Though the lockdown in 2020 threw many workers out of work, the big fiscal stimulus, fueled by government debt and an unprecedentedly large monetary expansion, offered stimulus checks and elevated unemployment benefits to millions of Americans. In 2020, US federal spending grew by 50 percent, making the deficit share of GDP the largest since 1945, and the M2 in the economy grew by 26 percent—the largest annual increase since 1943. Such fiscal and monetary expansion prevented a collapse in consumption. After an initial fall in Spring 2020, US household consumption bounced back and grew by more than 40 percent in the third quarter.
The Amazon syndrome
The boost in consumption made online retail merchants among the biggest beneficiaries of the fiscal and monetary stimulus. Amazon, one of the largest and most profitable companies in the world, saw its profits surge during the pandemic. Revenues and net profits growth for Amazon were 38 and 84 percent respectively for 2020. Simultaneously, Amazon workers got an average pay raise of only 6 percent, including bonuses and extra hazard pay. This disparity indexes exactly how the benefits of the monetary and fiscal expansion are distributed between capital and labor. Given the defeats of unionization drives in Amazon warehouses, we can expect this disparity to persist or get worse.
Amazon’s business is not just a question of capital and labor, but also of international political economy. Measured in gross merchandise value, 40 percent of sales in Amazon are directly from Chinese vendors. During the pandemic of 2020, 75 percent of new sellers on Amazon were from China. Amazon has aggressively recruited Chinese vendors to sell items to its customers directly, despite the concern that this practice elevated the percentage of mislabeled, faked, and unsafe products sold on the platform.
It is not an accident that amidst the pandemic, the US trade deficit in general and the deficit with China reached a historic high, trade war notwithstanding. Amazon is not the only retailer that expanded its sourcing from China during the pandemic. Chinese electrical appliance exporters saw a surge in orders from the US and elsewhere that they could barely manage. As such, a large part of the stimulus-fueled consumption spending in 2020 went to purchase goods from China. This is only an acceleration of a trend that began long before the pandemic. Before Amazon, Walmart exemplified the same dynamic, in which the liquidity provided by the US state supports consumption spending, which largely benefits US corporations and China’s export machine, rather than US workers.
In light of these dynamics, the recent discussion about whether the great fiscal and monetary expansion will bring back high inflation is misplaced. The dominance of monetarism as an economic doctrine has long gone, as we are told. But curiously, many public intellectuals and policymakers are still stuck in the monetarist assumption that fiscal spending and money supply growth will bring out-of-control inflation. We are still haunted by Milton Friedman’s assertion that “[i]nflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.” Echoes of Friedman can be heard when Larry Summers criticizes Biden’s \$1.9 trillion stimulus plan for being “the least responsible economic policy in the last forty years,” arguing that it would only ignite inflation “of a kind we have not seen in a generation.” But there is no reason to believe that Summers’ warnings will age better than the 2004 Economist cover with a platform shoe and a “Back to the 1970s” headline or Niall Ferguson’s 2011 prediction of a double-digit “Great Inflation of the 2010s.”
Facing the mismatch between economic reality and monetarist orthodoxy, we should not blame the reality, but question orthodoxy. In 2017, then-US Fed Chair Janet Yellen admitted that she and her colleagues “may have misjudged….the fundamental forces driving inflation” after spending two days in the Fed policy meeting to debate the “mystery” of low inflation amidst abundant money supply. When central bankers from around the world met at the IMF Annual Meeting in DC in 2017, the paradox of stubbornly low inflation amidst large government deficit and cheap money across the developed world were enthusiastically discussed. The World Economic Outlook that the Fund published on the eve of the Meeting pointed out that “persistently low inflation in advanced economies... deepens the downside risks to advanced economies’ medium-term growth prospects,” presenting a major risk to the global economy. Echoing Yellen, IMF research director Maurice Obstfeld added at the report's release press conference that such low inflation is “puzzling.”
