Top Antitrust Expert: We Need a New Approach to Giant Tech Firms Like Google

Economist Cristina Caffarra, a leader in competition and antitrust, warns that ever-expanding tech giants like Google, Meta, and Apple raise concerns about the exercise of power and democratic discourse. So why is it so hard to get anything done?

Since the 1970s, economists buying into the Chicago School of Antitrust have waved off the dangers of lax antitrust policies, professing that “the market” would sort out issues of competition and punish companies that abuse size and power. The Chicagoans’ narrow focus on direct consumer costs as the sole measure of harm didn't consider the impact of consolidation on small businesses, start-ups, workers, or, for that matter, democratic norms. Nor did it raise red flags for tech platforms that were touted as “free” for users (while monetizing our attention and personal data).

A growing number of critics argue that these basic assumptions are both wrong and outdated, as evidenced by the fact that in many industries, particularly technology, companies have been growing to gargantuan proportions and, as anybody who owns a smartphone is painfully aware, they seem free to gobble competitors, hinder innovation, and serve up crappy, overpriced products.

These conglomerations of money and power not only end up widening the inequality gap, but they also threaten democracy itself, as University of Utah antitrust expert Mark Glick and other experts have attested. That’s why tech-focused antitrust voices are sounding the alarm as companies like Google, Amazon, Apple, and Meta expand at a breakneck pace, encroaching into every possible area of our lives, from our cars to our refrigerators to our dreams.

European antitrust and competition expert Cristina Caffarra has been a top advisor and expert before the European Commission and in courts and agencies across Europe, as well as a guide in antitrust efforts in the United States. Her experience includes landmark cases on the economics of platforms and the digital economy for and against Microsoft, Amazon, Apple, Google, Meta, and more. She spoke to the Institute for New Economic Thinking about what she sees as the most pressing areas of antitrust, why regulation and legal actions have largely failed so far, and why, from her perspective, too many economists have been part of the problem rather than the solution.

Lynn Parramore: Let’s start with the overall antitrust landscape in Europe in comparison with what’s happening in the U.S. It has long been said that Americans have lagged behind in taking on Big Tech in competition matters. What’s your view?

Cristina Caffarra: For a good decade, Europe felt itself to be a pioneer in enforcement, particularly against tech. The case against Google Shopping [Google’s shopping comparison service] started in 2010 and the case against Android started in 2015. There was a time when I was visiting the U.S. that we looked at U.S. colleagues and practitioners with some element of smugness, saying, look, we’re enforcing in Europe but you haven’t done anything since Microsoft 2001.

What has happened since is an increasing realization in Europe that the antitrust cases we initiated and pursued, however well-intentioned, have not delivered yet and are not going to.

Take the Google cases. We have led them to a conclusion and there has been a finding of infringement against Google, but it has taken far too long and the remedies have been ineffectual. This is inherent in antitrust assessment. It’s the nature of the beast that you often intervene as a result of complaints. The reason the European Commission pursued the Google Shopping case is that they were inundated with complaints -- the case selection in prioritization often follows the complaints you have. What happens is that enforcement bandwidths get tied up. While the Commission spent five years focused on Shopping, Google was moving the monopoly from the desktop to mobile devices. The search monopoly was effectively translated to mobile, and by the time the Commission opened the investigation in 2015, it was far too late.

The same is true in other cases. The Commission is pursuing cases against Amazon, against Apple -- all framed in ways that are to my mind not going to deliver anything.

So Europe, having started off as a pioneer, has ultimately not been able to show that you could deliver. To us Europeans, the U.S. was really frozen under the permafrost since Microsoft. But things began to change when you started to see the progressive New Brandeisian discourse [an antitrust movement focused on competition] getting a bit more into the mainstream.

I vividly recall a meeting that I attended back in late 2015 at the Metropolitan Club in Washington, put on by the Jevons Institute, a small group of people who talk about antitrust. Jason Furman and Peter Orszag (at Citibank at the time) came to present what they considered to be an interesting result that was beginning to seep into the conversation. They had been in President Obama’s Council of Economic Advisers, and they had uncovered that over time, concentration was increasing and margins were increasing. This was the start of an antitrust discussion at the time. The gathered antitrust community was totally in disbelief that this was telling us anything important or interesting. Why would concentration be going up? People argued, wait, you’re not measuring market concentration at the right level. You’re not doing market definition properly. Margins are not particularly going up. Why would they be going up?

So the antitrust establishment, such as it was then, was skeptical that there was any degree of under-enforcement or that they were watching anything interesting. At the same time, we started to hear rumblings from other voices like Barry Lynn [journalist and director of the Open Markets Institute] and others who were noticing the phenomena, but it hadn’t percolated through the antitrust establishment. To me, that meeting was the very first time that the antitrust establishment was confronted with the potential for a claim that we have underenforced widely in this country, and you can tell because concentration is on the up, margins are on the up, and the share of GDP that goes to labor is down. We have less creation of companies and less vitality. But most importantly, workers are disadvantaged in this new order.

That was in 2015. Then you had the development of these Brandeisian voices and so on. In the spring of 2019, I went to the Zingales conference in Chicago, as the only European, I think. I was approached by Doug Peterson, who was and still is the attorney general of Nebraska. He heard I had experience working against Google in Europe and asked if I would be interested in assisting a coalition of bipartisan attorneys general bringing cases against Google. I say, whoa, yes! Where do I sign? So I became an advisor to this coalition, initially a single coalition, that later split (I advised both for a period).

I was on the steps of the Supreme Court on the 9^th of September 2019 when [Texas Attorney General] Ken Paxton launched, with all the other AGs, that antitrust investigation of Google. Then the initiative split, and it was Texas, on the one hand, that is pursuing Google adtech [accusing Google of monopolizing technology underlying online advertising] and then you had Nebraska and Colorado leading the way in pursuing [Google’s] search [accusing Google of monopolizing the online search market].

Simultaneously, you started to see cases brought by federal agencies. The Federal Trade Commission (FTC) began to look into Facebook and Amazon, and suddenly the Department of Justice (DOJ) began looking into Google and Apple. In December 2019, I had an event in Brussels with a thousand people coming from all over. I had Doug Peterson speaking at that event together with Max Miller [assistant attorney general] from Iowa. The title of the panel was, “Drums Beating From the Hill. Are We Beginning to See Enforcement Revived in the United States?” At that time, the U.S. was way behind, but that impetus made a huge difference and it was at the level of the state AGs. It was the states and it was a bipartisan initiative to pursue Google in particular. Of course, when you are the United States and you start to veer, it carries a lot of force.

The Europeans started thinking, oh, look at them, they woke up and they’re doing stuff! Then you had the election of Biden, and you got Jon Kanter [assistant attorney general for the DOJ], Lina Khan [FTC Chair], and Tim Wu [White House antitrust adviser] and suddenly there was government policy reflecting their views. The current perception in Europe is that in terms of posture, the regulators in the U.S. have overtaken us because Kanter and Khan are very much progressives. They are certainly very much ahead of European regulators. The only exception was the U.K., though now, with the current government and a new CEO to be nominated, it’s not clear what’s happening and they may take us back to where we were.

So the U.S. posture is something we watch with great interest. But will it deliver? In Europe, we are in a world in which antitrust has failed. But we woke up in 2019, too, and said, oh, we’ve got a lot to do, but unlike the U.S., we are a regulatory power -- we do regulate a lot. In 2019 there were these political designs to essentially pair up antitrust and regulation, and so we are now in a world where we have digital regulation, the DMA [the EU Digital Markets Act, which addresses perceived unfair business practices by large online platforms designated as important gatekeepers between European businesses and consumers]. This is now law. Of course, what we’ll actually do is a very big question.

LP: You’ve noted a need to scrutinize tech business models and to fundamentally change them. Why are the business models themselves important to address?

CC: This is very much my baby. I came up with this discussion of business models in a 2019 article. It was the first time discussions of business models and their antitrust implications appeared in the antitrust community. The point I made is that when you think about categories of concern in antitrust, which are premised in all cases, like, for example, self-preference, you see that yes, there is a thing called self-preferencing. This is when firms favor their own business. I’m an economist, though, and I also know that not every form of self-preferencing is anti-competitive.

LP: What would be a case in which self-preferencing is benign?

CC: Suppose Amazon is throwing up a particular recommendation in the buy box [the white box beside the product detail page used for customers to purchase items in their cart]. Now (and for clarity, I have advised Amazon), Amazon will say that the algorithm that is selecting that particular product is designed to provide the product that is the lowest price, highest quality, and matches the requirement of the consumer the best. Why? Because, they will say, we care about the consumer coming back to the platform over and over again. They will do so only if they get the sense that they were given a fair recommendation and value. If they get a biased recommendation, the consumer will suss it out and eventually be unhappy. That’s the story.

But is it a form of self-preferencing every time Amazon recommends its own product? It's not clear, because Amazon makes money either way. If I’m buying a battery, Amazon makes money whether I buy an Amazon battery or a Duracell because they get a commission. Financially – and here’s the monetization point – it’s not clear that Amazon makes more selling Amazon batteries v. Duracell batteries. It depends on the margin. The incentive is not necessarily to sell an overpriced Duracell battery or to sell one of their own if it is crap, because the consumer will say, well, it’s a bit cheaper but it’s crap. I’m not going to go back and buy Amazon again.

