Anti-Capitalist Chronicles: Making Sense of Today’s Inflation - Debt, Austerity and Tax Cuts

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In this episode of Anti-Capitalist Chronicles, Prof. Harvey uses the diagram of capital’s circulatory processes, shared in the last episode, and applies it to the pressing issue of inflation today. Harvey draws parallels to how inflation was handled during the Reagan and Thatcher administrations, with austerity politics and the resulting reduced standard of living for the working class. These attacks on social expenditures were explained as  necessary to curb inflation, yet there is much more to the story. By utilizing the framework of capital’s circulation within a capitalist mode of production, Harvey reveals the many possible causes of inflation and how public policy often has hidden intentions. 

To download the diagram: https://www.dropbox.com/s/qcd7k6so6v4jhss/capitalism-cycle.pdf?dl=0

Transcript has been edited for clarity

This is David Harvey, and you're listening to the Anti-Capitalist Chronicles, a podcast that looks at capitalism through a Marxist lens. This podcast is made possible by Democracy At Work.

Welcome to Part Two of this analysis of how to use the general framework of the circulation of capital within a capitalist mode of production in order to understand some of the key questions of today, in terms of the stability and crisis tendencies that we observe within the capitalist mode of production. Last week, I spent some time talking about this particular framework [shows diagram], and I now want to look more explicitly at it in the context of certain things that have happened historically, and which are likely to happen in the near future. I want to begin with a couple of quotations which I think are rather revealing.

The first is a quotation that comes from a man called Alan Budd. Alan Budd was the economics advisor to Margaret Thatcher, and so he was the person who was in the economic tank, as it were, working through the policy shifts of the Thatcher period. One of the issues that was dominant in the Thatcher period was the eradication of inflation. Now inflation's come back recently, so this is why it's very important to go back and look very carefully at what Thatcher did in relationship to inflation. Her demand was to eradicate inflation, to tame it and to deal with it. and Alan Budd was very much part of the think tank that was helping her do that.

So after Thatcher left office, Alan Budd was reflecting a little bit on what they'd actually done in terms of economic policy, and he confessed in an interview a rather extraordinary insight. The extraordinary insight was this: that Thatcher's commitment to the eradication of inflation had at its core the idea that this was going to be used – and this was Budd’s word – to “bash the workers,” and to destroy the union movement, and to destroy the power of Labor. He went on to say, very explicitly, that “rising unemployment was a very desirable way of reducing the strength of the working class. What was engineered (and this is a bit astonishing to say for somebody coming out of his political wing) in Marxist terms was a crisis in capitalism, which recreated a reserve army of labor, and has allowed the capitalists to make high profits ever since.”

Now this is something that you should very much bear in mind. The fight against inflation can easily turn into a convenient way in which to attack the standard of living of labor. You can reduce wages; you can increase unemployment; you can do all those kinds of things. If you look around us right now, you'll see a good deal of that kind of thinking creeping into the discussion of contemporary inflation, and I'm going to come back to that in a minute.

The second quotation comes from somebody who is in a rather analogous position to Alan Budd, in the Reagan Administration. That is David Stockman, who was in command of the Office of Management and Budget. The OMB is a very important institution. It creates all kinds of analyses of what will or will not work in the way of public policies. One of the things that had really upset the Office of Management and Budget was the fact that in the early years of the Reagan Administration, very close attention had not been paid to going into debt. One of the things that David Stockman was very concerned with was to try to bring down the debt, and yet in the early years of the Reagan Administration, the administration was increasing the debt. It was doing so mainly on the grounds of national security. Much of the debt was actually generated out of a rapid expansion of the defense industries, and this is when Reagan got into an arms race with the Soviet Union (as it was then), and then an attempt to destroy the Soviet Union by outbidding the Soviets and pushing them so that their economy would would crack. But the fact was that the deficit under Reagan expanded dramatically, and then what Stockman observed was that in the later years of the Reagan Administration – and this actually continued over into the next administrations – the indebtedness became a very important issue which required that austerity politics be visited upon the budget.

