How the Fed Enforces the Status Quo

Federal ReservePaul Krugman has written a couple of blog posts about David Beckworth. I know what you’re thinking, “Why would Krugman be writing about soccer? Or is he writing about the Spice Girls?” Don’t be an idiot like me: it’s Beckworth, not Beckham. He’s an economist of sorts. In the first post, Krugman was impressed that Beckworth agreed with him about the limitations of monetary policy when interest rates are already hanging around zero. But in his second post, Krugman grumbled because Beckworth seemed to be backtracking.

The argument that Beckworth is making is really interesting, even if Krugman’s argument is valid. Beckworth’s argument is that fiscal stimulus can’t really help the economy either. He claimed that any stimulus created by the government spending money would be offset by the Fed raising rates. Krugman countered that this isn’t true in the current situation where the Federal Reserve has consistently been unable to keep inflation as high as its (ridiculously low) inflation target. When it comes to this, I think there is an easier way to counter Beckworth. Basically, he’s just making the argument that there is never anything the government can do to fight economic downturns. So why bother?! That’s a typical conservative conclusion in search of an argument.

But there is something to be said for Beckworth’s argument in a general sense. In regular times, the Fed stands guard over the wealth of the power elite. If the economy starts to really take off — most especially in the form of workers actually earning more money for a change — the Fed raises interest rates to slow the economy down. The only time in the last four decades that we have seen a substantive improvement in the earnings of ordinary workers was when crazy heterodox Fed chairman Alan Greenspan went against what all the economists said.

The interesting thing is that Greenspan showed that unemployment could get down to below 4% without causing inflation. But the actual real world experiment hasn’t changed the thinking of economists. I still hear economists claiming that inflation below 6% is going to cause inflation. I know that things change over time. But 6%? Really?! That’s extreme. Things haven’t changed that much. But this is why I think it is better to think of economists as religious apologists than as scientists. But instead of arguing on the literal truth of the Bible, they argue for whatever is best for the power elite.

So in good times — or moderately good times — the Federal Reserve really does have the power to kill any recovery that democratically elected officials might be able to facilitate. And that really doesn’t speak well for us. It means that what hereditary “rights” did for feudalism, the Fed does for modern capitalism. And capitalism hardly needs such help! But with the Fed, it makes it substantially harder to break the established bonds of the power elite. It’s not just the fact that money makes money and that’s why you are best off being born rich. It is also that the most important economic entity in the entire world is there to enforce the status quo.

But just like we tell children fairy tales to make them behave, we tell ourselves comforting myths about meritocracy in America. But it is time to put away childish illusions and look at the cold reality of modern America. Then maybe we can change it.

See also: The Myth of the NAIRU and Its Purpose

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About Frank Moraes

Frank Moraes is a freelance writer and editor online and in print. He is educated as a scientist with a PhD in Atmospheric Physics. He has worked in climate science, remote sensing, throughout the computer industry, and as a college physics instructor. Find out more at About Frank Moraes.

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