On the other hand, I’m saying that there are some business models in which self-preferencing is inherent and most likely bad, and that is typically ad-funded businesses. Why? Because ad-funded businesses monetize in no other way than through directing traffic to themselves, to their own sites. They want to work as the turnstile that directs traffic to themselves. That is inherent when there is no other form of monetization.

If you want to monetize a commission for being the platform – think of Uber or Airbnb, or think of Apple – you monetize mostly on the device. In these cases, the unit economics of their business is fundamentally different from the Amazon example I mentioned, so if you have a general rule that says “thou shall not self-preference,” you get these companies saying, well, "I don’t! My algorithm is completely fair." It just is designed to optimize what a consumer wants. But then the regulator says: how do I know that what the company says is true? Do I believe you just because you’re Amazon and you tell me you have the right incentives? Maybe. But that is why I would favor some form of algorithmic transparency: a regulator can say, Amazon, come and show me your algorithm and tell me how you constructed it. Obviously, no one really wants to do it, but that would be the way to check.

The point is that to presume that every time you are recommending your own product is a form of self-preferencing and illegal is wrong. We need to think about how companies monetize because companies are driven by incentives. In economics, we talk about incentives, and they are, in turn, designed as a result of the monetization structure. Can I make more money this way or that way? That’s why I was very much a fan of the approach that the U.K. did, which was not a generic “thou shalt not self-preference” kind of thing.

The U.K. approach was intended to be bespoke– that is, tailored to an individual company. The U.K. invented this approach: Amazon, Apple, you will have to do this, and Google, Facebook, you have to do this. Each and every one of them had a different set of problems and a particular bespoke regulation tailored to their business model.

That is the only way we can hope to achieve anything with regulation, because the other model, which is generic and simply says something like “don’t self-preference” is going to be met with such endless resistance that it won’t lead anywhere. I think what we’re going to see in Brussels and with the DMA is absolute and total resistance. Companies are resisting not just the designation but the obligation that is placed on them because they’re going to say this is not relevant to me.

LP: Many people are aware of the problem of “killer acquisitions,” a situation in which a big firm buys a startup in order to neutralize the competitive threat, like Facebook buying Instagram. But you’ve also been critical of the more common “reverse” killer acquisitions – scenarios in which an established company buys features or startups so they don’t have to build something themselves, sort of allowing themselves to throw in the towel on their own efforts. Can you talk about these and why we should be concerned?

CC: It’s quite pervasive, and I can mention half a dozen deals right now that are progressing that have got this feature. It’s much more widespread that a real killer acquisition. A real killer, like some we were looking at in pharma, is when you buy something to suppress it. You suppress it because you’ve got a product that competes with it and you don’t want the competition. That is a killer acquisition. What I see in my practice much more often, the reverse killer acquisition, is based on the idea that you buy something out there that you were actually doing yourself, or could have done if you really put your mind to it, or maybe you were even halfway there. But then you buy this slightly better or more advanced version and thereby you kill your own. You reverse kill. You kill not the target that you’re buying, but your own thing.

LP: Is this, then, a killer more of innovation than of competition?

CC: The two are incredibly close. If we care about dynamic competition, which is really, fundamentally, the creation of new products, and competition in the creation of new products, then we have to care about a situation in which if I didn’t do the deal I would have an incentive, as the buyer, to run as fast as I can to catch up with these other companies that are already in the market. The two become one.

Let me give you an example. Let’s take the FTC case against Meta concerning the [fitness startup] Within acquisition, which is being challenged (for transparency, I have had some involvement with this case). I would argue that the deal has got features of a reverse killer acquisition to the extent that Meta was trying internally to develop capabilities to do immersive reality fitness work. (There’s a further discussion about whether that particular user case is an important building block for them towards establishing themselves in this new form factor which is the metaverse. I would argue it definitely is because they hold a significant number of small BR apps [streaming apps]).

Anyway, fitness is an important user case, and there is evidence in the public domain that’s how Meta was thinking of it. You’ve got your headsets and you’re thinking about things that you can do that are social and fun in the immersive reality world. Exercising is one of them. There is a big focus on exercising in the metaverse. It is a very significant future application and a building block for other things, but this is something that they had their eyes on before. To me they didn’t buy Within to kill Within, but so that they wouldn’t need to make any effort of their own. Within is no longer independent. It’s now owned by Meta, so it can be used and manipulated to do all the other things that we know Meta does when they acquire a company. Meta owns the headset and the store, and they can do various things to make it more difficult for others to establish themselves. The point about the reverse killer is that to the extent that there was an incipient effort inside Meta to develop its own fitness app, that effort is killed.

The company can say, well, the effort was going nowhere, what’s wrong with buying a better version. Well, yes, but the point is that you’re Meta, right? You could get it right. You could make it work. You have the funds and the ability. In the U.K., the exact question was asked when Amazon bought a stake in Deliveroo [an online food delivery company]. The CMA was considering that they could, in principle, have done a delivery service themselves, and by buying Deliveroo they were forgoing their own effort in this space.

The result in reverse killer cases is that we see less innovation. I see this much more obviously as a phenomenon with these big digital companies because they have the cash, they’re so acquisitive, and they constantly acquire complements -- and not just those that are totally independent and what have you, but things that they are trying to do themselves. Then they turn and snuff out that internal effort. Think about a world in which Within was attracting other funding and went further into the future, working with all headsets, and then Meta developed their own version. There would be more competition, more choices for people looking for fitness apps. That is the point.

LP: You’ve noted that the best way to avoid many of these antitrust problems is to preempt them by avoiding mergers in the first place. Why is this critical to intervention that works?

CC: It is a very important piece of this conversation. We have established and exposed that antitrust intervention is ineffectual; that we get there far too late; that we are not able to effect change on the ground; and that it will not work because the regulation that is before us is going to attract a series of challenges in which these companies will sue in Luxembourg, every step of the way.

Personally, I do not predict that there will be any sort of movement. So I am in favor of looking at the merger policies and how these companies have grown to the grotesque levels that they have grown today. We know that the regulators, certainly in the U.S., like Jonathan Kanter and Lina Khan, are thinking about this. Will the courts follow? There is no telling. They have to try it out. There is a huge body of the conventional antitrust establishment that says that this is all madness, that it has to end. There are a lot of people waiting for it to fail. But there’s no question that the merger policies have been incredibly permissive.

I’ve been in this business for 25 years and we’ve stopped almost nothing. There’s this view that for companies to merge is a fundamental right. But sorry, where is the evidence that all of these mergers are benign? That efficiencies are being realized? I’ve not yet seen an efficiency study worth a damn and I’ve often advised the parties. The majority of these deals are intended to create market power. The hubris of people who say they are not is extraordinary. I’ve got 25 years in my career to look back on and to say, guys, we’ve left behind a shitshow. A lot of people think that I’ve gone completely mad to say the things that I say, but it’s true. When I came into this business as an advisor 25 to 30 years ago, there was an element of idealism because, certainly in Europe at the time, antitrust was thought to be such a soft science. We thought we needed to bring structure and form and mathematics -- and then you had this crazy shift in which the economists understood there was a ton of money to be made by giving lawyers useful narratives and we sold our soul. That’s what happened.

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Dollar Dominance is Financial Dominance

What Strategies can Break This Dependency?

The dollar system has proven resilient in the face of recent extreme and unexpected shocks, but it has also failed to foster sustainable growth and prosperity. Can it survive its contradictions? Evidence from the latest Trade and Development Report of UNCTAD suggests better South-South and commodity producers-consumers agreements are needed, on the way to a more inclusive international monetary system.

In a climate of fiscal austerity, unconventional monetary policy has been at the forefront of macroeconomic stabilization efforts since 2008, with the beginning of the Federal Reserve’s quantitative easing (QE) programs. At the time, when the fiscal channel dried up (after a short-lived stimulus) but growth and inflation remained low, developed countries relied on large purchases of bonds and other securities by their central monetary authorities to support long-term credit creation while maintaining the smooth functioning of the money markets.

Within a few years, all major central banks developed their own QE programs, sometimes exceeding the Fed’s both in value and as a share of GDP. Nonetheless, the role of the Fed has remained crucial since dollar-denominated liabilities held by entities outside the United States and the trades necessary to fund them have become even more prominent in the past decade: “US dollar funding remains below its peak of a decade ago relative to the size of the global economy, despite having grown in nominal terms. However, the share of international funding that is denominated in US dollars has risen compared with other major international currencies, reaching levels last seen in the early 2000s and making it the dominant international funding currency” (Committee on the Global Financial System, 2020, p. 1; see also Lysandrou and Nesvetailova 2022).

Figure 1 Monetary base (% of GDP), selected developed and developing countries.

Sources: UNCTAD 2022, data from IMF, International Financial Statistics, Monetary and Financial Accounts.

As a result, as explained in UNCTAD’s 2022 Trade and Development Report, the Fed’s decisions reverberate globally via at least three channels.