The labor theory of inflation
We do not need to look far for a theory that can better explain the “puzzling” absence of inflation in recent years. In the 1960s and 1970s, before the rise of monetarist orthodoxy, many social scientists agreed on a labor theory of inflation, according to which the most important cause of inflation was the rising wage demands of powerful unions. This view was shared by Marxists like Robert Rowthorn and Weberians like John Goldthorpe, as well as centrists and conservatives. As laid out in a 1970 OECD report, high inflation in rich countries was understood to be a problem of the “wage-price spiral.” The concentrated power of workers organized into unions meant they could demand higher wages, which businesses would then attempt to recover by passing on higher costs to consumers. Ever rising consumer prices would lead workers to demand ever higher wages, and so on, in an unhappy cycle of rising prices. To remedy inflationary pressure, an earlier study by the US Chamber of Commerce suggested that “union monopoly… [and] compulsory unionism”—in other words, the basic framework of post-New Deal labor relations—“must be eliminated.”
In 1970, Barry Goldwater, the father of the American New Right, declared that “higher and higher union wage hikes” was the “root cause of the present price inflation.” He even suggested Friedman’s monetarist theory of inflation was a liberal apology for organized labor, downplaying “the tremendous role played by union demands in increasing the cost of production and causing the upward spiral of prices.”
What became of this labor theory of inflation, once so prevalent on both the left and the right? In large part, it has been overshadowed by Friedman’s monetarist explanation. In October 1979, Fed Chair Paul Volcker announced his conversion to monetarism. In practice, this meant the Fed would fight inflation by limiting the growth of the money supply (rather than targeting interest rates). The Fed’s evident success in stemming inflation by the early 1980s appeared to confirm the power of the monetarist approach. But historical research has revealed that the Fed’s embrace of monetarism was as much political as analytical.
In a 2016 paper, Daniel Thompson and I performed a test of the labor and monetarist explanations of inflation. Using data from twenty-three OECD countries from 1960–2009, we found that the power of labor—measured by labor share of GDP, unemployment rate, or union density—exerted a much stronger influence on the inflation rate than did the rate of growth of the money supply. Even a casual look at the curves of changing inflation rates of most OECD countries over the period reveals that they coincide much better with changes in labor power than with changes in the money supply. This would not have surprised Volcker himself. Even as Fed officials addressed the public in technical, monetarist terms, they were privately obsessed with the role of industrial relations and collective bargaining in fueling inflation. Monetary tightening was a means to induce recession and force the unions to restrain their wage demands.
Monetary contraction was only one of the tools the Reagan administration leveraged to beat back organized labor. In 1981, Reagan used the brute force of the state to crack down on unions by firing 11,000 striking air traffic controllers, jailing their leaders, and decertifying their union. Tellingly, Volcker called defeating PATCO, the air traffic controllers union, “the most important single action of the administration in helping the anti-inflation fight.” The success of this assault on labor can be read in the statistics. Union density fell from a peak of 33 percent in the 1950s to barely 10 percent now. The decline of unions and increasing competition from low-wage countries did bring down wage growth and, with it, inflation. Under the great wage repression, workers’ hourly compensation grew by only 11.6 percent from 1979–2018, while productivity grew by 69.6 percent over the same period. This was a sharp contrast to 1948–79, an era of stronger unions, when compensation grew by 93.2 percent, nearly tracking productivity growth of 108.1 percent.
Why has the monetarist theory endured, despite the evidence against it? Friedman’s theory sanitizes and depoliticizes the act of dismantling union power, casting it as a technocratic adjustment by central bankers committed to price stabilization. Long after it fell out of fashion in academic economics, monetarist orthodoxy remains attractive as a rhetorical device on the right today.
Cheap money flows to Wall Street and China
Recovering the labor explanation of inflation allows us to resolve the so-called mystery of chronic low inflation despite great fiscal and monetary expansion from 2001–2019. It also provides an insight into the fateful interdependence of American and Chinese economic processes. With workers’ bargaining power curbed, monetary expansion could no longer contribute to any wage-price spiral, even with low unemployment. While cheap money does not bring wage growth today, it does flow into financial markets, where it inflates asset bubbles and boosts debt-fueled consumption. The assault on US labor was simultaneous with the global expansion of productive capacity in low-wage countries, notably China. At the same time, consumption in the US has been maintained through the expansion of personal debt and cheap imports. When China joined the World Trade Organization in 2001, it became in large measure the workshop of the world. With an army of disciplined and low-cost, rural-originated labor not protected by independent unions, Chinese factories pumped out a whole range of consumer goods at a fraction of the US cost. For American workers, the price of this import bonanza was the loss of 2–3.7 million manufacturing jobs between 2001 and 2018.
