Sorry, Monetary Policy Is Not a Friend Of the Common Man

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In a recent Time Magazine article, newly installed Fed Chair Janet Yellen argues that monetary policy is an instrument in the favor of ordinary Americans. She lays out the now-familiar arguments that, "economic stimulus comes through higher house and stock prices, which causes people with homes and stocks to spend more, which causes jobs to be created throughout the economy and income to go up throughout the economy." It's an odd argument to make in light of recent economic misfortune. Per capita income in the US grew not at all in 2012, and job growth was, at best, limited to slightly less than population expansion. Using alternate measures of employment, there were no additional jobs.

In a cloud of rising suspicion, FOMC officials and mainstream economists have begun to search for alternate explanations that seek to marry the "uneven" economic progress of the past five years to their theories in a way that preserves the paradigm (which is very much the same as Bernanke's, just as it was Greenspan's). The most recent and noted example was Larry Summers' trial balloon with the negative natural interest rate.

To say there exists some measure of dissatisfaction with economic affairs is more than a minor understatement. It has been slowly changing, but this is uncharted territory (at least in the past few generations) for the Federal Reserve. The ebb and flow of economic history has produced varying degrees of mistrust and euphoria about monetary policy, but since at least 1980 the Fed has been held (in the mainstream) in very high regard. That only began to shift, minutely at first, in the instance of the dot-com bust. But even there mainstream sentiment downgraded ever so slightly away from the omniscience that was ascribed to Greenspan in the 1990's.

Even after the housing bubble and panic of 2008, the public largely looked to the FOMC to offer salvation and an economic fix. Only a few pointed to the Fed's "wealth effect" and credit saturation policies as causes; the public largely embraced the idea of "emergency" measures. Sure, there were high levels of uncertainty surrounding such untested policy applications, but the alternative, as they were told, was a much worse fate. There was still enough faith in orthodox economics to let the matter settle itself.

The results were almost immediately proven unsatisfactory. The second dose of QE provoked a sudden backlash that gained strength with each rise in energy costs. In less than a year, the deficiencies in economic recovery were obvious enough to fuel a somewhat organized protest in the lower reaches of Manhattan Island. The Tea Party had already existed and was more than suspicious toward Bernanke's doctrine, but it was the emergence of the Occupy Wall Street cabal that was most interesting. Here was a largely socialist/Marxist response to what they determined as capitalism's failings.

Despite the fizzle to OWS's efforts, the impulse remains largely embedded and often only slightly veiled. At times, it has peaked beyond the lighted shadows and intruded into the mainstream consciousness. As I said, OWS was only the first. More recently, there was the attempt at a mass strike of fast food workers, urging the minimum wage to rise to at least $15 per hour, and earning the support of one entire political party. That protest was as much in response to the "uneven" recovery and the stagnation that has befallen the American dynamic as anything to do with minimum wages. Minimum wages are now a symptom of the failures of the "wealth effect."

Just last week, writing in Rolling Stone magazine, author Jesse A. Myerson provoked much in the way of fascination over his blatantly Marxist credo arguing for the youngest generation to demand redress at the hands of this economic malaise. Among the claims were the usual suspects, including guaranteed work, social security for everyone and nationalizations of nearly every industry. But it was his claim that the youth should agitate to "take back the land" that was perhaps most telling, and in a way very ironic.

Writing so very eloquently that, "ever noticed how much landlords blow?", Myerson stretches further to opine that, "the value of land has nothing to do with my idle, remote landlord; it reflects the nearby parks and subways and shops, which I have access to thanks to the community and the public." There is more than a little of President Obama's "you didn't build that" lingering in the childish formulation. Setting aside the very real improvements made by landowners, this is a theme that is as old as ownership itself. No new ground is being laid here, only the return of the theme of the oppressive nature of poverty, again belying the "wealth effect."

