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Inflation Now, Recession Soon: Capitalists Want Us to Pay for Their Crisis

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Working people in the U.S. are facing the worst inflation in 40 years. Gas is at $6 a gallon in many places; groceries are up by more than 10% over the past twelve months; rent is skyrocketing. For millions who were barely scraping by, this is a disaster. And this time there are no government checks coming. 

Official statistics confirm that in May, consumer prices were up 8.6% over a year ago. Grocery prices had already breached the 10% mark in April. Meanwhile wages and salaries only rose by 4.7%. When prices rise faster than wages, workers lose. In other words, unless your pay went up by at least 8.6% in the past twelve months, you’ve seen a pay cut. Your ability to pay for things has been reduced. 

This process we are seeing unfold now began with the pandemic-induced stock market crash of February and March of 2020, when central banks pumped trillions of dollars into the financial system through repurchases of securities from banks and big corporations as the world went into lockdown. 

One of the ways inflation happens is when the supply of money exceeds the supply of goods and services, and in the U.S. alone, this stimulus to the banking system added more than $8 trillion to the money supply over a two year period. Inflation is also caused by the supply of goods not meeting demand.

This inflationary wave was initially triggered by supply chain problems linked to COVID lockdowns as demand for goods from China surged as well as the impact of climate-change on agriculture. The Russian invasion of Ukraine which began on February 24 has created even more shortages of food and fuel. This is a perfect storm.

A Range of Causes Rooted in Capitalist Contradictions

Not all of this inflation is new. Housing costs had already seen steady increases due to many factors – the destruction of public housing, the crooked practices of the mortgage industry, and decades of developer speculation – in a 50-year process that long predates the 2008 Great Recession. Since 1965, U.S. house prices have increased by 118% after adjusting for inflation – 7.6 times faster than median household incomes, which rose by a pitiful 15% during the same period. The increase in home prices just since 2008 has been three times that of incomes, and more than eight million households are behind with rent.

In the last twelve months, the price of gas has gone up almost 50% while the prices of both new and used cars have also leapt upwards. Grocery shopping has become a jolting experience, with some price rises far exceeding the official averages. For example, in April the price of eggs rose 44% year on year due to an ongoing outbreak of avian flu – a disease whose spread is rooted in the factory-farming methods used by agribusiness. Sudden increases in fresh fruit prices have had consumers putting them back on the shelves.

In 2021, 53 million people turned to food banks and community programs for help putting food on the table. In March of 2022, two thirds of the 200 food banks in the Feeding America network reported seeing 15% more people applying for food assistance in March than in the previous month

These figures inevitably raise comparisons with the 1970s. The last time food prices increased by double figures was 1979, the year before right-wing Republican Ronald Reagan was elected president – largely by promising to end inflation.The head of the Federal Reserve at the time, Paul Volcker, sharply raised interest rates in order to cut across inflation which caused the economy to crash in what became known as the Reagan Recession

Working class communities were crushed with a deep and lasting wave of unemployment, officially reaching almost 11% and remaining above 5% until 1989. The most oppressed suffered the worst: by 1983 the unemployment rate for Black Americans exceeded 20%. In other words, inflation was controlled through an all-out attack on working class living standards which ushered in the period known as neoliberalism.

The Fed’s Cure Much Worse Than The Disease

The circumstances may be different, but the response of the capitalist class is the same: make workers pay for the crisis. 

Six weeks ago, on May 4, Fed chair Jerome Powell, announcing a 0.50% point interest rate increase, stated that his intent is to reduce employment, and through that, wages, with the assumption that prices will then go down: “by moderating demand, we could see [job] vacancies come down, and as a result… to get wages down and then get inflation down without having to slow the economy and have a recession and have unemployment rise materially.” 

The way “moderating demand” works in this scenario is to make borrowing costs higher for businesses and individuals, leading businesses to cut back on investment, thereby needing less workers.

Powell repeated the point on June 15, following an even larger 0.75% rate increase: “You have a lot of surplus demand, for example in the labor market you have two job vacancies essentially for every person actively seeking a job, and that has led to a real imbalance in wage negotiating. You could get to a place where you would expect to see those wage pressures move back down to a level where people are still getting wage increases, but at a level that’s consistent with two percent inflation.”

