-era benefits and stimulus checks, combined with supply chain shortages, have created an economy with too much money chasing too few goods, bidding up prices. 

In response, the Federal Reserve, a group of officials responsible for keeping inflation low and employment levels high, has increased interest rates six times this year, making it more expensive for people to borrow money and pay off debt. The Fed hopes that, as a result, people will spend less money, and inflation will eventually go down, even if that means creating a recession. 

In “A Left Answer to Inflation,” Hadas Thier, a New York-based writer and activist, argues that the Fed’s monetary policy forces working-class people to pay the ultimate price for inflation. And in a recent Reader interview, Thier explains why Chicago is the birthplace of conservative economic policy and discusses alternative government responses to inflation that prioritize the economic well-being of workers—a break from the Chicago school of economics.

This interview has been edited for length and clarity.

Sky Patterson: What is inflation?

Hadas Thier: The basic definition of inflation is a rise in prices that’s somewhat generalized in the economy. I think people have seen the effects of that pretty clearly just in our day-to-day lives. People are feeling it at the grocery store, in their rent, and when they put gas in their cars. The way inflation is often talked about in the mainstream media is just to talk about the rate of inflation, without talking about the rate of wages going up. Unless, of course, it’s in order to blame wages. What’s left out of these mainstream analyses is that what impacts our purchasing power is how much inflation rises relative to our wages. Over the last few decades, even while inflation has been up (until recently), wages have risen at an even lower rate. That’s what it means when wages don’t keep up with inflation.

Your article says “It is time to forsake the Chicago school of economics.” What do you mean by that?

The Chicago school of economics was basically a bunch of economists at the University of Chicago, and they had a very conservative economic philosophy, which is, in a nutshell, that the market is always right. And we should always allow the free market to rip, no matter what. So somebody like Milton Friedman, who is kind of the most well-known economist to come out of the Chicago school, was against things like rent control, minimum wage, and national parks. To him, all of these things stood in the way of the free market. And those free market ideas were really a minority position for much of the 40s and 50s; with the Great Depression and the failures of the market, the dominant economic discourse at the time was known as Keynesianism (based on the ideas of economist John Keynes). Keynesian ideas emphasize maintaining full employment, having the government play a very active role in borrowing and spending in order to keep the economy humming, and so on and so forth. 

The ideas percolating at the University of Chicago’s economics department were, in Friedman’s words, part of a derided minority. And what changed things for them was the inflationary crisis of the 1970s. It was really a turning point for the U.S. economy: It meant the end of the post-war boom in the United States. There was a lot of competitive pressure from Western Europe and Japan, there was a militant labor movement at home, and the American economy was suffering in various ways. So the response of the capitalist class was to raise prices and unleash this inflationary spiral.

The Federal Reserve’s response was basically to take up a lot of the ideas of Milton Friedman and the Chicago school of economics and engineer an unprecedented hike in interest rates and therefore a recession. This was very explicitly not just an economic attack, but a political attack. It raised interest rates, essentially creating mass unemployment, which peaked at over 10 percent in 1982. It was coupled with President Ronald Reagan making an assault on the labor movement, famously firing 11,000 striking air traffic controllers to end that strike, making the point to the American labor movement that you’re not going to be able to fight and win because you will have the crushing weight of the federal government against you. And that was the way that not only inflation was curbed in the 1970s, but a militant labor movement was tamed in the 1970s. 

What has been the Chicago school of economics’s influence on how the government currently responds to inflation?

Milton Friedman saw Keynesian policies as being largely to blame for inflation. For Friedman, the full or high employment that the Keynesians were supporting exacerbated this problem because when workers aren’t sufficiently afraid of losing their jobs, they will tend to demand higher wages. And when there’s too much money in the system chasing not enough goods, that will cause inflation.

For Friedman and the Chicago school, the best way to fight inflation is to constrict the money supply, pull back government spending, increase unemployment to curb workers’ bargaining power, and so on. Friedman believed if you let the market do what it does, it will always reward the best ideas with profits.Those ideas are certainly very dominant today. 

It’s not necessarily the case that Friedman’s particular brand of the Chicago school of economics is the most dominant within the mainstream discussion, but they do play a hugely influential role. 

The Federal Reserve is the central banking system of the United States. Set up in response to the Great Depression, the Fed was charged with maintaining the stability of the financial system, prices, and employment. When choosing between price stability or full employment (or anything close to full employment), the Federal Reserve tends to side with price stability and fight inflation. They’re an institution of bankers and the financial elite; that is ultimately the class that they represent. 

So, the main way that the Federal Reserve has responded to inflation is to raise interest rates. At best, that is a kind of blunt instrument because when you raise interest rates, you make it harder to borrow money by making credit more expensive. It means that it’s harder for businesses to borrow money because credit is expensive. So there’s less production and less employment. Meaning when you raise interest rates you can have the impact of raising unemployment and possibly inducing a recession. 

It’s not a side effect that raising interest rates increases unemployment—it’s actually the intended goal.

Why do you call inflation a site of class conflict where one class benefits at the other’s expense?

The heart of this question is: who pays for a rise in the cost of production? In theory under capitalism, if the cost of production is too high, it should reward the capitalists that can do it more efficiently, or their profits should suffer if not. But that isn’t how it goes. Instead, companies are bailed out. They’re allowed to raise their prices as far as they can get away with—there are just no caps or regulations. So it’s workers that have to pay the price through higher unemployment and higher costs of living, rather than having any kind of political and social protections in place for our purchasing power and our pockets.

What’s a more worker-friendly response to inflation?

I think that’s a really important question for the left to get its head around because we have to have an answer to inflation. It hurts working people and there is a better solution. 

How do we address inflation in ways that protect our purchasing power, rather than profits? One way is price controls. They have fallen out of favor in the mainstream discussion because they do away with the whole concept that the free market should be allowed to reign, no matter what. But they have been used at different times in history and sometimes quite effectively. 

The United States, under President Franklin D. Roosevelt, was kind of a wartime economy. Prices and controls played a very critical role in the price Stabilization Act. Rent control was a big part of that because companies just couldn’t get away with taking advantage of the state of the economy to drive up prices. There are different aspects of price controls that still exist in some places. Medicare being able to negotiate prices is a form of price control. The more you expand Medicare, the more you can impact drug prices.

We can decrease prices through public spending and investing in things like public housing, public school systems, and public colleges. When you socialize costs, you decrease people’s actual cost of living. Another important response is to support social safety nets, like food stamps. These mitigate costs specifically for the people that need the most. The government could also play a more interventionist role in actually supporting investment in the supply chain. Although it has a more long-term effect, it is an important part of having more democratic control over the economy. The Federal Reserve is an unelected and not transparent part of the government, so democratic control is essential. 

Supporting the labor movement, any demands for higher wages, and unionization efforts have a tremendous role to play in making sure that the working class isn’t made to pay for the crisis in the way that the government and the federal reserve have it set up to pay.

They tell us that we shouldn’t raise the minimum wage because bosses will fire people if they have to raise their wages. Well, that’s a big problem if our economy can only function on the basis of extremely low wages. So we need to be able to fight on several fronts at once and have a holistic approach. 

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