Econolosophy — Monetary Policy is Not a Class-Neutral Tool

 One of the biggest cover-ups in economics is the representation of political tools as technocratic, class-neutral mechanisms. Perhaps nowhere is this more true than in the realm of monetary policy. The debates on what the Fed should do to influence the trajectory of interest rates are usually riddled with sophisticated words like “macroprudential” and “optimal control.” We are led to believe that models and scientific thinking drive the actions of central bankers.

The reality is more nuanced. Modern central banks heavily control the relative shares of income going to labor and capital. When the Fed is willing to let aggregate demand accelerate to push up wages for the working class, labor benefits; when the Fed clamps down on wage pressure for fear of igniting inflation, capital benefits.

The modern business cycle, for better or worse, systematically benefits capital before it benefits labor....

The reason I am emphasizing all of this is because history is rhyming, as it usually does. Coming out of the most recent recession, capital benefited enormously from the cost cutting that was done during the downturn. Business productivity soared, and an unprecedented amount of slack in the labor market kept wage growth muted. The result is that the share of income going to capital spiked, reaching historical levels.

However, the moment of truth is coming for the Fed. Slack is diminishing, and the wages of workers are beginning to rise. The capitalists are screaming nonsense about wage-price spirals and financial instability in order to get the Fed to tighten, in hopes of locking in the record share of income going to capital. If the Fed ignores the capitalists, it can put upward pressure on labor’s share of income by keeping monetary policy extraordinarily loose. Inflation is a nonissue, and it won’t become a threat until after rising unit labor costs cut substantially into profit margins.

Monetary policy needs to be understood in this context....

Monetary Policy is Not a Class-Neutral Tool
Econolosoph

How about instead, "Monetary policy is a capitalist tool.

We have avoided these class debates in the domain of monetary policy for far too long. If the central bank as an institution were more democratic and transparent, the battle between capital and labor would be publically acknowledged and dealt with.