There is cyclicality to everything in history, and the inane railing against rent is very reminiscent, to me, of the People's Budget. Set against the backdrop of industrialized England in 1909, it was the introduction and building of the modern English welfare state. Championed by the New Liberals, especially Chancellor of the Exchequer Lloyd George (who would ride this Progressive idea to the Prime Minister's office) and Winston Churchill, then the head of the Government's Budget League, it was a paradigm shift in societal relations and the understanding of business and a marketplace.

The People's Budget included all the now-familiar assumed remedies to poverty - redistribution in the form of "taxing the rich." At its heart were graduated income taxes and a "death tax" on the wealthy. However, the most controversial of the new redistribution methods was to be a capital gains tax on the "unearned increment" of value in the land due to what Myerson alluded: the value of land due to its proximity to parks and public improvements. In other words, a key piece of the scheme was to be "retaking" the value of land "owed" to the people, by way of the government, of course, and unfairly concentrated in the hands of the wealthy.

Winston Churchill himself, arguing for this new idea of "fairness", said that the government's attitude toward wealth must change to the modern concept of poverty and the Progressive ideal of equality, forced as it may have to be. In September 1909, Churchill proclaimed that the state (not the government) will give itself the power to ask, "How much have you got? but also, How did you get it.?"

The battle over the People's Budget radically altered the British state, not the least of which was the final decapitation of the House of Lords. Hearing the extent of the new taxation, the peerage in Parliament broke the "unwritten" constitution of the English government that had existed for a century and a half. The Lords vetoed the Common's budget bill, creating an existential crisis for the government that would ultimately see the veto power, and any remaining vestiges of real authority, stripped. And even though the New Liberals were almost defeated in the elections of 1910, invoked early as part of the Lords' provocation, the redistribution of England as a matter of government responsibility was set.

The ideas supporting this, especially what Churchill alluded to in "How did you get it?", were worked out of a particular economic strain of the late Victorian age. Prominent among these scholars was John Atkinson Hobson. Hobson was most influential in his idea of underconsumption. Writing in 1889, Hobson claimed in The Physiology of Industry that,

"We are thus brought to the conclusion that the basis on which all economic teaching since Adam Smith has stood, viz., that the quantity annually produced is determined by the aggregates of Natural Agents, Capital, and Labour available, is erroneous, and that on the contrary, the quantity produced, while it can never exceed the limits imposed by these aggregates, may be, and actually is, reduced far below this maximum by the check that undue saving as the consequent accumulation of over-supply exerts on production; i.e., that in the normal state of modern industrial Communities, consumption limits production not production consumption."

You can hear easily in those words the modern conception of aggregate demand. Hobson's revelation, if you will, was that the accumulation of wealth was causing suppression of wages as the wealthy, as a necessary condition of being wealthy, saved more than they "needed." This was particularly true in proportionality of incomes. The solution to this economic subsistence was redistribution, particularly as land ownership formed so much of the basis of this "unearned" wealth and disproportioned savings. By forcibly removing hoarding from the wealthy and redirecting it to the working classes, the economy theoretically moves upward to its potential limits. The economy can sustain itself and derive more equitable distribution when government steps in to manage and regulate industry and tax those that have gained wealth that is not their own.

In 1913, John Maynard Keynes wrote of Hobson, "One comes to a new book by Mr. Hobson with mixed feelings, in hope of stimulating ideas and of some fruitful criticisms of orthodoxy from an independent and individual standpoint, but expectant also of much sophistry, misunderstanding, and perverse thought." By the 1930's, Keynes had almost completely adopted this theory of underconsumption and government redress, as it was also being adopted in the US largely through the work of underconsumptionists William Foster and Waddill Catchings (who influenced Herbert Hoover and FDR).

Another of Hobson's admirers was Vladimir Ilyich Lenin, particularly the extension of underconsumption theory to the description and construction of imperialism. Writing in his 1902 book Imperialism, Hobson described the process as,

"Every improvement of methods of production, every concentration of ownership and control, seems to accentuate the tendency. As one nation after another enters the machine economy and adopts advanced industrial methods, it becomes more difficult for its manufacturers, merchants, and financers to dispose profitably of their economic resources, and they are tempted more and more to use their Governments in order to secure for their particular use some distant undeveloped country by annexation and protection."

