June 18, 2013
We Told You So
Posted on May 18, 2012
By James K. Galbraith, The Baffler
As noted, this strategy will have to be developed in a hostile environment of unstable oil and food prices. However, it would be a grave mistake to interpret that unstable price environment as “inflationary,” as leading toward a sustained or inertial inflation. In particular, money wages have not changed or caught up; real wages are therefore falling—and quite sharply—in view of the commodity price jumps. As Ben Bernanke acknowledged in a recent speech, nothing in the present movement of price indices can be attributed to wages. In Bernanke’s choice phrase, “the empirical evidence for this linkage is less definitive than we would like.”
It is Democratic Party mantra that Presidents do not comment on the actions of the Federal Reserve. But in this situation, comment is needed. An appropriate comment on the larger role of monetary policy does not amount to interference in routine decision-making, e.g., of the Federal Open Market Committee. Rather, it should reflect the core reality: the Federal Reserve and other financial regulatory agencies failed in their responsibilities in the past decade and now they must take up those responsibilities again.
The entire point of a regulatory system is to regulate. It is to subordinate the activities of an intrinsically unstable and predatory sector to larger social purposes, and thus to prevent a situation in which financial interests dictate policy to governments. That is, however, exactly the situation we have allowed to develop. The job of the Federal Reserve and of the other competent agencies in the next administration must be, in part, to reestablish who is boss. Specifically, there needs to be a very thoroughgoing revamping of the financial rules of the road, to dampen financial instability, deflate the commodity bubble, reduce the enormous monopoly rents in the financial sector, set new terms for credit management, and generate productive capital investment where it is most required. This is in large part the Federal Reserve’s job, though it has strong inter-agency and international dimensions.
These measures cannot be viewed, or undertaken, in isolation from the international financial position of the United States. Obviously, a successful speculative attack on the dollar would severely disrupt the orderly implementation of this or any other strategy. Equally obviously, a unilateral defense of the dollar via a campaign of high interest rates would severely aggravate the problems of the real economy.
Collective security, in short, is not merely a slogan. It is the lynchpin of our future financial and economic security—security that cannot be assured by any unilateral means. Only a collective effort will keep America’s creditors committed to the stability of the dollar-reserve system for long enough to effect the next round of economic transformation in the United States. Conversely, continued failure to appreciate the financial and economic dimensions of unilateral militarism is one certain route toward the failure of the next administration’s economic and financial strategies. The two largest issues we face—how to maintain American economic leadership in much of the world and how to manage American military power—cannot be separated from each other.
Collective security is, however, also more than simply a way of reducing risks and instabilities. It is the foundation stone for many physical transformations of the economy to come. It is obvious, in particular, that the military basis of international power on which the United States continues to rely is completely out of date, and has been for decades. As Iraq has demonstrated to everyone including the professional military, military power alone cannot deliver stability and security at all—let alone at an acceptable human and social cost. Yet parts of the military establishment continue to develop, and to harbor, the technological talent and capacity for problem solving which every aspect of our energy problem now needs. Shifting the basis of our security system away from one based on military equipment is a key step toward making those resources available.
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