The Political Rationale to Engineering a Recession: Monetary Austerity and Class Wars
By Clara E. Mattei, Assistant Professor of Economics, New School for Social Research, USA, and
Aditya Singh, Ph.D. student in Economics, New School for Social Research, USA
In a seeming paradox, Fed Chair Jerome Powell warns against the possibility of interest rate hikes producing a recession but is not willing to relent on his monetary austerity agenda. Indeed, Fed officials are preparing market participants for at least another 0.75 percentage point hike in interest rates at the end of the month. Is this recipe for a self-inflicted recession pure madness? Is the Fed acting out of misguided economic theory? This dismissive set of questions do not suffice to explain the profound structural shifts that the most powerful central bank in the world is engineering.
To make sense of what is going on, it is fundamental to stop thinking about our economy as an “economy in general”, and rather thematize it as a capitalist economy. This means acknowledging that smooth economic growth — the pursuit and investment of “capital” as money — is grounded on a specific socio-economic order, or “capital order”. Indeed, capital is at root a social relation, whereby the majority of people “are willing” to sell their labor power for a wage.
In this light, we can think about inflation not merely as an economic problem but, structurally, as a political one. To do so, we can go back to the insights of John Maynard Keynes after World War I who at the time expressed a deep fear for the political consequences of inflation. Keynes, the British economist remembered for his anti-austerity stance, was actually advocating for harsh dear money in 1919–1920. He motivated his policy advice with words of caution that are by now famous:
“a continuance of inflationism and high prices will not only depress the exchanges but by their effect on prices will strike at the whole basis of contract, of security, and of the capitalist system generally.” (February 1920, Mattei p. 155).
After the Great War, inflation was debauching the currency; the loss of confidence in money opened spaces to question the very idea that an economy mediated by money was the best way to run society. As my forthcoming book, The Capital Order explores, during the red years of 1919–1920, Western countries faced the gravest crisis of capitalism. Inflation escalated the struggles of the working classes who experimented with different ways to organize society via production for use and not for profit, communal rather than private property, and emancipated rather than commodified labor (see chapters 3 and 4 of Mattei 2022).
In such an explosive scenario, economic experts coined austerity as a multifaceted agenda of monetary deflation, budget cuts, regressive taxation, and outright attacks on organized labor to defend the status quo and force workers to return to the back of the line. In Britain, the Bank of England hiked the interest rates to 7% in 1920, causing unemployment to peak at 17% (of the insured workforce) a year later. Thus, the impact of monetary and fiscal policy on labor relations largely contributed to foreclosing emerging post-capitalist alternatives.
Today, one hundred years later, the historical conditions are not comparable in terms of revolutionary fervor. However, remembering past events is crucial to avoid the flaws of the “end of history perspective”. Indeed, far from being irreplaceable and eternal, capitalism is a historical system that requires constant protection.
In the last months, monetary experts running central banks have expressed explicit concerns over the “lack of order” in the current relations of production. The message of Jerome Powell and fellow economists is that workers have had it too good in the post-pandemic recovery. In his finessed technical wording, “The labor market has continued to strengthen and is extremely tight.” A decade ago, there were 10 openings for every 38 unemployed. In June 2022, there were almost two job openings for every unemployed person: the American economy created an additional 372,000 jobs, a record high, spawning what experts consider to be one of the tightest labor markets in history.
Moreover, the data on resignations in the past months is impressive. From April to September 2021, 24 million American workers abandoned their jobs. In May 2022 alone, 4.3 million people quit, that is, 2.8% of the workforce. Thus, amidst a hot labor market, many Americans are giving up on wage labor altogether. The labor force participation rate — which measures the number of people who are working or are actively looking for work — dipped to 62.2% this June. Worker shortages have been a reality for months now and layoffs are at a historic low.
Such a structural change of bargaining power with respect to the previous decades means that companies have been forced to raise wages to keep their employees in their jobs. Wages and salaries in the private industry increased 5% over the 12-month period ending in March, beating a 3% increase during the same period a year before. Higher labor costs are coupled with rising labor mobilization through a novel wave of unionization — especially in the retail industry — which is poised to escalate as inflation mounts. Indeed, as Keynes’ quote emphasizes, rising prices make workers more spirited: they trigger demands for larger paychecks and propel a more general dissatisfaction with the capitalist economic system.
If we pay attention to the preconditions for monetary stability under capitalism, that is, the stability of the fundamental pillar of wage relations, then the rationale for engineering a recession via interest rate hikes becomes clearer. Increases in the costs of borrowing induce firms to forgo productive investment, thus triggering layoffs. Indeed, experts today are factoring in a rise in US unemployment to at least 4.1 percent in 2024, with Larry Summers telling us that “We need five years of unemployment above 5% to contain inflation.”
As Michał Kalecki has often reminded us, higher unemployment acts as an essential disciplinary device for workers. By momentarily destabilizing the economy, austerity is successful in the most important goal of stabilizing class relations and thus of refurbishing the foundations for capital accumulation.
In 1921, the Guild Socialist intellectual G.D.H. Cole, who was living the political consequences of British post-war deflation, put his finger on the essence of the austerity counteroffensive:
“The big working class offensive had been successfully stalled off; and British capitalism, though threatened with economic adversity, felt itself once more safely in the saddle and well able to cope both industrially and politically with any attempt that might still be made from the Labour side to unseat it” (Cole 1958, 419).
In a nutshell, the economic downturn fortified capitalism. Not only were wage relations reaffirmed, austerity also guaranteed wage repression and a resurgence of private profit.
Once we expose the classist implications of austere monetary policy, we may dissect the rationale for another crucial institutional feature of our economic system: central bank independence.
Indeed, class war via monetary policy necessarily implies the urge to protect the power to tweak the dials of macroeconomic management. The diffusion of central bank independence around the globe was another battle horse of economic experts in the 1920s. In a historical moment in which the general public was demanding a greater voice in economic decisions and the British Labour Party advocated for the nationalization of the Bank of England, the in-house economist of the British Treasury, Ralph Hawtrey, vehemently defended the vital necessity for central banks to be free from “criticism and pressure,” noting that only in this way could they follow the precept “Never explain; never regret; never apologise” (Hawtrey 1925a, 243). Keynes agreed heartily. He wrote: “My own view is in complete accord with that of Mr. Hawtrey, that this activity is one which should be pursued by a semi- autonomous body not subject to political interference in its daily work” (“Discussion by Prof. J. M. Keynes from the Chair,” in Hawtrey 1925a, 244). The common ambition was impeccable: the economic sphere had to be shielded from political liability.
In his recent op-ed in the Wall Street Journal, President Joe Biden declared that “tackling inflation” was his “top economic priority” and acknowledged that “recovery to stable, steady growth” required a hefty readjustment in monthly job creation “from current levels of 500,000 to something closer to 150,000”. In the same breath, he spoke about deficit reduction — a sprinkle of fiscal austerity to boost monetary austerity — and endorsed central bank independence. He took pride in distancing himself from the doings of previous administrations who had “inappropriately” interfered with the FED’s decisions to increase interest rates in moments of inflation.
Once more, we witness the inevitable anti-democratic logic of austerity: to make decisions that are against the interest of the majority, experts have to have a free hand. These policy episodes only help underscore the structural anti-democratic nature of our economic system more generally.
