Why the Fed's Raising Interest Rates Won't Work
by John Lawrence
Inflation is a supply and demand problem. The Fed only sees it as a demand problem: there is too much demand. Therefore, it seeks to reduce the public's ability to demand by reducing wages and creating more unemployment. Problem is that businesses are short staffed. They are trying to hire more workers, not laying them off. There is no "industrial reserve army" of people competing for jobs. Businesses are competing for workers. The reason why prices are going up (hence inflation) is not that there is too much demand, but that there is too little supply. This is caused by supply chain problems which comes down to the fact that most things Americans consume are produced overseas, mainly in China. Also the sanctions on Russian gas and oil combined with Russia cutting off supplies even beyond the sanctions means that everything that is transported including consumer goods is even more expensive. The problem is that the US does not produce much of what it consumes. Again it's a supply problem. Container ships coming from China raise their rates because gas is more expensive. This makes the goods they transport more expensive. When the major things Americans consume come from China (consumer goods) and Russia (energy costs), America is at the behest of countries that it considers enemies. And so is Europe.
The traditional way of fighting inflation is for the Fed to raise interest rates and drive up unemployment. When unemployment increases, demand decreases because unemployed people don't have as much money to spend. In other words money is withdrawn from the economy. This is of course to the detriment of the unemployed people which are usually those on the lowest rung of the economic ladder. But as we've seen during the pandemic, those at the bottom of the economic ladder are usually those who are indispensable workers - grocery workers, agricultural workers, truck drivers, nurses, caregivers. The economy cannot function for anyone without their services. So the only way the Fed can achieve its goal is to drive businesses into bankruptcy. Then all those workers will be in the ranks of the unemployed and be forced to underconsume. Actually, the more that Americans consume, the more greenhouse gasses are created. Underconsumption could have a very salutary effect on the atmosphere and the environment.
Another way to withdraw money from the economy in order to reduce demand is to raise taxes. Again taxes are usually raised on the poor and middle class further immiserizing them. Congress refuses to raise taxes on the rich which Joe Biden has proposed doing. This would help inflation to some extent, but the rich don't consume basic items to the extent that the middle class and poor do. So in order to reduce demand to the point where it is more or less equal to supply, money must be taken out of the pockets of the poor and middle class. The other alternative is to increase supply. But since the US is dependent on supply from foreign suppliers, this is not that easy to do. Long range, the solution is for the US to make more stuff, but corporations have settled on a model of getting stuff produced where labor is cheapest and that means overseas.