The answer here, of course, is further regulation and nationalization of industry to break this tendency toward economic-driven imperialism. So the state claims the authority to do all these measures on behalf of the people with the goal of enforcing "fairness."

Bringing this full circle, then, you can see how much these century-old ideas echo in the current invocation of activist policies. Janet Yellen tells Time magazine that the Fed has a duty to help put people to work, and will do so largely through applications of theory that suppress the attractiveness and viability of savings. She has expressed disfavor and distrust of markets on more than one occasion, and now finds herself in full concert with the theories of the People's Budget and all the demand-side religionists that have come before. The expressed idea is to get economic agents to spend, to increase aggregate demand in direct combat with an economy that is assumed to be clutched by underconsumption.

The more policymakers try to address aggregate demand in this manner, let's not forget the ARRA "stimulus bill", the more leftists demand further action. That is the irony here, that the philosophy that underpins the OWS/fast food workers/Myerson youth exhortation is the same philosophy that has created these very conditions. One cannot argue that the Fed has sat idle in watching aggregate demand fall well short of economic potential (however one may describe it), and one also cannot argue that the Fed has not provided policy based in the conceptions of Hobson/Keynes.

The sands of time have proven rather conclusively that savings are not the vital economic measure of unequal redistribution. Rather, the long-term economic trajectory is shifted upward via innovation; the same failing in Karl Marx's critique of capitalism also applies to Hobson. Employment grows not on the pace of redistribution-derived consumer spending in the lower classes, but as new firms innovate and grow to replace older firms that have seen their last days. Failure and rebirth are the capitalist "secrets", and demand always follows supply in that line. Interrupt it at your peril.

Unfortunately, we see in the 21st century a different strain of imperialism that is rooted in Hobson's preferred solutions to it. By giving government more power over industry and business, Hobson suggested that government would be able to end business agitation toward external colonialism. But in doing so, governments have introduced the seeds of cronyism that take the form of internal imperialism. Big businesses have achieved regulatory leverage in a manner that may preclude the innovation and business cycles from creating that positive economic trajectory. And monetary policy, all in the name of aggregate demand, appears to be playing a large role.

Ultimately, that is perhaps the biggest shame to it all. The Federal Reserve complex from Greenspan to Bernanke to Yellen claims to be a full strain of free market capitalism, embraced in great numbers by those that also claim to be friends of industry and business (of all sizes). But instead, this monetary formulation shares far more in common with the Progressive impulse to eliminate and replace free market capitalism with a statist centralized authority. That leads the OWS and its sympathizers to further their efforts against a capitalism where they see Janet Yellen and Wall Street as its apex and heart, when in fact they are really protesting their own philosophies put into practice via a bastardized capitalism - so corrupted by devotion to aggregate demand in this era that it can hardly be referred to as such.

There will never be, and has never been, any such thing as fully free markets, nor should there be. What we are arguing is not absolutes but proportions. The proportions, as pendulums often do, have swung too far too long in the direction of the statist ideas toward "fairness" and redistribution. That includes monetary policies and practices as well as legislative efforts. In perhaps the greatest and most tragic of ironies here, the Fed appeals directly to inflation as a means to destroy savings, an impulse to which I have to think Hobson would readily approve, but that inflation is itself a means of redistribution that further concentrates savings among the wealthy. More than an irony, it seems as if this inconsistency is a feature of this philosophy, as taken to its logical ends it produces something akin to circular reasoning. It is a place where the socialists of OWS criticize directly the tools of socialist monetary policy as if they are anything apart from each other.


Jeffrey Snider is the Chief Investment Strategist of Alhambra Investment Partners, a registered investment advisor. 

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