[Marxism] Robert Reich warns deflation, not inflation, threatens US capitalism

["Fred Feldman" <ffeldman@xxxxxxxxxxxxxxxx>]

American Prospect
 <http://www.prospect.org/web/view-web.ww?id=11676> The Real "Flation"
Threat
Deflation, not inflation, is what Ben Bernanke should be worried about.

By Robert
<http://www.prospect.org/web/page.ww?name=View+Author&section=root&id=10
2> B. Reich
Web Exclusive: 06.22.06

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Each generation responds to its own traumatic memory. Ben Bernanke and
his Federal Reserve remember the double-digit inflation of the 1970s and
are determined to mount a preemptive strike. That's why they're poised
on raising interest rates yet again. Bernanke and company have no direct
memory of the trauma that haunted the previous generation, the
depression of the 1930s.

Each generation, in its determination to avoid the nightmare it does
remember, runs the danger of over-reacting, and thereby bringing on the
opposite trauma. A generation ago, economic policy makers paid too
little attention to inflationary forces then building in the American
economy. Eventually, Paul Volcker had to break the back of inflation by
raising interest rates sky high. That put the economy into a severe
recession. Now Bernanke and company are paying too little attention to
deflationary forces building in America and the global economy.

Bernanke fears that today's economy resembles the one that began to
overheat the 1970s. But he's wrong. Labor unions today don't have nearly
the power they did then to get wage increases. Big companies don't have
nearly the power they did then to raise prices. Global wage competition
is keeping a lid on American wages, just as global price competition is
pushing down on American prices. Meanwhile, fancy computer software is
allowing rivals all over the map to erode almost anyone's market share.
Who's going to raise prices in this environment?

What's more, there's no reason to raise prices. Productivity has been
soaring over the last five years while the median wage has been stuck in
the mud. Wages, remember, constitute about 70 percent of the cost of
doing business. So how can price pressures be building? Bernanke and
company worry the U.S. labor market is heating up. They're wrong here,
too. Despite what look like rosy employment numbers, a smaller
proportion of the American labor force is employed today than it was in
2000. Millions of people don't show up on the unemployment rolls because
they're too discouraged even to look for work.

The price increases we're now witnessing are not due to excess demand
over limited productive capacity, which causes inflation. They come
mainly from soaring prices for energy and raw materials. These
commodities are being bid upward because of China's rapid growth, but
take a closer look and you see something else going on. Much of the
increase in commodity prices is being driven by speculators who expect
prices to continue to rise. In other words, part of what we're seeing
are speculative bubbles. Such bubbles can burst any time. The fact is,
the global market is glutted with productive capacity, and that's not
chiefly because of the huge gains in American productivity. If you
really want to see a glut, take a look at China.

If anything, there's too much capacity relative to demand. This is a
recipe for deflation. Prices can begin to drop because buyers hold off,
expecting further price decreases. It happened in Japan in the 1990s.
It's already starting to happen in certain housing markets in the United
States that had been red-hot but are now cooling so fast home prices are
dropping. Deflation is often accompanied by stagnant or falling wages,
which make it harder for consumers to afford to buy. Look what's been
happening to American wages.

The Fed and other central bankers around the world are raising interest
rates because they're fighting the last war. But they already won that
war. Inflation is no longer our biggest threat. They ought to be worried
about the war before the last one, and the specter of deflation. They're
in danger of losing that war even before they know they're in it.

Robert B. Reich is co-founder of The American Prospect. A version of
this column originally appeared on Marketplace.

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