By Sasha Abramsky (China Daily)
Updated: 2008-03-04 07:27

The economic news of the week: inflation in the United States is now the highest it has been since 1981. In many sectors of the economy - food, energy, healthcare - it is now running at double-digits, and the dollar's value against the euro has plummeted through the $1.50 barrier.

If your measure of decent policy is "how does this effect the poorest sections of society?" - which is as good a measure as I can think of for ethical decision-making - then the monetarists were wrong, not because inflation was not a huge problem, but because the shock tactics they used to tackle it hurt the poor, the least job-secure, the most.

The only way to rein in inflation as rapidly as the monetarists wanted, during a period in which trade unions had considerable muscles to flex, was to send interest rates soaring at the same time as the government worked to shatter organized labor and use the specter of mass unemployment to drive down real wages. Inflation was tamed - but at the cost of tremendous societal dislocation.

Today, however, when labor is utterly quiescent in the US, not reining in inflation hurts the poor the most. The reason for this is that unemployment is not the pre-eminent concern here. Rather the bigger, broader, concern is staggeringly low wages for the working poor.

Quite simply, a tremendous number of people are working for remuneration that is not keeping up with price increases. Since poor people spend most of their disposable income on necessities, when the price of those necessities goes up, as it has for several years now, the purchasing power of the poor is hit first and hit hardest.

A moderate dose of monetarism - not of a scale to trigger the unemployment of the early 1980s, but enough to at least curb some of the inflationary pressures in the economy - combined with some smart, targeted, federal subsidies and mortgage-relief interventions would probably benefit the poor in 2008 rather than hurt them.

After all, when the Federal Reserve lowers interest rates, poor people who already cannot afford mortgages and cannot afford mass consumption lifestyles do not really benefit - these are reliefs for the middle classes and stock owners rather than the invisible poor.

But when prices of staple goods rise as a result of inflation, the people at the bottom of the economic barrel, those without the bargaining power to be able to push their wages up, suffer most.

Two-fold threat

Today, the US is facing a two-fold inflation threat. The first, in a global economy it has relatively little control over, upward pressures on energy prices, surging demand for food products and increased competition for mineral and metal resources, are all going to feed through into global inflation.

That is why food and energy prices, as well as prices of toys and clothes, are rising lockstep in the US, India, Africa, Europe and pretty much everywhere else.

The second, however, is a made-in-the-USA problem.

The Bush government has presided over an extraordinary hollowing-out of the US economy, relying on borrowing money from overseas to shore up its spending, cutting taxes without any regard for what it will do to the budget deficit, refusing to in any way, shape or form, structure policies that favor saving over instant consumption.

All of these policies help create inflationary cycles. They are squashing the value of the dollar against almost every other major currency - meaning imports cost more and any commodity priced in dollars soars in price. That is why the 7 percent inflation rate this year is far outstripping that of Western Europe.

It is why the US inflation rate will continue to outstrip that of our peer nations in coming years. Which means, over time, the US standard of living vis--vis our competitors and peers is steadily, dramatically, eroding.

Sensible steps

How to rein in this cycle? Well, one sensible step would be to moderately raise interest rates - or at least not lower them - to take a partial lesson from the monetarists a generation ago.

It would encourage more savings, would slow borrowing-based consumption, would put the brakes on the dollar collapse, and, in the long-run, ought to help the US get its economic house in order again.

But that is not politically palatable because it would slow down the economy at a time when the housing crisis and rising energy costs have already put a crimp in spending.

And it would risk at least temporarily exacerbating an already awful housing slump and foreclosure crisis (though that might be an exaggerated risk, given that the Feds' recent interest-rate cuts have utterly failed to reverse the housing collapse).

The alternative - raising interest rates, but crafting very specific federal programs and local/state grants to help families in imminent risk of losing their homes, or even community service plans that would allow families to trade community service for temporary mortgage assistance - but this will not be accepted because this administration cannot abide the notion of an interventionist, public works-favoring federal government.

So we have a spectacle of the world's wealthiest nation heading in exactly the wrong direction so as to provide short-term shots of adrenaline to a faltering mass consumption economy. That is not just cynical politics, it is also deeply destructive. What it means is the rot at the center of this economic mess will continue to spread, making it that much harder for the next administration to cut it out.

Lower interest rates might help the middle class maintain their lifestyles for a few years, but unless inflation starts to be taken seriously again an awful lot more poor Americans are going to be standing in food lines or borrowing money to buy the gas to drive to work during those same years.

If this were any other country in the world, lowering interest rates in the face of inflation numbers such as were released this week would result in condemnation from the International Monetary Fund, in financial powerbrokers strong-arming politicians to do the sensible thing and reverse course.

Nobody will strong-arm the Fed to raise rates, and, to subsidise the nation's current reckless consumption patterns, the poor will continue to see their already-shrivelled purchasing power decline.

The author is a senior fellow at the New York-based think tank Demos The Guardian

(China Daily 03/04/2008 page9)