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  July 5, 2016

Why Bankers and Financiers Benefit from Low Inflation Policy

PERI's Gerald Epstein explains why financial institutions like the IMF promote fiscal policy that reduces investment, economic growth, and employment
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Gerald Epstein is codirector of the Political Economy Research Institute (PERI) and Professor of Economics. He received his Ph.D. in economics from Princeton University. He has published widely on a variety of progressive economic policy issues, especially in the areas of central banking and international finance, and is the editor or co-editor of six volumes.


SHARMINI PERIES: It’s the Real News Network. I’m Sharmini Peries coming to you from Baltimore.

Earlier this month the IMF publication Finance and Development published an article with the title Neoliberalism Oversold, which argues the perhaps the IMF should rethink its support for neoliberalism. According to the author, neoliberalism has resulted in greater inequality and lower economic growth. It’s a remarkable admission consider that the IMF has been and continues to be the main proponent of neoliberalism in the world. But what does neoliberalism and its economic policy mean?

With us to discuss the macroeconomic approach to neoliberalism is Jerry Epstein. Jerry is Professor of Economics and founding Co-Director of the Political Economy Research Institute at the University of Massachusetts, Amherst. He has recently done an interview on the topic of inflation targeting in neoliberalism where he discusses the rise of inflation targeting central bank policy where the emphasis is on very low inflation to the exclusion of other policy objectives. Jerry I thank you so much for joining us today.

JERRY EPSTEIN: Thank you for having me.

PERIES: So Jerry, as I mentioned, the IMF economist Jonathan Ostry published an article this month in which he questioned the wisdom of IMF emphasis on liberal economic policies. That alone is quite interesting and I’m wondering what you thought about that article?

EPSTEIN: Well it’s pretty remarkable that they actually used the name neoliberalism because for decades that’s what they were implementing. But to them it was just sound economic policy. It was just efficient economics. So to actually name it as a type of economics, with a particular type of policy implications I think is a very new thing for the IMF. It’s just like an economist for decades not wanting to call our system, capitalist and use the word capitalism. Well that’s been changing too. It makes us understand that this is one among a number of different approaches.

Now neoliberalism the way Jonathan Ostry and others have used it typically means free market economics. That is let the market rule. But in fact as many [inaud.] economists and political scientists have pointed out, that’s a misunderstanding as well. Because what neoliberalism really means is that the whole system including the government operates in the interests of the major corporations that are trying to dominate the market and they’re trying to get rid of any government policy or economic policy that really helps the working class and most people. So it’s a very interventionist kind of activity and not a free market activity. And the IMF as you said has been one of the dominate institutions worldwide that has been intervening around the world implementing neoliberal policies.

PERIES: So let’s get to inflation targeting here. Explain to us what that is you’re tackling in these series of interviews you have done.

EPSTEIN: So inflation targeting is an approach to central banking that was promoted by the IMF and many economists around the world to say that the central bank should stop intervening so much in the economy to promote employment a more equitable distribution of income, jobs, that it should have only one goal and that goal is to maintain a very low inflation rate and to use market friendly tools, mostly short term interest rates to implement that goal. The idea of course is that the free market will take care of itself. It will promote economic growth and so central banks shouldn’t get in the business of trying to allocate credit, generate more employment, just keep inflation at a very low rate.

PERIES: Now, so what is a problem with that kind of inflation targeting?

EPSTEIN: Well one problem is that the market economy doesn’t take care of itself. It doesn’t generate full employment by itself. So macroeconomic policy that’s just geared towards hitting a low inflation rate isn’t going to do much to promote more employment. In fact, it will have the opposite effect typically because by trying to keep inflation very low central banks typically kept real interest rates relatively high. And that tends to reduce investment, reduce economic growth, reduce employment. Now one might ask why did this IMF and other institutions promote this idea? Where did that come from?

PERIES: Yea who does it benefit?

EPSTEIN: Right, who does it benefit? And historically, it’s the banks and the financiers that have been enemies of inflation. They typically like interest rates being high because that generates more profits. They like inflation to be stable and low because they’re the ones who own most of the wealth. So when inflation goes up unexpectedly and it goes up too high it tends to reduce the real value of their wealth.

And on the other side the poor people who tend to be debtors, they tend to benefit from unexpectedly high inflation. Why? Because if you borrow $100 to buy a car and your job pays $100 a week, all of a sudden inflation goes up and your job starts paying $200 a week, then the $100 you have to pay back for the loan has gone down in terms of your hourly wages by about half. So debtors gain from high and unexpected inflation and creditors lose.

So what happened as I suggested earlier is that the major banks and particularly financiers, commercial banks, convinced the IMF and other central banks that there only goal should be to keep inflation low. That happens to help out the bankers.

PERIES: So let’s focus in on what macroeconomic policy central banks could adopt as an alternative.

EPSTEIN: Well what’s happened since the 1980’s and 1990’s when these ideas were really promoted, we’ve had dramatic seat change in the underlying nationalism and global economies and we’re seeing this seat change in all of the political uproar from Brexit, the economic crisis in the European Union, the economic crisis here in the United States, rise of Trump and on the other side of course the very successful campaign by Bernie Sanders and the context for all of this is the great financial crisis of 2008, which we’re still living with many of their consequences. In this context, inflation targeting which before was a dangerous kind of approach is now really an irrelevant approach. That is, the problems facing macroeconomic policies, central bank policy, fiscal policy, is how to get out of this economic crisis. How to start generating more jobs, higher wages, allocate more resources to do with the problems that we’re facing like global warming, unemployment and so forth.

In that context, inflation targeting is simply a sideline and what you see is the central bankers that are trying to, in their own funny ways, deal with some of these problems. Janet Yellen, the head of the Federal Reserve and Draghi the head of the European Central Bank, they’re undertaking all kinds of experiments and economic policy and trying to justify them in terms of inflation targeting but it just doesn’t work. What they need to be doing instead is thinking about how can we directly solve the problems our economy is facing. I should point out that the central banks could in fact do a lot more but they’re very constrained because it’s the fiscal policy. The government spending, the government investment, other government policies which are putting central banks in a strait jacket. They’re not austerity which is what everybody’s fighting in Europe and we’re fighting here in the United States is making it impossible really for central banks to do the job on their own.

PERIES: Alright Jerry, if you are interested of course in watching or reading the interviews where Jerry Epstein explains this further please click on the link below. This was just a promo practically in terms of the issues that he tackles in the actual interview so have a look. Thank you so much for joining us Jerry.

EPSTEIN: Thank you very much.

PERIES: And thank you for joining us on the Real News Network.



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