First, it is able to affect liquidity in key domestic and international markets. In particular, through swaps and repurchase agreements (repos) of various collateral from private domestic and public foreign entities, it has repeatedly been able to prevent money market freezes, at least in the core of the global financial system. However, it has been far less efficient in disciplining cyclical expansions of global finance in the context of international capital mobility.

Second, it affects the value of the dollar and, thus, the price of imports and exports domestically and abroad. It ensures that it provides a floor for interest rates in other regions which cannot allow their currencies to depreciate too much against the dollar to avoid over-exposure of their balance sheets to dollar-denominated debt (Moreno Brid et al. 2022). From the early 2000s until 2021, oil price movements provided a mitigating factor, thanks to their negative correlation with the US dollar.

Figure 2 Dollar-euro exchange rate and crude oil price, January 1999–September 2022

Sources: UNCTAD 2022, data from World Bank and Federal Reserve Bank St. Louis

Third, it affects US growth and private demand, including imports, thus affecting global growth. During the Covid-19 crisis, the Fed’s accommodative stance and its activity in the international repo markets prevented extreme stress in the global money markets and allowed central banks of developing countries to reduce interest rates quite significantly. Indeed, while in many cases they themselves engaged in asset purchases, it was mostly to control liquidity risk rather than to provide stimulus, which was predominantly supplied in the form of loans, including to public banks (Aguilar and Cantù, 2021).

Finance First

As soon as the US economy started emerging from the crisis and the Fed signaled its intention to raise interest rates in May 2021, the favorable conditions just mentioned reversed, forcing interest rate increases in many developing countries, especially those most exposed to dollar-denominated debt.

The announcement of May 2021 was followed by a crucial decision to make two standing repo facilities, which had been functioning in a temporary mode for some months, permanent: one dedicated to United States domestic primary dealers and soon to include additional depository institutions (Standing Repo Facility), and one for foreign and international monetary authorities (FIMA repo facility). The move showed that the Fed’s commitment to global financial stability remains unchanged (Mehrling, 2022). That, together with the preparations for such eventualities by the central banks of many emerging economies, has so far prevented a repeat of the 2013 taper tantrum.

But, as argued in the Report, the impact on the real economy cannot be stopped. With fiscal policy heading towards austerity, with crude oil and gas still at elevated prices, the increased cost of credit is going to affect the most fragile sectors and regions of the world economy through reduced investment, wages and employment growth, and liquidity stress, hitting hard the unemployed and low and medium wage earners everywhere, as well as firms and governments with elevated external debt in developing countries (UNCTAD 2022).

Hence, while central bankers in the core of the international system focus pragmatically on avoiding short-term systemic instability, the real economy deteriorates, a fact that is increasingly overlooked by policymakers. What is particularly worrisome is that the commodity price rally initially followed expectations of a global growth rebound, but when the Fed’s moves, coupled with fiscal austerity and new international supply-chain disruptions, changed the economic scenario, many financial markets remained buoyant. The world was denied its economic recovery while speculators continued profiting.

A clarification is needed, here: The Fed claims policy normalization is aimed at reducing inflation. But, to be more precise, its policy levers operate indirectly, ideally affecting prices by subduing the bubble in commodity markets as well as GDP growth, thus preventing higher import and energy costs from spreading through to wages. However, the Fed does not have a monopoly on liquidity creation: private financial institutions matter too. Moreover, large dollar reserves held abroad can and have been mobilized. What matters, eventually, is that the Fed is stuck as a lender/dealer of last resort.

The Covid-19 economic crisis reinforced again the Fed’s position at the vertex of the global financial and monetary system. Within that context, its main concern is financial stability, and thus its activity focuses pragmatically on those markets that appear to be systemically relevant. As a result, liquidity is not guaranteed everywhere, and pockets of gluts and scarcity persist (Eren et al., 2020) and could widen. This is particularly true during a monetary tightening, but periods of financial expansion are not free from peril, especially for emerging markets that can attract disruptively large speculative inflows of capital. The various strategies implemented to protect themselves have included accumulating reserves and developing swap agreements between central banks that integrate, in an uncoordinated way, the Fed’s channels. The central bank of China and associated development banks have played an important role in this context, largely by increasing their lending capacity (UNCTAD 2022).

This dollarized financial system has recently proven resilient to extreme and unexpected shocks, but it has also failed to promote sustainable growth and prosperity. The pragmatism of the central bankers, who are forced to safeguard the financial stability of an unequal and stagnant economy, is not free from dangerous consequences. Its success can buy the world some time, but it also inevitably intensifies the unsound separation of the financial and real economy and of liquidity and solvency concerns. This inconsistency became especially evident in 2021 when speculative and oligopolistic increases in prices appeared even as economies remained below their pre-Covid levels, triggering the premature tightening. For all the pragmatism of its managers, the inadequacy of its underlying vision makes the global dollar system vulnerable to growing political stress.

For a Few Dollars Less: Towards a More Inclusive International Monetary System

The current crisis is signaling clearly an alternative direction, which requires some degree of de-linking from the global financial cycle while relying on more patient capital funding that reconnects credit with development (UNCTAD 2005; 2022). Similarly, economic models that assign complete control of price formation to speculative markets have proven particularly vulnerable and incapable of inducing sound investment strategies. As detailed in the Report, that is quite evidently the case for energy markets, which in many countries joins the worst of two models: the shadiness of price negotiations in concentrated markets, coupled with the risk of boom-bust dynamics, due to sudden shifts in the prevailing conventions and expectations. Indeed, this system, to which we should add the privatization and liberalization of national distribution networks in all developed countries, has produced alternating episodes of very low and very high prices (UNCTAD 2011, 2022). This instability is not favorable for most producers, especially smaller ones and those based in developing countries, or for consumers, and has damaging long-run consequences, the more so as the energy sector has to play a pivotal role in climate change mitigation planning (UNCTAD 2022, ch. III). It is, instead, highly profitable for speculative trading companies and vertically integrated giants.

The end of the commodity super-cycle in 2014, for instance, marked the beginning of a period of extremely low prices for oil. A game changer was the lifting of the ban on United States oil export in 2015 and the normalization of the relations between the United States and Saudi Arabia. The price recovered for a few years until 2020, when it dropped dramatically, partly because of a fall in demand and partly because of the failure of producers to agree on a cut in production. Production actually increased, and prices of some crudes even went below zero, with the market in deep contango (i.e. future prices were much higher than spot prices) with companies running out of storage space and resorting to floating storage (Fattouh, 2021). This period was financially debilitating for many producers – and this explains partly their reluctance to engage in further production as prices started their climb in 2021.

Figure 3 Global and US crude oil production (million barrels per day) and crude oil prices (dollars per barrel).

Source: UNCTAD 2022, data from OPEC, World Bank and U.S. Energy Information Administration.

Large state producers, such as Saudi Arabia, Qatar, and Russia, are often accused of strategically holding onto reserves or production. However, as UNCTAD’s Trade and Development Report clarifies, the de-centralized shale oil sector in the United States appears to be equally hesitant to increase production when prices increase, citing Wall Street investors’ pressure as the main reason (figure 3, McCormick, 2022, UNCTAD 2022).

Clearly, thus, it is urgent to establish a more sensible regulation of energy markets, including making explicit plans for the reduction of fossil fuel consumption. It is crucial that those plans be made together with producers to avoid taking advantage of periods of extremely low prices to leverage a power that disappears as soon as the price trend reverses. That should go hand in hand with an intensification of international cooperation to support global liquidity, public investments for development, adaptation, and mitigation of climate change (UNCTAD 2019, 2022, Gallagher and Kozul-Wright 2021).

As is often the case, the idea is not new. “Between the 1940s and the 1950s, some prominent economists were called upon by international institutions to contribute to [a very similar] debate including: John Galbraith, Nicholas Kaldor, Albert Hart, Mordecai Ezekiel, Gerda Blau, Jan Tinbergen, Richard Kahn, James Angell, and Colin Clark. Among the most active institutions, a major role was played by the United Nations through the Economic and Social Council (ECOSOC) and the Food and Agriculture Organization (FAO), which promoted some of the boldest plans in this field.” (Paesani and Rosselli 2014) From that period, particularly famous has remained Nicholas Kaldor’s plan, later elaborated by A.G. Hart and J. Tinbergen, for a commodity-based reserve currency to stabilize prices and the trade cycle. The plan was presented at the first UNCTAD conference in 1964 and involved an encompassing reform of the international monetary system through the establishment of an international reserve currency backed by a multi-commodity buffer-stock.

Back from Geneva, “Kaldor informed Hart that the first world countries were striving to keep all monetary matters out of UNCTAD, including [his own plan]. The developing countries, on the other hand, were trying to form an expert group on commodity and currency problems that was to report back to UNCTAD and ECOSOC” (Paesani and Rosselli 2014).