In other words – slash jobs so that workers are forced to accept raises far below the level of inflation. Slash jobs, slash workers’ pay, this is Powell’s formula. And while Powell claims this can be done without triggering a recession, most economists now disagree.

Wages Are Not The Cause!

As multiple commentators, from Krystal Ball of Breaking Points to a host of mainstream economists, have pointed out, Powell’s implication that wages are to blame for inflation is nonsensical: it is wages that have stagnated while prices have risen. 

The prices of gas, rent and food reflect multiple factors in the world economy and – as Powell has since been forced to admit before the U.S. Senate – raising interest rates will have zero direct impact on them. Nevertheless his intent, clearly, is to keep going with the goal of attacking wages and jobs. Biden, for his part, has given the Fed carte blanche, saying he is leaving it up to the experts and will not intervene. 

The result will almost certainly be a new recession which will destroy not just this or that job opening but millions of jobs. A number of major corporations – particular household names from the tech sector like Uber, Meta/Facebook, Twitter and Redfin – are already laying workers off, or rescinding existing job offers, in anticipation that there will be a major downturn. This will be the third such shock in 14 years and will be an absolute disaster for workers and working class families. 

Harvard Economic Guru Calls for 15 Million Unemployed to “Cure” Inflation

An indication of the potential depth of this recession can be glimpsed from Democratic economic guru Larry Summers who has loudly proclaimed that what’s needed is mass unemployment: 

“We need five years of unemployment above 5% to contain inflation—in other words, we need two years of 7.5% unemployment or five years of 6% unemployment or one year of 10% unemployment.” 

It’s an absolute fantasy to pretend, as Summers implied in late June, that the damage to the economy and workers’ lives could somehow be turned off after a single year of 10% unemployment. But Summers was saying the quiet part out loud, unlike his colleague over at the Fed, this is the plan that the billionaire class and its advisors have in store for the rest of us.

The Neoliberal Hangover

Millions lost their homes and jobs in the 2008-09 recession. But the calculated creation of a recession with the aim of cutting workers’ incomes has not been done since neoliberal austerity was unleashed across the board during the late 1970’s and early 80’s, after big business concluded that, with the post-World War II boom over, their profits could only be protected by attacking workers’ living standards. Ravaged rust-belt cities like Detroit and Flint, MI, Gary, IN and Kenosha, WI – once home to the world’s largest auto factory, now known mainly as the site of an armed rampage cheered on by white supremacists – all of these ruined cities remain as crumbling monuments to this brutal project, as do the parts of many cities that were set aside for Black people in a previous period and which big business simply abandoned in revenge for the uncompleted uprisings of the 60’s. 

Most workers old enough to remember the Reagan Recession should be out of the workforce by now, but far too many are forced to stay in work by the reduced pensions and shady, stock-market based savings plans that were created under neoliberalism. 

The generations that followed them saw industrial jobs replaced with low paid service sector employment, increased and precarious working hours, and stagnating incomes. For all of these as well as young people just entering the workforce, for the disabled, for single parents, and for all those faced with the special oppressions that inflict high levels of unemployment and homelessness, rising prices are now creating new levels of insecurity.

For working families life was hard even before the current wave of inflation. In May of 2020, the average livable income for a family of four, as estimated by the MIT living wage project, was $68,808. But median household income was only $67,521 in 2020 according to the U.S. Census Bureau. 

In other words, just over half of the households in the U.S. lacked a livable income in 2020. And as confirmed by multiple sources including none other than Trump’s alma mater, the Wharton School, the situation has only gotten worse

“According to Penn Wharton’s Budget Model, that [inflation] increase translated to an [additional $3,570 in expenses] for all working households. At the same time, incomes rose 4.5%, the sharpest rise seen since 1983. However, this increase has not been enough to keep pace with inflation, meaning households, on average, saw a decrease in their real income.”

Inflation is an International Phenomenon

The Financial Times of London, an elite outlet offering advice to the capitalist class, reports that even before war broke out in Ukraine, prices had risen to multi-decade highs in many countries, with the IMF predicting economic slowdowns in 143 countries, accounting for more than four fifths of the world economy. Global inflation was already surging, with the February forecast at 6.2%, 2.25 percentage points higher than January’s. 

