The Invisible Handcuffs of Capitalism: How Market Tyranny Stifles the Economy by Stunting Workers (36 page)

The registers were not foolproof, however, since employees still had the option of not ringing up the sale and then pocketing the money for themselves. To make the clerk more likely to record the sale, employers turned to 99-cent pricing, which became common
soon after the introduction of the cash register. With 99-cent pricing, customers would be less likely to pay the exact price. The clerk, in turn, would need to open the cash register to get a coin, which could only be done by ringing up the sale.
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Stores with multiple clerks could purchase machines with cabinets with separate cash drawers and a distinctive bell tone for each clerk.

In contrast to Munger’s Congregational Church, the direction of the collection plate is reversed in the case of the penny. Business offers the customer a penny to monitor the potential sins of the clerk. Similarly, customers in some fast-food restaurants can receive free meals if the clerk fails to give them a receipt, which serves the same supervisory function as the penny.
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Since the clerks themselves belong to the ranks of guard labor, guarding commodities rather than other workers, the customers become the guards of the guards.

With more modern technology, such as surveillance and radio frequency devices, requiring clerks to give a penny change is no longer as necessary as it once was. As a result, some economists and politicians have recommended eliminating the penny so that the government could save the expense of producing the coins. In addition, clerks would no longer have to spend as much time counting up change.

Business would not be likely to pass these savings on to the public. Instead, without the penny, merchants will probably round prices up to the nearest nickel. According to one estimate, this rounding would cost the public $600 million per year, suggesting the scale of even unnoticed guard labor.
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What the Fed Hath Wrought

Let us return to the sado-monetarist policies of the Federal Reserve system discussed in
chapter 2
. Remember that the policies initiated by Paul Volcker in the 1980s and continued by Alan Greenspan aimed to traumatize working people, making them too fearful to demand better wages and conditions. To flesh out this point requires discussing the nature of monetary policy.

When the economy seems healthy, monetary policy makers often get a considerable credit. Lavish praise, such as Bob Woodward bestowed on Alan Greenspan, is not unprecedented. For example, in 1988, Milton Friedman and his co-author, Anna Schwartz, famously blamed the Great Depression on the Federal Reserve, yet the public credited the Fed for the prosperous years of the 1920s. As Friedman and Schwartz observed:

As the decade wore on, the [Federal Reserve] System took—and perhaps even more was given—credit for the generally stable conditions that prevailed, and high hopes were placed in the potency of monetary policy as then administered.
⁶⁵

The leaders at the Fed recognized the danger of the excessive speculation during the late 1920s. They thought that they could target speculation without damaging the economy as a whole. They only learned how wrong they were when the Great Depression hit.

Fifteen years after Friedman’s book appeared, he wrote on the editorial page of the
Wall Street Journal
:

The Fed has consistently … claimed credit for good results and blamed forces beyond its control … for any bad outcomes. And this avoidance of accountability has paid spectacular dividends. No major institution in the U.S. has so poor a record of performance over so long a period as the Federal Reserve, yet so high a public recognition.
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Fifteen years later, Friedman repeated much of this same statement in another opinion piece in the same paper.
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The severity of the Great Depression may have been surprising, but the downturn should have been expected. The market economy often fails to accommodate the desires of policymakers; instead, it tends to move by unpredictable fits and starts. Interludes of uninterrupted growth seem to promise a new normality, but they are never permanent.

When the economy stumbles, not just workers, but the economy as a whole suffers. Even the business community has to pay a steep price.
In a severe downturn such as the Great Depression, the glorification of the wonders of the marketplace itself does not seem so credible. A large part of the business community, normally hostile toward government intervention, welcomed Roosevelt’s efforts to use the powers of the state to generate an economic recovery.

During this period, economists became disoriented. The economy was not behaving the way mainstream economic theory had assumed. John Maynard Keynes temporarily refocused economic theory by developing what to conventional economists seemed a revolutionary theory. He showed why market forces were unable to produce enough investment to keep the economy healthy.
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In the United States, economists wrongly interpreted Keynes as simply advocating more government spending. The New Deal was seen as validation of this narrow interpretation of Keynes’s theory.

Although Keynes’s work had captured the imagination of the bulk of economists by the end of the Second World War, within a few decades the economy slowed down. In that environment, Keynes’s ideas fell out of favor. Robert Lucas, a conservative University of Chicago economist and future Nobel Laureate, smugly declared Keynes’s theory to be dead.
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Ironically, once the economy began to unravel in 2007, Lucas admitted to a reporter, “I guess everyone is a Keynesian in a foxhole.”
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The most popular school of economics in the period following Lucas’s declaration was called monetarism—a theory that held that a modest but steady growth of the money supply was the most effective way to keep the economy running at maximum efficiency. The chief attraction of monetary policy was that it minimized the role of government intervention in the economy while appearing technocratic, even scientific. For the monetarists, all that was needed for a strong economy was to give the Federal Reserve the right to manipulate the economy in the way that the monetarists advised and keep the government out of the way.

A good number of economists followed Milton Friedman in advocating a policy that puts the economy on a monetary autopilot. Accordingly, monetary rules were to be set in stone, denying monetary authorities any discretion.

The Fed did briefly follow a monetarist formula when Paul Volcker was driving the economy into a depression. After the recession threatened to spin out of control, Volcker took his foot off the breaks. Since then, the Fed has left Friedman’s abstract monetarism on the shelf.

Neither Friedman’s nor Volker’s nor Greenspan’s policies are capable of creating a stable economy. When coupled with the goal of controlling labor, they are certain to do great damage.