Indeed, already in 1954, Gerda Blau, the Chief of the Commodity branch at FAO, was quite lucid about the political challenge faced by those kinds of projects involving a multilateral reconsideration of the monetary and trade system, arguing that “any agreement between consumers and producers would be successful only if both parties perceived it as a sort of contract of mutual insurance against the same risk. This was the case of price volatility […] but not the case of long-term declining trend in the terms of trade between industrial and agricultural products” (Blau 1954, cited in Paesani and Rosselli 2014) and of the related international monetary reform needed to face it. Blau herself favored, for pragmatic reasons, a commodity-by-commodity approach, coupled with compensatory finance (Fantacci et al. 2012).

Some 70 years later, we might indeed be facing a window of opportunity for more regional, South-South, and sector-specific agreements to regulate commodity prices to see the light of day. Developed countries need to realize quickly that stability in these essential markets as well as monetary coordination are also to their advantage.

Note

The views expressed here are the author’s only.

References

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Fantacci, L., Marcuzzo, M. C., Rosselli, A., & Sanfilippo, E. (2012). Speculation and buffer stocks: the legacy of Keynes and Kahn. The European journal of the history of economic thought, 19(3), 453-473.

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Lysandrou, P., and A. Nesvetailova (2022). Why the Ukraine crisis will make little difference to dollar supremacy. Institute for New Economic Thinking. Available at https://www.ineteconomics.org/perspectives/blog/why-the-ukraine-crisis-will-make-little-difference-to-dollar-supremacy (accessed 1 August 2022).

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Worker’s Wages & Leverage Are the Real Targets

Why did Corporate Democrats “cede” the economic argument? Are they really fighting inflation or trying to weaken workers’ bargaining power? INET's Thomas Ferguson joins Paul Jay on theAnalysis.news.

Transcript

Paul Jay

Hi, I’m Paul Jay. Welcome to theAnalysis.news. The Dems, the Democratic Party, has retaken the Senate as we are speaking. It’s still not clear whether they’re going to retake the House, although most of the pundits are predicting they won’t by a slim margin. What happened and why?

We’ll be back in just a few seconds with Thomas Ferguson to discuss the results of the election, some of the economics involved, and why so many people got it wrong.

One of the things that were most frustrating for me in watching the lead-up to the elections was the way the Democratic Party, of which I am– certainly, of corporate Democrats, everyone knows that watches theAnalysis, I am no fan, but yes, as opposed to [Donald] Trump, yes, I would hold my nose and vote Democrat if I lived in a state where a Republican might actually win. As it turned out, even though I’m not even living in the U.S. anymore, I’m still registered to vote in Maryland, but given that the Democrats were going to win everything there is to win in Maryland, I didn’t vote because my nose was sore that day. All that said, I was very frustrated with the way the Democrats couldn’t even defend their economic record, which was rather pitiful but still better than the Republicans.

The basic argument the Republicans were giving– and here I’m going to show you a little clip from the Stephanopoulos show on the Sunday just before the election where Chris Christie goes on and on about how the Democrats are going to lose because they couldn’t deal with inflation. Everybody knows inflation came from the stimulus spending that was pushed through by the Democrats.

Donna Brazile

“What drives inflation? It’s not just who is in Washington, DC. This inflation is being driven by huge demand at a time we had two years of economic lockdown.” [crosstalk 00:05:59]

Chris Christie

“I’ll take Larry Summer’s word for it, okay. Larry Summers, Clinton’s Treasury Secretary, told the Biden administration two years ago, “you go ahead with the spending you’re talking about, and you are going to create enormous inflation.” It’s exactly what happened. We can try to blame it on a whole bunch of other things, but when you put $5 trillion that you printed into the economy, after all the money that we put in during COVID, that’s why you have inflation. The fact is that it’s got to stop at some point, and the Democrats don’t want to talk about that because their constituencies are all about ‘pay me more’.”

“In the end, Sarah’s right that they ceded that this round to Republicans.”

Paul Jay

Well, there are various studies, and as we get into the interview, I’ll quote one of them that shows that, in fact, at the very most, that spending may have caused maybe 3% inflation. That’s at a time when inflation was practically zero. That inflationary effect, meaning stimulus spending, money that went into people’s pockets, well, that money’s long been spent. It has very little to do with today’s inflation, yet I didn’t see Democrats defending their record.

The San Francisco Fed paper I referred to actually said that even if there was 3% inflation caused by these policies, it was better than the alternative, which was a deep recession. I didn’t hear that being said by Democratic candidates. I’m going to ask Tom why he thinks the Dems couldn’t even defend their own record when they could have actually had something positive to say about it. Before we get into that, I’m going to ask him why did so many of these polls get it wrong? Why did so many of the predictions of the results get it wrong?

Now joining me is Tom Ferguson. Tom is the director of research at the Institute for New Economic Thinking. He’s also an emeritus professor at the University of Massachusetts. Thanks for joining me, Tom.

Thomas Ferguson

Boston, please. Let’s not–

Paul Jay

I have to say Boston. Boston. University of Boston, Massachusetts, sorry. Not Amherst. Okay, here we go. Alright, so, Tom, let’s start. This isn’t the first time polling has been wrong, but it was really wrong. Even the internal polls of the Democratic Party, nobody was really expecting the Republicans to do so badly. When I say nobody, I guess I should say almost nobody. What do you think?

Thomas Ferguson

Well, okay, look, I have to tell you, first of all, we have just done Groundhog Day again, meaning in the sense of the movie, we’re rerunning what we did in 2020 with small changes. In that sense, I’m less censorious about the polls, and I would be more censorious of the pundits if you like. When you’re at this tight a set of races, it takes only a very small margin to blow you completely off. I mean, it doesn’t mean your polls are way off. It means if you’re 3% or 4% off, you got a lot of races miss-called, but it’s not that bad a deal.

On the other hand, what’s striking to me is the way you can see this– I’d be inclined to say ten-brained punditry that was just everywhere, and it’s still everywhere in telling you the meaning of the election that I am pretty sure they can’t actually discern. Mostly everybody agreed that the Democrats would get a drubbing, and they got a drubbing, actually. It’s not like things worked out wonderfully for them, but it worked out a lot better than everybody thought it was going to.

I am quite struck by the basic line, as far as I can tell, and I read this frankly, as coming from the White House, too. It is certainly reflected in things like the New York Times, particularly today, where there is no room for doubt. Just read what might be in the old days, the front page there. They’re all sitting around telling you it was a victory for middle-of-the-road candidates in this sort of happy and rosy scenario. It’s middle-of-the-road candidates in the Republican Party and middle-of-the-road candidates in the Democratic Party.

Now, a problem with this is that when you actually compare the major polls, Edison and AP-NORC, they actually differ by just enough in some key places that it’s actually hard to tell anything, particularly on the question of exactly how many women were thinking what and how they actually voted. I’m having trouble with that. I think we have to be cautious there. It seems to me a lot of people rushed to judgment.

Look, the first thing I think to be said about the economics of this election is something that, as far as I can tell, no election analyst has said, but which is obvious, which is, hey, opening the Strategic Petroleum Reserve pays. That is to say, there’s absolutely no question that inflation was heavily on the minds of voters. I’ve seen folks try to dispute that, too, using some poll data. I think that’s nonsensical.

It is clear, and I know very well from folks who were around who told me this, is that plenty of people gave [Joe] Biden the advice if they didn’t get oil prices down, he’d be toast. Well, they got them down. Now, some of that was just the fact that because of the Fed rate rises, the whole of the world now fears a recession. People stopped, the price fell, and then OPEC raised prices in response to keep its revenue up.

Still, the point is they opened the Strategic Petroleum Reserve; tell me that that’s not really important here. Before we hear all the stuff about the importance of culture and everything else, stick with that opening of the Strategic Petroleum Reserve.

The other point to notice is that a number of government programs in the farm belt are actually offering to buy crops at well above their existing futures prices in the market, which works out, too, for farmers. That’s not universal, but it covers a lot of crops. This type of stuff is running in the background if you like, and for sure, it’s important there.

Alright, first, one thing Biden did was defused the economic record and make it better by just turning on the pup briefly. Now, we’ll see how they rebuild that thing in the next few months. Why didn’t they defend it? Well, I think, look, the first thing to be said is it’s not easy to defend. There’s a lot of slippage on this, but the bottom line was that for most people, their wages just haven’t kept up with inflation. There are a lot of claims made about the lowest-paid workers. I think that’s a huge mistake. Not meaning that it didn’t rise, but what they were actually doing was adjusting. If they wanted any low-wage workers at all in dangerous occupations that had formerly been safe, they are now dangerous, and they have had to pay higher wages for that. I don’t think that was a general tilt, if you like, in favor of labor.

I note that in ’21, they actually lost ground in unionization. Once the Democrats came in, the rate of unionization fell back, not forward. That’s off of a BLS release I was just looking at. Anyway, the heart of the matter is, you want to understand that no matter what anybody else tells you, or the Americas is what we might call sumac moment in Pence, that’s after the new budget, that will be brought in in a few days by the Prime Minister and the Chancellor of the Exchequer in Britain. Put bluntly, they’re going to do big budget cuts.