What Stockman observed (again, after he left office) was that the increase in the deficit was one of the ways in which the Reagan Administration then found themselves able to go after social expenditures, which were benefiting labor. So in both the Thatcher and Reagan cases what you have is a public policy which is designed to do x, where underlying it is the effect that it actually do y and and the y in this case was destroying the power of labor and bringing the standard of living of labor down, curbing wages, and making profitability much easier because of the unemployment which exists.

If you look at the first years of the Reagan Administration, unemployment in the United States went to around 10 percent, and Reagan went after trade unions and organized labor. One of the arguments that was made was that you had to do this in order to bring the deficit down, but as Stockman pointed out, it was Reagan who had raised the deficit in the first place. So he raised the deficit and then claimed that in order to cure the deficit, you have to go after the standard of living of the working people and bring that down. And Thatcher, as Alan Budd was saying, was doing the same thing.

We're in a situation right now which is very interesting because suddenly last summer, we got a strong sense of inflation, and the question was, where is this inflation coming from? Initially most people said it was short term because of the disruption in the supply chain. In other words, when you look at the whole diagram of the circulation of capital, such as I was examining last week, you would say that the problem was that the supply of the means of production was curtailed. You had to pay much more to gain those means of production, and because you had to pay much more, you had to raise prices of the goods that were produced, or analogous goods like second-hand cars etc. So the feeling was that there was something wrong within that system. You could locate what the problem was in terms of supply chain constrictions. The logistics were horrendous. There were all these boats lined up with cargos outside of San Diego Harbor, and nobody could figure out how to get them ashore. There was a logistical mess up in the supply chain, and therefore the inflation was going to be temporary because the supply chain would quickly iron out.

And in a sense, it did begin to iron out a bit, but notice at this point nobody said “the problem is wages are too high and there's not enough unemployment” and all the rest of it. Nobody said that sort of thing back in the summer, but as it became clear that the inflation was not going to go away as quickly as people anticipated, that it was not a temporary thing but a structural thing, people started to say it's no longer disruptions in the supply chain which is the problem, but it's coming from somewhere else. Is it coming from labor? Part of the argument has been that labor was very well treated during the the COVID problem because they were basically given a lot of tax money, largesse, and of course the government went into debt – debt financed to keep people alive in the face of the sort of unemployment and collapse of both industry and entertainment and all the rest of it, because of the impact of the COVID virus. People were beginning to say that the problem is the Biden Administration went far too much into debt. What we now see is the assumption of power by the Republican Party, and one of the first things they're saying is that they're not going to increase the debt ceiling unless there are equal kinds of reductions in social expenditures.

So it's social expenditures, not expenditures on the military and all the rest of it. It’s social expenditures. It's an attack upon working-class living standards and [the Republicans say] that they're going to have to do this and they have to do it because the deficit is out of control.
We're starting to get all this rhetoric now: “The deficit is huge, because it's so huge and all its largesse has gone to the working people over the COVID virus, and yes, maybe that was a good idea at the time, but enough is enough. We now have to bring that largesse to an end. We've got to get people back into the workforce. We've got to try to get the Federal Reserve to raise the interest rates and start to create a recession.”

So there's some talk now of a recession coming, and it's almost like Alan Budd said. You create a capitalist crisis, and that becomes the best way to reduce the living standards of labor and increase the profit rate. So you get the whole story of austerity politics, that it’s necessary in order to deal with the deficit or to deal with the supposedly excessive treatment and more generous treatment of Labor during the pandemic.

The interesting thing here is if you ask yourself the question, go back to that diagram and say where did the increasing deficit come from, and this argument is that the increasing deficit
is something that the Biden Administration created through its response to the COVID virus. Actually, before that, there was a tax [cut] that Trump passed, and Trump's tax reform of 2017 actually gave a huge amount of benefit to the capitalist class, particularly to the top one percent, the top 10 percent, and to capitalist corporations. Everybody recognized that about 70 or 80 percent of the benefits of that tax reform went to the ultra-rich, and actually that tax reform was bought at the cost of adding around two trillion dollars to the deficit. In other words, exactly like David Stockman said about Reagan – you increase the deficit deliberately in order for them to legitimize going after social expenditures and saying that social expenditures are the problem. You're getting a repeat of that argument coming out.