The FT warns that measures like the U.S. Fed is proposing risk creating “stagflation” – a combination of rising prices with stalled economic growth which plagued Western economies in the late 1970s. They talk about the stagflationary shock of 2022 as a world wide phenomenon and describe similar trends playing out today, in country after country.

The United Nations confirms the FT’s analysis, and worries about the effects of “faster-than-expected monetary tightening by developed country central banks” on the rest of the world. This is in part because sharp interest rate increases by the U.S. and European central banks will massively exacerbate the global debt crisis facing poor countries, especially for debts denominated in dollars. The UN knows that this will also create the basis for uprisings of workers and the poor, as we saw with the Arab Spring in 2011 and more recently in Sudan and in the “Pink Tide” of Left electoral victories in Latin America. 

A New York Times headline says it all: “Food Prices Approach Record Highs, Threatening the World’s Poorest.” The article went on to say that “prices have climbed to their highest level since 2011, according to a U.N. index. It could cause social unrest ‘on a widespread scale,’ one expert said.”

What Caused This Crisis?

Many supply side factors have exacerbated the inflationary effect of the Fed’s policies. These include the murderous war in Ukraine, the effect of climate change and unsustainable agricultural practices on food supplies, supply chain problems like the lockdowns in China which are blocking both ports and factories, all the way to the shortage of truckers in the U.S., which in itself is a direct result of neoliberal deregulation and the bosses 40 year war on truckers’ living standards. 

But ultimately the causes of the crisis are based in the anarchic nature of the capitalist system. While it’s true, as Robert Reich has pointed out, that the biggest corporations, with their virtual monopoly positions, engage in price gouging just because they can, this is a product of these mega-corporations’ domination of the economy and politics, rather than the root cause of inflation itself. 

The attempt of central banks to deal with the economic crash in 2008 and subsequently restarting the economy and again in 2020-21 by turning on the money gusher, pumping “liquidity” into markets at unprecedented rates, and then the “stimulus” of 2020-21 the bulk of which went to big business – are collectively referred to in the financial media as the policy of “easy money.” They represented a reversal of thirty years of neoliberal, monetarist policies. 

It is completely false to say, as many media commentators do, that the bulk of the stimulus went to ordinary people, or that lower income households’ savings remain “padded” by what’s left of their stimulus payments more than a year after the final check. 

The reality is that of the $6 trillion figure which Congress originally authorized, one third was never spent. Only $1.497 trillion went to direct payments to individuals and families. The real money gusher was never voted on by Congress. It came from central banks like the Federal Reserve and its European equivalent the ECB, and is barely mentioned by most corporate commentators. The enormous sums involved were confirmed in February 2022 by researchers working for the United Nations

“Since the start of the pandemic, the central banks of Japan, the United Kingdom, the United States, and the euro area have added roughly $10.2 trillion in security assets to their already large balance sheets, letting their total assets soar to over $25.9 trillion (as of end-September 2021). The Fed has been buying $120 billion worth of securities every month and has accumulated a total stock of $2.6 trillion in mortgage-backed securities and $5.5 trillion in U.S. Treasury securities.”

While it did work to restart the economy, the vast sums spent on stock buybacks increased inflationary pressures. The United Nations admits this with surprising frankness:

“One factor that has been holding back investment is a massive increase in stock buybacks, especially in the United States. The increases in stock price often just benefit senior corporate executives and major shareholders… Instead of a sustained increase in investment, [we see] persistent supply-side bottlenecks, which have been feeding inflationary pressures.”

In other words – the money gusher in the 2010s and again since 2020 did not relaunch productive investment in new technologies, or build affordable homes, or improve education or healthcare, or even replace the nation’s crumbling infrastructure or upgrade rail or trucking. It went into the pockets of the super-rich and the above quotation shows the United Nations’ economists confirming it.

Over the last fourteen years, the capitalist system has been lurching from crisis to crisis. Its failure to actually develop the real economy is a reflection of this deeper crisis. The capitalist class, based as it is in private property and beset by all the limitations of the nation state and increasingly unstable political systems, is turning from one desperate measure to another and each one creates new problems, including the looming probability of a recession. 