Now, the bottom line on that is they got to do it to keep their costs down as interest rates rise. What’s happening to every country on earth now as interest rates rise, the cost of that debt that they’ve all run up rises a lot, not a little. The U.S. is in that boat too. You could see the Republicans were actually saying it. Interestingly, as a number of folks pointed out, the media wasn’t caring it in those last two weeks about the various Republican proposals for chopping Social Security, lowering the rate Medicare reimburses for doctors, and things like that. Now, this is close to inside baseball, which I actually despise, but it is perfectly obvious that Democrats in the White House are thinking about some of these too. Biden has a long history of talking out of both sides of his mouth on Social Security, to put it politely. The budget pressure is going to be very intense there.

I think it’s clear that, in general, the Democrats did not feel, the national Democrats didn’t feel like defending their economic record of helping people because they’re not thinking they can continue to do that. Way too quickly, they have pulled back on lots of expenditures to even measure the pandemic spread. It’s like today they’re running articles on how thousands of jobs are disappearing in public health that were temporarily funded by the CDC Foundation as part of the government there. You’ll notice– it’s quite striking the way the Biden people, and Biden himself, said the pandemic is over, but yesterday they extended the emergency rules on that which will allow them to keep spending. These folks have been cutting back for quite some time.

Paul, I’m sorry to throw raw meat to you, but I have to tell you, I agree completely with you. These folks were not defending their economic record on the spending side because most of them don’t believe it. They don’t believe it because they’re corporate Democrats.

Now here, I cannot help but observe one of those delicious ironies that it’s like this is too good to make up. Although a lot about what you’re about to read in some of these cases, the case of the crypto failure there– Samuel Bankman-Fried. This is a big centrist Democrat who– although he pretended to be a left-liberal Democrat– look where they spent the money. I’m in the process of doing that with my colleague Paul Jorgenson. And no, it’s not money. It’s mostly funded to sort of center and center-right Democrats, and it’s a lot of money. In that sense, one of the big financial props of the center did not hold there. Within days–

Paul Jay

Tom, let’s just stay on the economic thing for a second. You and I discussed this a little bit off-camera, but it seems to me that they did not want to push back on the argument that government spending was causing inflation, and the only alternative to that is austerity policies, cut back on government spending, and then supposedly higher interest rates are going to do something about inflation. Both of those things are not what’s causing inflation. If I understand it correctly, low-interest rates were not significant in this 8-9% of inflation. Government spending wasn’t significant. The two things they’re doing are going to cut back the government spending and continue raising higher interest rates. There’s another agenda going on here.

Thomas Ferguson

No, I don’t disagree that we are about to see an effort very carefully now because they’re in a much stronger position than they were. My reading is the White House thought they could blame a lot of this on the Republicans. Now they won’t be able to do that. It will be a much more difficult sell than it was all the Republicans, which the Republicans were clearly just raring to step into that role.

I have to say, in all honesty, that the other reason you would have some difficulty in pushing that line, though it’s not the controlling thing, is given the media worship of Summers and company, the people, the inflation hawks who were warning, in my view, utterly bogus claims about the role of the stimulus program. If all of your daily papers and all of the talking hats that you’re watching are saying the opposite, it’s tough for a candidate to just walk up to people and say different. In that sense, this is one of these deals where I’d like to blame– I’m not saying the system as a whole; it’s more specific than that. The major networks, the New York Times, they just all spend way too much time on Summers. They don’t look at serious counterarguments. They hardly print them, and it’s ridiculous. It’s also the case if you talk or listen to folks who have access to the White House and I occasionally bump into these people, they will say the influence of the conservative inflation hawks in the Democratic Party is quite strong, and they’re actively talking to the upper levels of the Biden White House.

Paul Jay

There was an interesting piece in the Economist, and it’s not only been there, but it kind of came out and said it. This is what I think the agenda is. It says that “we up until the pandemic…” we being the elites, “have been able to control…” quote-unquote, “core inflation.” If you read the whole article, it’s clear they mean wages. “We were able to control this because we had a reliable, cheap source of labor in China.” But two things have happened with the global supply chain. One, the pandemic has shown us that we can’t rely on this anymore the way we have. Two, the rivalry intentions with China are threatening those supply chains. Now American workers, and I should say I’ll add to that Canadian, are gaining some leverage. Is that what’s really– when I said there’s another agenda here, is that the real problem they’re trying to deal with is they don’t want the working class in North America to gain leverage here. They need to beat people down with higher interest rates and cut back social network spending, which also gives workers more confidence in terms of how they fight.

Thomas Ferguson

Okay, what I’d say is this. You got to treat even the White House as a place where a set of parties fight out stuff. The arguments inside that, if you like, it’s not the Republican Party, where as far as I can tell, there’s very little disagreement with that strategy saved, curiously, on the Trump side, which likes to talk the MAGA line, about making America great again for workers, even though they do essentially nothing to make that happen and indeed do many things to make it work. There is that tension in the Republican Party, and a different kind of that version of tension is in the Democratic Party, where there is clearly a wing that is actually friendly to the workforce. The striking thing is that when you look at unionization rates after the Democrats have been in here now for almost two years, they haven’t hardly moved at all. They actually went retrograde last year. There were a lot of strikes. You hear the familiar line that “this is the friendliest president we’ve had in years for labor.” What that means is they get to come to the White House or something.

On the National Labor Relations Board that is restructured, I think, in a way that is friendly to labor. But the NLRB and elections are increasingly irrelevant to what’s happening to the bulk of the workforce, which never reaches the stage of even getting to mount a union election. You do see a raft of unsanctioned strikes from small strikes of all kinds.

You notice what the White House did. It kicked off the question of the railway contract settlement until after the election. This is going to be very interesting. I just saw where the Secretary of Labor was saying that “well, he told Biden to say there can’t be a strike.” They need to tell the employers there that sick leave and some controlled over time, especially on weekends for people, is an important issue and not just sit out there trying to quote “mediate that.” It’s obvious. Anybody who studies American railways or transportation, in general, can see just how crazily one side of these situations has been, particularly as they try to run very, very long trains with one or two people. I think you Canadians know something about that especially.

Paul Jay

I worked on the railroad for five years. I worked as a Carmen mechanic on the railroad for five years, and that was beginning when I was there. We were starting to wage– it was a big fight of whether you could or whether you needed a railroad worker in the van, in the caboose at the end of the train. They started getting rid of them, and they started having more accidents.

Thomas Ferguson

Yeah, well, the workers have been in the caboose for a generation or more now; that’s clear. So yeah, all right, I think we’re on the same wavelength here. Yes, I think we have this serious problem even in the Democratic White House, and I can’t wait to see how they negotiate this there. I mean, just watch the railway strike business since I think at least four of those unions have already turned down the contract, and probably some more will be coming along.

More generally, look, this problem of wages hasn’t been solved. In fact, there’s no doubt that, in general, wages have lagged well behind inflation, and that’s not going to change as a result of this election. You could say probably you’ll just continue with the policies you’ve got. I do not, myself, think that that can go on forever. Inflation does begin to start institutional changes happening because the results are so disastrous if you just stay put there. I don’t know where we go into the future here. I think it’s going to be very interesting.

Now, on the general question of inflation in the world, I would just comment this way. I don’t disagree with the Economist article, which I haven’t read, the one you just quoted. You can see that U.S. reliance, U.S. firm’s reliance on China is declining. The usual estimate is about half of the Chinese trade surplus with the United States is American firms selling back into here. It is clear to me that the combination of Taiwan’s high-tech subsidies in China and especially the COVID rules there for lockdowns included foreign firms. I mean, you know, some CEO flies into there to see how his firm is doing, and he’s going to spend ten days at a hotel that he didn’t bargain for. Well, that cooled him off. I think that has very clearly altered the top runs of American business attitude towards China. There are still guys cheering on, “let’s invest,” but it’s a lot lower than it was.

The other side of it is the restructuring of Europe. You also see that basically strategic trade issues and decoupling are becoming much more important now. Those are going to create– they are already creating supply shocks of all types, and that’s not going to stop. It’s going to continue.

Paul Jay

Even if they move production to India, say, one, it’s going to take some time to get anywhere near what it was in China. Two, that wasn’t the biggest issue. The biggest issue is during the pandemic, they couldn’t get stuff here. The ports were so clogged up. We’re in the era of pandemics now. This ain’t going away. Every month there’s a new one coming by.

Thomas Ferguson

Yeah, that was one of the significant failures of the Biden administration. They should have generalized vaccines quickly. They should have told Pfizer and Moderna, “okay, look, you’re going to have to.” Given the amount of federal support for the background of these viruses, not necessarily to those companies at the time they had it, but the whole development of the vaccines. The whole development of the vaccine was certainly in the background. Large programs of federal support from DARPA, from the NIH, and other places there. They should have said, “ok, after you’ve made a couple billion now, give everybody access to the vaccine.” They haven’t done that. Most of everybody else’s vaccines, while they are around, they haven’t been disseminated on a wide scale. Some of them, I don’t think the Chinese or the Russian vaccines work that well.

Paul Jay

Yeah, they’re maybe 60% at best, whereas the American ones are up around 90%, if that’s all to be believed.

Thomas Ferguson

Yeah. So the result is that you’ve got a worldwide problem. In the latest round of vaccines, the take-up is not that high, even in the U.S. But it’s, of course, zero in countries with no access to it. You’ve just let this thing sit out there, and it will keep mutating. I entirely agree. This is now the biggest gambling operation in the world. It dwarfs from a cow in Las Vegas and everything else. It’s like, you bet the whole planet on this policy. This is stupid.