Now the easiest way to deal with the deficit problem – and I'm not going to say there's no problem about the deficit, there is a problem – but the easiest way to deal with it is to reverse all of the tax cuts which Trump put through. You just reverse them, and then you've got two trillion dollars off of the debt, immediately. If you ask where the problem lies in the economy right now and why we're talking about a recession, it’s because what the bourgeoisie and the real “geniuses” of right-wing economics are doing, is exactly what was being done before, which is to increase the deficit and then say we have to claw back that deficit by reducing social expenditures, reducing Medicare, or cutting back on the forgiveness of debt and all the other things that the BidenAdministration has been doing. In other words, you attack the social policies of the Biden Administration on the grounds that you're retiring the debt, but the debt you're retiring is in fact the debt which has been incurred by a tax reform which gave a vast amount of largesse to the ultra rich.

So in an interesting way, if you put those two quotes of David Stockman together, saying we ran up a deficit in order to be able to then legitimize the reduction of social expenditures for the mass of the population, along with Alan Budd saying actually what you engineer is a capitalist crisis and unemployment and you do that so as to reduce the power of labor, and as you reduce the power of labor you can actually then increase profits. So here is one of the ways in which you could say that there's an alternative explanation of where the crisis came from.

Now, that is not the only way to look at it, because if you go around the diagram you can say, “Is there something else going on which is significant and and important?” Where else within that diagram do we see people acting in such a way as to actually encourage inflation? And the answer here again starts with the logistical problems of a supply chain, starts with the scarcities in the supply chain, but actually prices are going up on all kinds of things. The prices are going up on the means of production as well as prices going up of consumer goods, and because the prices of means of production like computer chips and so on are going up, so putting prices up operates in a food loop.

Now, who has the capacity to raise prices no matter what the state of demand is? The
argument being, of course, that if there's a strong demand and weak supply, then you're going to get price rises, There was a time when some of that was going on, but then people started to find they could raise prices anyway, and so maybe here's another option to look at: the inflation problem i arises because people are raising prices because they can, and as a result they're getting very high rates of profit. If you start to look very carefully at some of the profit rates, particularly of energy corporations and pharmaceutical products and the rest, they're doing extremely well. They're all raising prices, and so you've got a psychological thing. You're saying we can raise prices no matter whether we have to or not.

Now I have a friend who's a publisher, and he said he went in one day and his assistant said, “You know, we should raise the prices of our books by 10 percent.” And he said, “Why? Have we got some hidden increasing costs I don't know about?” And she said no. “Well, other sorts of bottlenecks in here that we need to take care of?” And the answer came back: “Well, that's what everybody's doing. Everybody's raising it by 10 percent.”

So suddenly you find you go into restaurants, and all restaurants are raising prices by 10 or 15 percent. Suddenly you go into the supermarket and all the prices have gone up by 10 or 15 percent, and people are doing it because they can, and they're increasing their profits. During the pandemic, many people were not really doing too well on the profit front, and then what happens is that you come out of the pandemic and suddenly you can open up and you also find at the same time you can raise prices. I mean, the restaurants in New York – you used to go out and have a meal every now and again, but right now you go out and have a meal and it costs 10, 15, sometimes 20 percent more, and on certain items like wine or something like that, which the real costs have not gone up that much, but nevertheless the prices which you're paying in restaurants are going off the charts.

So again, when you trace the effects around that whole circulatory process that I was looking at last week, you can find several places at which the possibility of inflation arises. The supply chain – yes, indeed. It can be a wage, but in fact there's a nervousness around right now because real wages started to rise about a month or two ago, but now they've stopped. The unemployment rate has not come down, which is bothering a lot of people, and clearly there are impulses within the bourgeois planning apparatuses to try to actually bring down your wage rates by increasing unemployment. There’s nervousness about the fact that this unemployment rate is at an all-time low and has been stuck there around 3.5 percent over the last several months, and it seems that the Federal Reserve has not gone far enough to try to curb demand.
Again, the answer is you've got to curb demand, and one of the ways you can do that is by using wages, but now they’re saying “we have to reduce the social wage,” and the social wage
is of course the amount of taxation that goes to supporting fundamental facets of daily life of the mass of the people. We'll begin to see an attack upon all of that, but remember, the attack is in the name of deficit reduction, when deficit creation was the mantra in the Trump regime and
deficit creation has been the mantra elsewhere, at various times, as a way of justifying the reduction of wages and the reduction of the social wage.