The Hopelessness of Monetary Engineering

Friedman and Schwartz explained that the mistakes of the Fed on the eve of the Depression were due to the death of the agency’s chairman, Benjamin Strong, which deprived the Fed of a strong leader who might have met the challenges of the late 1920s. Obviously, the problem went far deeper than an individual personality.

The Fed still makes serious mistakes as Friedman had noted time and again. Yet many of the governors and bank presidents of the Fed are very skilled people. In addition, the Fed employs an enormous number of economists—an estimated 495 full-time staff economists as of 2002, besides contracting with a couple hundred influential outside economists.
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No single person is capable of making the Fed guide the economy to perpetual prosperity.

The task of the Federal Reserve is complicated because its regulation of the money supply takes a while to work its way through the economy, especially when the Fed is trying to stimulate the economy. Just think about the way changing the mix of hot and cold water in a shower only affects the temperature after a delay. Until then, the preexisting mix of hot and cold water is still working its way through the pipes.

In the case of the economy, the typical delay for stimulation is about six months. In part because of the long lags between cause and effect, the Federal Reserve often causes the economy to speed up when, in retrospect, slowing down would be appropriate and vice versa.

Although the Federal Reserve may not be able to calculate the appropriate time to do so, it is more than capable of putting the brakes on economic activity. When the Federal Reserve tightens monetary conditions, or even if business believes that it is on the verge of tightening, management may fear that many other firms will be laying off workers in the near future. Worries about weak economic conditions make business even less likely to invest.

One danger is that either markets or the Fed itself can overreact, turning the desired slowdown into a major recession, or possiby a depression. Friedman and Schwartz are not alone in blaming the Fed for causing the Great Depression when it tried to rein in speculative activity.

In contrast to the threat of overkill in slowing the economy down, the Fed’s powers to stimulate economic activity are limited. Interest rates can be a factor in determining investment, but confidence about the future is far more important.

Business realizes the difficulty that the Fed faces in trying to revive the economy through monetary policy. Without confidence about the likelihood of the Fed engineering a recovery, business will hesitate to invest. New investments in plant and equipment generally bring in profits only after a relatively long delay, increasing the probability of a miscalculation. After coming out of a depression or recession, business is likely to be gun-shy about investment.

Economists use the metaphor of a string to suggest the asymmetrical nature of the power of the Fed. Yanking on a string (tightening the money supply) has an obvious effect; pushing on a string (making money more available) may not. Often, in order to create enough confidence to start a recovery, the Federal Reserve pushes so hard on its string that it sets off a period of wild speculation. Confidence mutates into overconfidence. Sometimes, however, the crisis becomes so severe that monetary policy is important.

In any case, all too often the Federal Reserve tends to create the exact phenomenon that it is supposed to eliminate: economic instability. Efforts to control labor while trying to create a steady rate of economic growth make serious mistakes even more likely. The processes set in motion then have had far-reaching consequences.

The Inadvertent Traumatization of Business

The traumatization of labor under Greenspan made the crisis that occurred late in the administration of George W. Bush more severe. With wages held back for decades, many households tried to maintain a growing standard of living by relying on unsustainable debt burdens. This debt became the plaything of finance, which was registering enormous profits. However, these profits could not find profitable outlets, so business turned to speculation rather than to investment in productive capital. This strategy meant that the future economy would be equipped with a less effective capital stock.

The traumatization of labor also contributed to Alan Greenspan’s policy response to the dot-com and housing bubbles. Confident that he did not have to worry about wage inflation, Greenspan sat back and watched the bubbles inflate. When this bubble burst in 2000, Greenspan defended his performance in managing the economy by contending that, even with his army of economists, recognizing the dangers of financial speculation is impossible to identify in advance.
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About that time, the chairman was fueling a real estate bubble that was about to crash only a few years later. Soon thereafter, Greenspan launched a similar defense.
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We have made the case that the Fed’s effort to hold wages in check lowered the long-term rate of economic growth. And once this was coupled with the difficulties any monetary authority would have with the time lag for policies to become effective and business uncertainty about future costs and technological conditions, the risks of using monetary policy to control labor increase substantially. Engineering a healthy economy is tricky enough, but when efforts to fight against labor are thrown into the mix, the difficulties are compounded.

We cannot precisely calculate the toll of sado-monetarism. Over and above the direct economic costs of lost production, traumatization campaigns erode the quality of labor. Workers lose the opportunity to develop on-the-job skills to the limited extent that such opportunities are possible in a Procrustean workplace. Prolonged unemployment
causes so much damage to some workers’ self-esteem that they effectively become unemployable.

While precision is impossible, we can conclude with confidence that the cost of recent monetary policy has been substantial. With the collapse of the subprime mortgage bubble, trillions of dollars quickly evaporated in the United States alone. The long-term costs in terms of lost economic growth are likely to be even greater. Ignoring all the personal hardships associated with the downturn, suppose that efforts to control labor caused a tiny share of the crisis. In that case, one might question whether the bloodlust of the Federal Reserve actually served the real interests of its business clients.

The Irony of Asset Prices

In contrast to the harsh medicine used to “cure” increasing wages, the Fed treats financial assets with kid gloves. Several reasons might explain why the Fed has been loath to limit speculative excesses. First, the obsession with transactions distorts economic policy. Although the Fed’s mandate is to control inflation, the government’s measurement of official inflation rates only looks at the prices of products sold on the market—not financial assets. With that mindset, during the late Greenspan era the Fed’s successful traumatization of labor made inflation seem an unlikely threat. At the time, the speculative buildup of asset prices seemed to be a sign of economic health.