I would add the Gates Foundation has not helped here. Bill Gates has famously opposed this vaccine. Everybody says, “what’s he doing there?” My take is that what you’re actually looking at here is an effort to make American intellectual property essentially non-negotiable. That is to say that the fundamental story here is the U.S. government and its major companies think that the intellectual property issue is so important they’re not willing to compromise on it. That’s a big mistake. On issues like this, they should just give the stuff away. It’s not like–

Paul Jay

Just to be clear, because the coin just dropped for me, what you’re saying. You mean give it away on a worldwide basis because as long as most of the world’s not vaccinated, the thing keeps mutating. It’s impossible it doesn’t come back to the United States or to North America. Over and over again, you have completely broken global supply chains which was the whole basis of globalization which means you have to keep moving more and more production back to North America, which again is going to give workers here more leverage. So you better beat the shit out of them now.

Thomas Ferguson

Well, I was surprised when I was looking at some numbers on growth in manufacturing in the United States the other day out of the St. Louis Fed. There’s rather a lot of– there’s more than I would have thought. I’m not expecting to see lots of on-shoring, except in the case of our re-onshoring, I think, except in the case of goods with a defense component and sort of basic things you need. I suspect that you will see, and I trust we will see some continuous effort to keep masks and things like that available.

Paul Jay

I saw an article. A lot of the production that goes on in China, not all but a significant part meaning FOXCOM as the best example, is actually owned by Taiwan. It’s a Taiwanese corporation. I saw that Taiwan’s planning more investment in the United States, including trying to develop some semiconductor business there.

Thomas Ferguson

We are subsidizing our semiconductor folks, especially intel, to try to do more here. In the high-tech stuff with a defense or vital part aspect, you’ll see a good deal of that, but I think you’re going to find more and more people moving to places like Vietnam. What you’re going to do is– this will sort of be a kind of– well, it calls to mind the old empires of the late 19th century where the French, the British, and eventually the Americans, late joining, create its spheres of influence. Although the American position in China was famously, “everyone should have a right to get in.” Meaning the Americans should get in too. I’m not looking for a lot of that, but you’re right, and this is going to be continuously generating trouble. It does not help that the Biden administration and the CDC have just not– they haven’t got any monitoring system in place in real-time to find out what variants are around. I mean, they find out now by looking at hospital stuff that’s two weeks old. In the sense of what the vaccine is out there by the time you get sick enough to go to the hospital–

Paul Jay

Tom, just before we finish, if you’re watching mainstream media, there’s at least been discussions about high energy prices and what that means for inflation. There’s at least been a discussion about the supply chain. The thing that’s getting very little attention, something you mentioned just a bit to me off-camera, is how high margins and profits are simply higher than usual these days, and that doesn’t get talked about very much.

Thomas Ferguson

The Biden administration has been very late on antitrust. They’re making some moves now, but they’ve been slow, and it’s probably– well, we’ll see. I wish them the best on that. There are people in charge that are serious about that, but it’s not nearly broad enough to do anything. It’s not going to constrain most companies. They were slow on that. They haven’t done anything on commodities regulations; this crypto thing that just happened. That was money mostly going to Democrats. It just blocked it.

Bill Clinton and others were all walking around saying, “how we really had to have a light touch on regulation.” No, we didn’t. A lot of people are out of vast sums of cash. It is said that relatively more blacks than whites were actually invested in cryptocurrency. I don’t know if that’s true. I don’t mean that most blacks– I’m not saying that all, just that the proportion compared is a little higher there. I think for younger folks of all types, everybody found it irresistible. I was doing my best to persuade members of the family not to do that. Look, fleming and flim-flam here are just– stock markets lend themselves to that, particularly at low rates of interest. Bubbles are the basic heart of low-interest rate policies and bad regulation. That’s just the long and the short of it. It’s now mostly the short of it.

Anyway, I think we should come back to one point, though, on this, which is the weirdness of all this. I would accept the fact that the Trump folks running in the states, if they were running fresh, usually did not do well in Secretaries of State office and things like that. Election deniers, though, in the House because their incumbents did very well. The insanity of the whole business is that, yeah, on the whole, I don’t think it was so great for Trump. I doubt that even Trump will try to claim that. You look inside the Republican Party, and it’s fairly striking. You have a serious challenge to Mitch McConnell, who was certainly the main bull walk in that party against Trump in the Senate. You’ve got even Kevin McCarthy, who is under severe threat from people who think he wasn’t friendly enough to Trump, even though we all know between this enormous gap between what he actually thought and what he did, he’s talked like a Trump person for a long time now. You may see this amazing– this development is really worth watching. In fact, inside the Republican Party, the Trump folks may, in fact, come out somewhat stronger in the congressional delegations than anybody would have guessed on election night.

Paul Jay

There’s one other factor that I think certainly mainstream media has not even touched, but I think it’s significant, which is there has been over the past eight years, nine or ten years, progressive organizations– I know better the situation in Pennsylvania, who have been bypassing the media monopolies and just knocking on doors. They’ve been knocking on doors now in Pennsylvania for close to a decade. There are three organizations that have been doing it, and there are similar or some of the same organizations across the country. To some extent, it’s really going under the radar. I think we saw some of that effect, at least in Pennsylvania and maybe in Michigan, where they recaptured the state legislature. Knocking on doors may be the new technology of the future, which is sort of funny.

Thomas Ferguson

Yeah, I’m having a hard time reading what’s going on in those. I am quite struck, for example, by the difference in the outcomes in Pennsylvania and New York. I’ve heard all kinds of noise made about this, but it is a fact that [John] Fetterman, but also the candidate for governor there, [John] Shapiro–

Paul Jay

Yeah, Shapiro.

Thomas Ferguson

— both ran well to the Left of most of the congressional delegation in New York. Not all of them, obviously, you got AOC [Alexandria Ocasio-Cortez] and people like that too. That was pretty strange. The other thing that I think people need to think about here is to look at the outcome. Compare Ohio and Michigan, where Ryan [Kelley] was said to be a strong hope for Senate. He didn’t even win his own county, which I think is Mahoning down there near Youngstown and things like that. If you look at voter turnout– these are all Senate race states. We’re comparing apples with apples, not states that didn’t have center faces or something. Compare the Senate races in Pennsylvania and the turnout in Orion, Ohio, it’s quite different. It’s also in Michigan. The Michigan turnout is eight or nine percentage points higher than the turnout in Ohio. The turnout variations here are quite marked. What is up? That may be–

Paul Jay

Well, I got to dig more into this, but I have a hunch that it’s these organizations that are not part of the Democratic Party. They’re progressive. They came into being to support progressive local candidates and were not always successful early on. I know they exist in Michigan. I know they exist in Pennsylvania. They’re funded and operating without almost no support from the Democratic Party itself at all. Maybe they didn’t exist in New York State. Maybe it was just assumed Dems would do well.

Thomas Ferguson

I know that they did to some extent in some places because I talked to some. One of them made a very interesting point to me. It might be appropriate to close on this one. At the time, the person there had actually gone down to Georgia in the runoff in 2020. Really, I guess that was 2021, just the turn of the new year that boosted the Democrats into the 50/50 tie there. He said, at the time, they were all campaigning. They were telling people, “look, if you vote for Biden, you’ll get a rise in the minimum wage.”

Now, of course, the White House never got around to that. Now, it’s fine to say that, yeah, they had a 50/50 situation, which was really 48/52, with two senators, maybe reluctant. My sense was they didn’t try very hard, and they could have done a much better job of that early on. Biden has plenty of authority to do that inside federal government contracts, and he didn’t do it. This is a problem. Now the minimum wage, the meaning of that is changing with inflation. It’s going to make the problem even more urgent in the next few years.

Paul Jay

Sorry, go ahead.

Thomas Ferguson

My reading of this is unemployment is going to go back up, and also, there are vast numbers of people out of the labor market that could be brought in with intelligent policies, especially on public health.

Paul Jay

Hang on, isn’t that the point of high-interest rates is to create more unemployment?

Thomas Ferguson

Well, we have Jerome Powell’s authority for that, right. He was pretty clear about it. Yeah, I mean, it’s just the worst form of rationing.

Paul Jay

Yeah, I just think if you want to understand both Democratic, corporate Democratic Party, and Republican Party economics, it seems to me it comes down to a very simple proposition. All of them depend on corporate money. Not just campaign money but the whole way the system works in terms of where you’re going to work when you’re out of the office and so on. If you run a business, it doesn’t matter if it’s a small, medium, or big business; you wake up in the morning with three things on your mind. How do I increase my market share? How do I produce with less workers? How do I produce with cheaper workers? Then you can worry about everything else. The whole elite is concerned about the fact that they may have to pay more money for workers, and that’s what the policies are aimed at. Am I wrong about that?