I think now we're beginning to see the Republican party start to articulate the “devastating” effect of the deficit running out of control, and how we have to bring it under control, that we have to bring it back down and it's absolutely essential that we do so and in order to do so we need to reduce social expenditures. “Social expenditures,” not increased tax rates, not take back the tax holiday that Trump created.

When you start to look at the whole system, you immediately start to ask certain questions. So where does contemporary inflation come from? I've not done enough work to come up with a definitive answer on that, but I think that a number of points would be, one place it came from was the fact that many corporations and enterprises have been raising their prices in order to increase their profit rate and in some ways recuperate from the fact that their profit rates were relatively low during the pandemic. So it's an opportunistic element of just raising prices because you can, and people have started to do so for that reason.

There may be a little bit of an influence of the largesse that the Biden administration extended to working populations with holidays and Social Security kinds of payments. There may be a small impact from that, but I think that's actually relatively small.

There may still be a residual of supply chain scarcities. There may also be some hidden things in terms of raw materials – oil prices, mineral prices, particularly rare earth metal prices.
If you use the whole diagram and go to every one of the points and say, “Is there a problem here? Is there a problem there? Is there a fact?”

And then the last point would be how many people have started to behave like rentiers? How many people in the top one percent actually invest in things? What they do is take their investment monies, take their gains, and they put them back into the purchase of assets. So you get bubbles in asset markets – in land and property and all the rest of it, you see price rises going on in terms of rents. So rents go skyrocketing up, for no good reason apart from the fact
that people can increase the rent, and given the fact that the number of new residences coming online is not sufficient, given what happened during CIVID, we now find [housing] is an issue.
One of the things I would do with that diagram – and I think that's why it's so important to me – is look very carefully and say: where in this chart is there a blockage, and where is there an impact and how is it then used by people for class purposes? Both in the Reagan case and in the Thatcher case we find two major policy thinkers in those administrations confessing that a) the increase in the deficit in the early years of the Reagan Administration was almost a deliberate process, which justified the attack upon the social wage in the latter part of that administration. And b) you find Alan Budd saying that the fight against inflation was actually an excuse to bash the workers and to reduce the standard of living of the mass of the population, in order to maximize the profit rates for the corporations and the rate of return for the most affluent families in the country at the time.

So these are the kinds of things that it seems to me come out of inspection of this system, and the reason I like looking at the system is that it helps me answer some of these questions. Right now, as I think we will see in the next few weeks, and as the Republican party starts to mouth off about how to deal with the deficit by cutting back on social expenditures rather than raising taxation and reversing the Trump tax cuts, this is the crucial policy question that we should be concentrating on.

But you yourself, by sticking with this diagram, can I think ask these kinds of questions of almost any issue that comes up, and start to gain a political perspective by asking the question: Where in this system is there some kind of blockage? And what you will invariably find is it's not just one point – it's not just the supply chain. It's also the ability to raise prices, and the need to increase the profit rate temporarily or opportunistically, the need to find ways to deal with the increasing rentierism, and the fact that more and more people want to just live off the fruits of appropriation of value, without actually producing it. We've got a real problem on our hands, and this diagram helps locate where some of the issues are, and where some of the answers lie, and at the same time it also suggests some means of attack against the forthcoming austerity politics which we're going to see repeated by the conservative administration in Britain, by the conservative administration and the House of Representatives in this country, and the conservative administrations which are emerging in places like Italy. This is why I stick with this diagram and why it helps me ask a set of obvious, potent questions. It also helps to situate how it is that somebody like David Stockman could make the statement that he did, and Alan Budd could make the statement he made, and very interesting thoughts about the aftermath of the Reagan administration and the Thatcher administration, which sets the stage I think for contemporary politics as well as an explanation of what happened in the past.

Thank you for joining me today. You've been listening to David Harvey's Anti-Capitalist Chronicles, a Democracy At Work production.

Transcript by Cindy Mitlo

The original content of this program is licensed under a Creative Commons Attribution-Noncommercial-No Derivative Works 3.0 United States License. Please attribute legal copies of this work to democracyatwork.info. Some of the work(s) that this program incorporates, however, may be separately licensed. For further information or additional permissions, contact us.

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