In the latest NATION, Jeff Faux (Economic Policy Institute) argues that
the recent tightening of federal reserve policies means that the Clinton eco-
nomic strategy is defunct. His basic argument is that Clinton traded in his
campaign promises for expanded public investment (and other short-term stimu-
lus) for the lower interest rates that budget tightening and accommodative
federal reserve policies would bring, with the latter expected to keep the
'recovery' moving. But, despite all attempts to kiss up to the fed chair, Mr.
Greenspan has not cooperated since he really represents the interests of bond-
holders who are inflation and wage-push hypochondriacs.
The wider political-economic implications of all this would seem to be
that there has been a swing within capital toward increased power of financial
capital relative to industrial capital (to the extent that the interests of the
latter might favor a less tight policy), or is it perhaps true that industrial
capital is less interested in domestic credit (and overall effective demand)
conditions, so that its own interests as per monetary policy now appear as
"more financial" than used to be the case?
Several questions arise from the above (for brevity I won't try to detail
the connections, unless those interested in fed policies want to discuss
this more): (1) with tight monetary and fiscal policy, are we headed for an
earlier end to the weak 'recovery,' perhaps followed by a more-than-otherwise
serious recession? (I can't remember the last time the economy was subjected
to a serious federal-fiscal contraction like the one--if I'm not mistaken--
which would result if current budgetary plans are actually carried out during
a period of long-run slack..... Was it the fiscal tightening and recollapse
back in 1937 when this last occurred?); (2) What if Greenspan (ala Scrooge
on Christmas Morning) suddenly had a change of heart and switched to a much
more expansionary policy? If there has really been a shift in the balance of
capitalist power and interests toward maintaining and increasing the value of
financial (fictitious capital) assets, what would be the response of 'the
market'? Would a robustly expansionary policy initiate capital flight on a
large scale (including a flight from dollar-denominated assets globally),
and what would be the implications of this? (3) In connection with (2),
would a more expansionary monetary and/or fiscal policy require some form of
capital controls in order to be successfully carried out? And what would
"success" mean in this context? In other words, can we presume that a more
expansionary policy would lead to a more rapid 'recovery' of productive invest-
ment, output and employment, given the above-noted possible shift in capitalist
power and interests (including the increasingly globalized character of U.S.
industrial capital)? (4) How would capital controls deal with the overhang of
dollar-denominated assets outside the U.S.A., or is this not a very serious
problem after all (e.g., because global finance capital has an interest in
preventing a world-wide collapse of the prices of these assets)? (5) How
does all this affect our conceptions of the extent of the Federal Reserve's
power to influence economic developments, and of the possibilities and pre-
requisites for a more 'progressive' (define it as you like) monetary and
fiscal policy?
These are a few questions that popped into my head when reading Faux's
article. I am interested in a discussion surrounding these and related
questions, among other reasons, because I am finding it increasingly dif-
ficult to (in my principles classes) come up with a coherent explanation of
how the usual textbook story about fed policies (money multiplier, credit
expansion, interest rates, investment and aggregate demand) bears any relation
to what is happening in the real world when the Fed is tightening at a time
when the economy seems to be nowhere near potential output.
Paul Burkett
ecburke@indst