Thomas Ferguson

No, I’m, of course, shocked, shocked, shocked that you could possibly think this, especially the fact that–

Paul Jay

Yeah, really, me too. [crosstalk 00:41:01]

Thomas Ferguson

Now, my reading is fundamentally that the stuff you’re reading in the New York Times now is quite constant with what the White House thinks. They think that the combination of abortion and democracy is enough to break enough votes off to beat the Republicans in this Groundhog Day situation. They are already reaching out to mount their corporate campaigns for the next general election. There’s already talk of bringing in a senior business Democrat. The White House is full of senior business Democrats, and that’s just all there is to it. No, this is just–

Paul Jay

If, as many people, economists and business pundits, and so on are predicting, if these high-interest rate policies are pushing us into a deep recession, and that’s where we are in 2024, good luck with cultural issues.

Thomas Ferguson

No, this is a longer discussion, but yes, that is a serious problem. I think the Fed will relent a bit, but not quickly.

Paul Jay

Alright, we can talk about that next time we talk. Also, when you’ve got some more data because you’re a data cruncher. Thanks very much for joining me, Tom.

Thomas Ferguson

Alright, thank you.

Paul Jay

Thank you for joining us on theAnalysis.news. Please don’t forget there’s a donate button at the top of the website. Subscribe to our email list. If you’re on YouTube, make sure you subscribe, even though we’re pretty sure YouTube is not communicating with our subscribers– even people that have clicked on that little bell, so they get notified. We’re getting lots of emails that people are not getting notified. At any rate, come over to the website; that’s the most reliable way to watch theAnalysis. Thanks for joining us.

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You’re Living in a World Wrought by the Federal Reserve. Notice Anything Wrong?

In her new book, veteran Wall Street watcher and economist Nomi Prins warns that central bank strategies deployed since the financial crisis are destroying the real economy, worsening inequality, and creating societal chaos.

Ever wonder why it is that for most of the 21^st century, no matter who is in the White House, no matter the state of the economy, and regardless of what ordinary people are suffering, money travels inexorably to the top?

If you find this baffling, you’re not alone. For many, it seems that the further we travel into this acutely challenging century, the political, economic, and social rules we thought we understood increasingly fail to apply.

Economist, journalist, and former Wall Street exec Nomi Prins is here to explain the inexplicable. Her latest book, Permanent Distortion: How the Financial Markets Abandoned the Real Economy Forever, is a highly readable and clear account of how the financial realm, with its central bank-fueled loose money and mega-wealthy financiers, has split off from the real economy, the place inhabited by regular working people who buy stuff and produce things.

The upshot: the people’s needs are increasingly ignored in favor of market demands.

Prins points to the 2008 financial crisis and the Federal Reserve’s response as the pivotal moment in which we jumped on a tiger that we can no longer seem to dismount. What was supposed to be an emergency response to a crisis ended up turning into an unstoppable addiction to cheap money which, Prins argues, initiated a vicious cycle of pumped-up financial markets, destabilizing inequality, a public left worse off, and a political system increasingly unable to make real progress on long-term priorities like climate change. She spoke to the Institute for New Economic Thinking about who is responsible, what the public needs to understand, and why this tiger will not take us anywhere we want to go.

Lynn Parramore: You’ve written several books about the U.S. economy and Wall Street. Why this new book, focusing on central banks and their influence? Why is this so important to understand now?

Nomi Prins: Since the financial crisis, one of the themes in my books is money and power. There’s a real thru-line from my 2009 book, It Takes a Pillage, which focuses on the financial crisis, to All the President’s Bankers (2014), where I go back into the history of American bankers and their political influence, on up through Collusion (2018), the global analysis of what happened from the financial crisis through the period before the pandemic.

That thru-line concerns this external body - the central banks - which can effectively manufacture money, and how this money, just by sheer mass momentum and the players involved, goes disproportionately to financial markets relative to the real economy. This activity, in fact, is detrimental to the relationship between markets and the real economy, and also to the real economy itself.

I wrote Permanent Distortion because to me, the distortion that money and power have created between markets and the real economy did in fact become permanent. It’s not just something we’re experiencing now, and then can we go back to a more glorious time when it wasn’t like this. It was around July 2020, when we were all locked down and not knowing what was going on with our lives, our personal economies, our health, and our families, when I realized that the Federal Reserve had doubled the size – or even more so -- of its book of assets. It had created about $5 trillion worth of money in a very short period of time.

During that time, the markets went from being very afraid and down to being very, very high. A lot of people said, well, we’re all at home using Zoom, so therefore the market just rebounded by so much. But that was just a small part of it. The bigger part was that money became available at such an immense level and therefore the distortion between where money goes in the financial markets and where it doesn’t go in the real economy became permanent. At that moment I saw that this can happen in any amount, at any time. There’s no restriction, no transparency, no responsibility.

LP: You make a strong case that high finance has become unhinged from the economy, and you go so far as to say it has become disconnected from capitalism itself. What exactly does that mean?

NP: When I’m talking about capitalism in that sense, I’m connecting it to the idea of financial markets supposedly being created to aggregate money in order to then funnel it into companies, and therefore into projects, and on into the real economy.

So the idea, technically, from a capital market perspective, is that borrowing money in order to do something, or selling bonds in order to finance something, or selling shares in order to finance something, used to have a particular relationship to each other. If there was a transparent use for a company that had value to shareholders, they would be willing to effectively invest their money in order for that company to do what it does to grow whatever it’s growing. Part of that use could be profits, part could be wages, part could be cars. The point being that the relationship was more or less (though not always) transparent at a theoretical level.

But now there is more money being thrown into the markets from an outside source. It’s not money from the actual profits of a company or its long-term strategy, or the productivity of workers, or the creation of long-term things. You end up getting an unmooring between what markets are theoretically there to do in a capitalist society and from a capital-raising standpoint. There’s this other source that comes in and kind of turbo-boosts and distorts all of those relationships.

LP: You place the roots of this trouble in 2008, a year which, you point out, increased the power of central banks. Yet, Ben Bernanke, the very economist in charge of the Fed at that time, just won the Nobel Prize. As some have pointed out, we are living in the world he created, and many hail him as the guy who prevented the second Great Depression. How did he contribute to the alarming picture you paint of an economic system gone off the rails?

NP: I thought the Nobel Prize for Bernanke was a bizarre choice, although it made sense if you believed the narrative that attributed to him the power to save the economy. And he also happened to have written a lot of things historically about depressions. But if you actually dig into both what he did and what he wrote to win that Nobel Prize, you find a concerning story. To understand it, you have to go back to before the crisis was apparent to everyone -- both during the Great Depression and during the 2008 financial crisis.

Back before it became apparent that a financial crisis was happening, there was an immense amount of leverage in the banking system over which Bernanke had responsibility to regulate. There was also an immense amount of assets being created off the back of a very small amount of interest coming in from subprime loans. Those subprime loans themselves had issues, and Bernanke knew it because the banks knew about the interest payments, and their rising delinquencies, and defaults. A small amount of subprime loans were structured to feed into a large amount of other assets by said banks. As this was happening, either he didn’t want to pay attention or he thought looming problems would just go away like many banks did. But Bernanke had information from the banking system in his position at the top of the Fed and certainly through his connection to the New York Fed. He was deeply connected to those banks and their liquidity and rising delinquency and default problems and he just chose to say that everything was effectively fine.

He did that even before the crisis became apparent. Then, in 2007, when things were absolutely crumbling and even the shares of real estate developers were plummeting, when there was so much information all over the place and reports from the FBI were going into the Fed telling them there were issues, what did Bernanke do? He did nothing.

So when the crisis did occur, Bernanke ultimately used the tool of quantitative easing, which is basically creating electronic money in return for taking out that debt from the market and putting it on the Fed’s books for safekeeping. He put it there and most of it stayed there. Later it manifested a larger crisis, or a looming crisis, by injecting all that money into the market on the auspices of saving the real economy.

What actually happened was the markets rose precipitously over all of the ensuing years. There’s one or two years where they wobbled a bit, but, in all the period of time during Bernanke’s chairmanship of the Fed, the real economy stumbled. To me, the narrative that he saved things from being worse is a false one. Yet that narrative was perpetuated and is still believed today by the majority of people who care to think about it, like the Nobel Committee, apparently.

And what about Bernanke’s writing on the Great Depression that he had done back in the day – as supposedly the main reason he got this prize? Well, he’s had an aura of having such great knowledge of the Great Depression. He was the man who wasn’t going to let it happen again. Yet he forgot, or didn’t recognize, that one of the reasons the central bank did what it did from 1929 to 1931, a time when many banks collapsed, is that there was a housing bubble. There was also overleverage and a situation where Wall Street banks had been doing nefarious things with money. So one of the reasons that the crash happened and so many banks went under afterwards was because of what happened before. The banks had become over-extended, over-leveraged and Fed wasn’t paying attention at the time.

Bernanke didn’t write about this. He wrote about what happened when the Fed tightened too much too quickly and caused another leg of the Great Depression. That strategy was something he wasn’t going to have happen on his watch, but he forgot or didn’t pay attention to anything that had actually caused the crisis, to what led to Great Depression. He showed the same blind spot in his approach to the financial crisis. To me, that’s like two negatives, two false narratives. The consistency in those two false narratives is that they are both related to over-leverage in the housing market, to Wall Street taking advantage of it, and to the Fed not doing anything.