This would be the third such major shock in only fourteen years and will rock workers’ lives and consciousness. Already majorities of young people question the ability of capitalism to solve society’s (and the climate’s) problems. Such a renewed crisis will only broaden and deepen this radicalization and the search for a way to permanently end inequality and exploitation. 

What Is To Be Done?

One of the reasons the central banks fear sustained inflation is because it can spur workers to fight back, as it did dramatically in the early 70s, building on the fighting spirit of the social movements that had developed to fight racism, sexism, homophobia, and the Vietnam War. 

By building fighting unions, workers were able to defend their living standards with widespread introduction of built-in Cost Of Living Allowances, or COLAs, in their union contracts.  A central part of their successes was the influential work of socialists and other radical activists who were at the center of many of these struggles. Tragically, no wider working-class-centered party was forged out of the struggles of this period which could hold together the best fighters and provide a way forward based on class struggle methods and preserve these lessons. Instead, the way to the Reagan era was paved by union leaders who accepted the arguments of capitalism, including the lie that workers’ pay raises were responsible for inflation, and these misleaders pushed concessionary contracts to preserve not workers’ living standards but their own comfortable positions. 

Today is not the Reagan era. The successive economic crashes, beginning in 2008, have smashed illusions in a golden future under capitalism. So have the successive betrayals of the Democratic Party and the rise of the right. These developments have created a different consciousness especially amongst young people but also amongst unionized workers. Following the walkouts of essential workers during the pandemic, in the summer of 2021 workers fought back in a series of hard-fought strikes.

At John Deere, despite a rotten national UAW leadership which was pushing concessions on its members while facing corruption charges for taking kickbacks, workers fought back, preventing a 3rd tier from being created, fighting for the rights of probationary employees and crucially, winning back COLA language that had been lost in the previous contract. Other strikes at Nabisco and Kellogg’s showed the same fighting spirit despite a weak union leadership, while carpenters in Western Washington rose up in a revolt against their compromised (and as it turned out, corrupt) leadership, enforcing their strike with roaming squads of picketers shutting down major building sites in the Seattle area.

Workers need to demand raises above the rate of inflation, and all future contracts need to include COLA (cost of living adjustment) language linking raises to a reliable measure of that rate, otherwise we will continue to lose ground. Historically, when inflationary pressures arise, the Federal bureaucracy comes under pressure to adjust the Consumer Price Index in ways that minimize the actual pain felt by workers, so the unions need to fight for committees of working class shoppers to create their own index. 

In Britain, the Trade Union Congress (UK equivalent of the AFL-CIO) called a mass demonstration in London on June 18 to “Demand Better.” Tens of thousands marched demanding higher pay to fight inflation. The following week the rail transport union, the RMT, brought rail transport to a halt with three one-day national strikes and further actions are expected. This is the kind of action that is needed, led by the unions with mass participation from working class people, whether unionized or not. But the AFL-CIO has not called a national demonstration since 1981. 

Today, the union leaders, tied as they are to the Democrats, have said next to nothing about this huge problem facing working people. The AFL-CIO and other unions should be demanding price controls against the monopolistic gouging of particularly the food and energy corporations. They should also be demanding that the Democrats legislate a livable Federal minimum wage. But these leaders have spent decades retreating in the face of employer demands, and show no sign of giving a fighting lead at the present time. They’re the reason why union membership has plummeted. 

To combat this assault on workers by big business, we will need to rebuild a fighting labor movement. The inspiring development of the Amazon Labor Union and the wildfire-like spread of worker organizing throughout the retail coffee industry is an indication that a generation of younger workers is ready to step up. 

These rank and file union members will need to challenge the existing leadership and take over the leadership of our unions for the struggles that are coming. We need leaders who take the average worker’s wage and are supported and held accountable by an active and organized membership. To fight inflation and a bipartisan establishment whose only solution is to make workers pay for the crisis created by capitalism, organized labor will need to be armed with an unambiguous class struggle program and a movement-building approach, with a political voice independent of the two parties of big business. 

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