This post concludes our symposium on inflation. Read the rest of the symposium here.
As earlier entries in this symposium have emphasized, inflation does not flow exclusively or mechanically from public monetary stimulus. Price-adjustment takes place where prices are “situated” – i.e. in the world of social relations and concrete interactions between particular buyers and sellers – not in an abstract vacuum.
If a bear prints money in the woods, and no price-setters are around to notice, does it generate inflation? If you give a billion dollars each to Elon Musk and the Mississippi Public Schools’ free lunch program, will they have the same impact on the price of milk? If an entrepreneur gets a billion-dollar bank loan to build a casino, is it less resource-intensive than the government constructing that casino?
The answer to all three questions, unsurprisingly, is no. Theories that ascribe all inflationary pressure to monetary phenomena may be seductive in their simplicity, but all they are peddling at the end of the day is the false hope of misplaced certainty.
None of which implies that finance is irrelevant to price stability. Far from it. Financial regulation lies at the core of sound inflation management. Accordingly, progressives seeking to turn the page on the past few decades of failed macroeconomic policymaking should not hesitate to bring the full scope of financial regulatory tools to bear in the pursuit of just price stability.
The most obvious way in which financial regulation can affect inflation is through its impact on investment and spending behavior. Modern economies are built on a foundation of both public money and, crucially, private credit. Decisions about how to create, allocate, and recognize different forms of privately-generated purchasing power, how to endow certain privately-held objects or assets with liquidity, and how to allocate or manage systemic risk between public and private sectors can drastically impact both aggregate demand as well as the distribution of wealth, income, and risk. Consequently, any discussion about addressing inflation through “monetary governance” needs to consider not only the government’s balance sheet, but the agglomerated balance sheets of the entire private sector, and the private financial sector in particular.
At the same time, however, the role of financial regulation in inflation-management can and must extend far beyond merely calibrating the overall amount of private credit in circulation by nudging banks and capital markets to lend just the right amount to keep production at “full capacity.” As my colleague Nathan Tankus has argued in a recent policy report, if we are committed to a deeper restructuring of collective priorities (to fend off climate disaster, for example) and collective decision-making processes, a simple model of “put money into the economy and let it run, unless it runs too hot” won’t do. We need a more fine-tuned approach that attends to (and restructures) how public money creation relates to private credit creation in different sectors. Once we refocus in that way, we can align aggregate investment and spending activity in closer accord with public priorities and decision-making processes than the current efforts to bribe investment managers through marginal price adjustments and indirect nudges.
Most immediately, it’s important to mitigate the inflationary pressure generated by price-setting corporations, especially in industries experiencing bottlenecks. To accomplish this, financial regulators can set explicit quantitative and qualitative limits and conditions on financial lending and investment, both at the aggregate level as well as at the sectoral, regional, and even individual and/or firm-levels. This could include, for example, restrictions on the amount of credit that could be extended to fund investments in luxury goods, like the nine-figure yachts presently being confiscated from Russian oligarchs around the world. It could also include categorical prohibitions on socially harmful forms of financial speculation, commercial predation, and real resource wastage by financial institutions, as is presently rife in the crypto industry.
More broadly, financial regulation can target the direct stabilization of prices through caps, guarantees, backstops, and penalties. Conversely, it can target the abuse of pricing power through prohibitions of and punishments for intentional consumer or borrower discrimination, as well as constructive interventions to mitigate the inflationary effects of historical and contemporary systems of oppression and structural biases against particular groups or communities.
This could be applied most obviously in the context of consumer financial services and products, such as loans, payments, insurance, and deposits. For example, eliminating predatory bank overdraft fees would have the practical effect of reducing the cost of banking for low-income, low-information customers. However, it could also be extended to products, assets, and industries whose prices are particularly sensitive to adjustments in underlying financing arrangements. For example, addressing racially discriminatory redlining practices could reduce the cost of housing for communities of color by ensuring they are not excluded from entire swaths of the housing market.
Looking to the future, if we are serious about pursuing a large-scale transition towards a more just economy, we will need an answer to how to maintain relatively stable prices while engaging in sustained fiscal stimulus. At this juncture, aggressive and proactive regulation of non-essential and unproductive private financial activity will become even more critical. Decisions about how to extend liquidity support, to whom, and under what conditions necessarily implies value decisions – i.e. picking winners or losers – in much the same way as traditional fiscal and budgetary policy. Just as President Biden is fond of saying, “don’t tell me what you value, show me your budget, and I’ll tell you what you value,” financial regulatory authorities “show what they value” through their choice of which actors, markets, and assets to support and backstop, and the conditions under which they do so.
For instance, Green New Deal investments, if enacted at the scale necessary to avert climate disaster, may very well generate inflationary pressure in certain sectors of the economy. But there is no essential need to ramp up unemployment or suppress credit in general to cool down that pressure if there are more targeted tools available that would achieve the same effects while simultaneously furthering the broader equity and sustainability goals of the Green New Deal. A targeted, capacity-building, ‘supply-side’-oriented credit policy, such as the prioritization of green over brown investment, or labor-intensive over capital-intensive modes of production (in contexts where the latter consume unreasonably high amounts of non-renewable resources), can be a powerful tool for furthering general industrial policy goals while minimizing the emergence of predictable bottlenecks and shortages.
Financial systems, like libraries, roads, and telecommunications networks, are public goods, and should be run on infrastructure owned and operated in the public interest rather than for the benefit of a small group of private profiteers. As a first step – or as a bridge to a more democratic option — regulators should be actively encouraging the direct public provisioning of basic financial services – payments, credit, insurance, etc. (even in the name of enhancing price competition and improving quality and access standards across the finance sector). The “prices” of goods and services generated by the financial system, including interest rates (i.e., the “price of credit”), are often defined by private financial institutions, and increasingly, the might of tech industry giants. Ultimately, if we want to regulate the price of money and thus the price structure of finance at a macro-level, we must “return to the source” to reassess the role of money in our political economy more broadly.