LP: Let’s talk for a moment about economists and economic advisers that influence our political system. What can you tell us about their relationship to power? Does it cause them to have these blind spots?

NP: The National Economic Council is generally made up of senior business leaders and bankers with current jobs, so a lot of them tend to lobby for certain policies that benefit them. In this last go round, there’s been an oddly exorbitant amount of lobbying to the Fed directly. There are about 120 different lobby groups that lobby the Fed directly, even beyond lobbying respective politicians and on behalf of respective companies or sectors! So “the economy” is really convenient as a funnel for any policy that has to do with money going in and out of anywhere. If policies are being formulated or explained by self-interested people or people that work for self-interested companies or parties, then they’re going to be skewed towards those people or companies. You don’t have Joe the Plumber hanging out in the middle of the Economic Council saying well, here’s what’s going on with my building and my house, now what are you going to do about those? That’s not how it’s structured. It’s ensures a very top-heavy approach to economics.

Take, for example, how the Fed views statistics, such as employment numbers, when it’s thinking about inflation or raising rates so quickly, which is really constraining to people on an actual budget facing other inflationary pressures, and, by the way, not actually doing anything about inflation. They’ve got the Executive Survey and the Household Survey. The Executive Survey counts every single job somebody has as a job in the economy, even if it's the same person, whereas the Household Survey only counts one job per human. So those numbers are disparate. There’s a lot that can be interpreted in different ways and the framework has been formulated, generally, by economists who accept certain narratives, who tend to confirm or to say what needs to be confirmed or said to keep the status quo. They’re the ones that remain in those advisory positions. You do get people who might try to push the envelope a bit in terms of definitions and policies, but they don’t tend to stay around.

LP: You note in your book that our whole society has become alarmingly top-heavy due to these top-heavy approaches. I was struck by the statistic that in a single year of the pandemic, 2020, there were 500 new billionaires created, just as regular people were losing their jobs, losing their health, and many were losing their lives.

NP: Yes, that statistic gets people’s attention. My other favorite is from the 2022 Oxfam report, which says that the top 10 billionaires were making $15,000 per second. When I do talks on the book, I make everybody imagine that, to think about the speed of what’s going on here. It’s because those billionaires are invested in markets that their wealth is propelling up so much. All the speculation, though, is driven by this excess amount of available money, by what the Fed has done.

LP: You refer to this as wealth accumulation without accountability. In what sense?

NP: If you’re participating in a market that’s going up, obviously the more you’re participating, whether as the head of a company that has options for stocks, or as an investor, or as the retail person who is placing just the little bit they have on it, then you’re going to benefit from that proportion of upside because you’re in it. If you’re not in it, you’re not going to benefit from the upside. That’s just the math.

What we’ve seen is actually more money created than what was sensibly needed to save the economy, and it’s obviously not going into the real economy. I’ve gone through the stats of the Fed’s book related to the $600 stimulus payments, the extra unemployment insurance, and even the PPP loans. The remaining money was leveraged into the financial system. What was on offer to the markets from the Fed dwarfs what actually went into the pockets of real people in the real economy.

As a result, the money just tsunamied upward in a very short period of time. That money unmoored from the real economy and did nothing for it. There were a lot of narratives flying around and guesswork on why the markets ballooned so quickly. What you didn’t have to guess was that trillions of dollars were created, not just by the US central bank, but by central banks around the world. And this was accumulated into the financial system and financial markets.

LP: How does this distortion impact our ability to confront long-term challenges, such as climate change?

NP: This goes back to the question of accountability. If money is being drawn into one place or one set of financial assets, the financial markets, it doesn’t go into preserving the social contracts or the Main Street economy or the fractures in Main Street economics. I think that as a result, government leaders of both parties get lazy about pushing through longer-term strategies. Because there is this external force of money, it distorts all of the decisions. Parties argue back and forth about where money should go where and so forth, but it distorts all that just that much further because of the ease with which money can be created and multiply and go elsewhere. The idea of long-term strategies, like fighting climate change, suffer.

Yes, we recently had a bipartisan infrastructure act passed, and that was positive (though it’s taking quite some time to actually agree on where that money’s going to go). But going back to what capitalism could be, what if that money that went to financial markets had gone to directly build solar or wind energy? Or the electrification of manufacturing plants? Or water purification?

If it could have gone to these areas more quickly, then you would see more of a shift. The pace of getting what’s needed to fight climate change would be faster if it weren’t way easier for money to flit about, especially when created in abundance, into areas where it can just multiply itself more easily rather than in awaiting to build a whole new production center and or new energy strategy. The fact that money can multiply so quickly in the markets makes it harder for it to stick around in one of those lasting areas —to build necessary, physical things, like new or upgraded power mechanisms.

LP: You write about developments in cryptocurrencies and the metaverse as responses to this distorted situation. How do you see them evolving in relation to it?

NP: When I wrote about crypto, I also wrote about decentralized finance. They’re not necessarily the same thing, though they do share commonalities in that Bitcoin, for example, was created off of blockchain technology, which has been around for decades. But let’s just focus on the fact that crypto grew exponentially in the wake of the financial crisis. That’s when the famous Bitcoin white paper came out. That’s when the idea of fighting against the bailing out of banks spurred this vision of having some way of financing, borrowing, lending, and keeping money outside of the auspices of the more centralized financial system, which had shown itself to be a) reliant on the Fed and the government and b) not particularly stable.

Even though we’ve got, obviously, centuries of the establishment of different currencies, including the dollar (with the dollar becoming stronger and the reserve currency in the last century), the idea that something else can compete on a currency basis, or at least be another avenue if it were to be regulated and safer, was a direct result of what happened and how it was handled by central banks in the wake of the financial crisis. It’s also why that idea grew exponentially again in the wake of the pandemic, when the same things happened. Instead of saving the economy by saving Wall Street, the idea was that the Fed was saving the economy by -- we don’t even know what -- but ultimately money gushed into the markets again. That was one thing. But the decentralized aspect of it is also an interesting area of transformation and will be for some time -- the idea of using technology to do financial transactions of all kinds away from the auspices of your Chase account or your Bank of America account.

In terms of the metaverse, I’m not talking about gaming and that type of thing, but of using technology to share, more directly, things like medical treatments or surgery secrets or what have you, across countries without everybody physically being in the same place, or engineering techniques that can allow easier fabrication of potential problems in new bridges that could be ironed out before the bridge is actually built or engineered so that you have more efficiency in the use of material. This is about pushing technology into something helpful for the building of real things and the creation of better and healthier lives for people through the auspices of virtual reality techniques.

LP: Some of that sounds hopeful, yet you use the word “permanent” in the title of your book. It sounds like we have no way of correcting this distortion between the financial markets and the real economy.

NP: I chose the term “permanent” specifically. It’s a big word. Given what happened in the wake of the pandemic and the fact that central banks could create so much money so quickly facing a crisis showed me that this can happen again and again. Not necessarily that big of an amount for that big of a crisis, but that we would have this unhinged, uncapped, untransparent process that can occur repeatedly.

Since I wrote the book, we have this high inflationary environment. The Fed is raising rates quickly, as are other central banks around the world. I think that’s creating a looming debt crisis for consumers, in particular, in the process, with the cost of money becoming so high for them so quickly. We’re starting to see delinquencies, defaults, and other problems arising as a result.

But be that as it may, in the U.K, the Bank of England, when faced with a pension crisis recently, was “forced” -- as described by articles associated with it -- but actually chose to create 60 billion pounds worth of money in order to buy gilts [the equivalent of U.S. Treasury securities] and to give a bid to the gilt market to raise the level of gilts. They chose to do that because gilts were declining precipitously and over-leveraged by a contingent of the pension fund community. The idea was that, as with any pension fund, you invest and the return that you get on that investment is part of what the pensioners needing to draw on their pensions get. But when there’s too much borrowing or there’s too much of a depreciation in the assets, then there’s a problem. You can’t pay what its owed to the pensioners.

That’s what happened in the U.K. As a result, the central bank is still raising rates – tightening policy -- and on the other hand, they’re creating more money -- loosening policy -- in order to buy those gilts. I think we’re going to continue to see these types of situations. That’s what I mean by permanent. There’s always going to be this possibility of money coming into some part of the market when it needs it because (particularly in developed countries) central banks can do that.

How do we get out of it? We can’t. First of all, it’s important to note that this is happening and not to accept false narratives, like the story that a host of $600 stimulus checks paid out two years ago is causing inflation today. That’s just really annoying and stupid. We need to understand that the Fed didn’t inflate money in order to pay people those $600 checks or help fund the PPP loans and whatever else was going on at the time. That’s not what’s causing our inflation. There’s a bigger picture. One of the things I think we can do is literally ask ourselves the question, do you think that this monetary body in Washington has the ability to do anything that can actually make my electricity bills go down by virtue of raising the cost of my credit card debt or my personal loans or my mortgage? The answer should be no. We need to understand and think about these relationships so that at least we don’t accept what’s false and we don’t become blind, to what’s going on. The public needs to know this. Congress should know this. That’s what I hope my book can do: educate people.

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