The interlock between Chinese production and American debt-fueled consumption can also be seen as a set of financial flows. Much of the cheap money created by the Fed flowed into China's foreign exchange reserves, denominated mostly in USD. These ballooning foreign exchange reserves allow the People’s Bank of China, China’s central bank, to create commensurate new liquidity in RMB, China’s currency, to boost domestic economic growth. As in the US, this new liquidity aggravated preexisting sectoral imbalances and inequality between capital and labor. Most of the liquidity ends up fueling investment by local governments and state enterprises, which have privileged and unlimited access to cheap loans from state banks. Workers and peasants benefit the least. As a result, the growth of per capita disposable household income and per capita household consumption expenditure has fallen far short of the growth of GDP per capita throughout the China boom. As of 2018, China’s GDP per capita is 64,644 RMB, more than two times of disposable household income per capita of 28,228 RMB. Corporate profit and government income account for the gap between the two figures.
One consequence of such imbalance and inequality, aggravated by the surge in global USD supply, is the relatively slow growth of household consumption and the buildup of industrial overcapacity. China responds to this challenge by exporting its excess capacity overseas, a policy accelerated by the Belt and Road Initiative begun in 2013. Beijing has been channeling a large part of its foreign exchange reserves toward the developing world in the form of development loans, largely denominated in USD. The terms of the loans are obscure, but research finds that nearly 90 percent of contractors in Belt and Road projects are Chinese. With pushback against Chinese lending in many recipient countries and the concern about the viability of many of the Belt and Road projects, China’s capital export saw a retreat after 2016. But as indebtedness and overcapacity resurged after Beijing doubled down in its monetary stimulus to rescue the economy from the pandemic fallout, it is well plausible that China’s capital exports will regain momentum in the years to come.
For US corporations active in emerging markets, China’s capital exports represent intense competitive pressures. In the 1990s and 2000s, US transnational corporations, motivated by their real or expected interests in expansion in China, served as Beijing’s proxy lobbyists in Washington. They worked hard to ensure a friendly US-China policy and obstructed any hostile policies. Today, many US corporations still benefit from their dealings with China, but an increasing number now see their Chinese counterparts as rivals in the world market. The intensifying competition from state-supported Chinese enterprises in more recent years dampens US corporate enthusiasm in neutralizing any Washington action that irks Beijing.
Inter-imperial rivalry and its remedy
Since the 1980s, easy money, combined with the epochal disempowerment of labor, has brought financial bubbles and domestic inequality. It has also aggravated geopolitical tensions. Development loans and capital exports from China have allowed Beijing to expand its sphere of influence in the developing world at the expense of Washington. This largesse has swung erstwhile US allies to Beijing’s position on contentious geopolitical issues and offered a lifeline to internationally sanctioned regimes like Iran and Russia. As such, a bloc of authoritarian rivals to the US has become ever stronger on the world stage. The resulting intensification of the great powers rivalry is comparable to the inter-imperial rivalry at the turn of the twentieth century unleashed by the rise of the German Empire, a relatively late-developing capitalist power whose loans and investments to underdeveloped regions of the world brought it into competition with established powers like Britain and France. As in contemporary China, Wilhelmine Germany was marked by deep domestic distributional conflict, as evidenced by the rapid growth of the German Social Democratic Party (SPD). And in 1914, as today, rising global tensions co-existed with a seductive belief that economic interdependence had made major war impossible.
Well before the pandemic brought on a protracted global recession, central banks worldwide worried that low inflation was stifling growth and dampening investment. They were rightfully looking for ways to reflate the economy in the aftermath of the global financial crisis and the years of anemic recovery that followed. But even as central bankers began to rethink the virtues of inflation, they did not grasp the root of the problem: the great disempowerment of labor since the 1980s. On the eve of the pandemic, the wage and salary share of US GDP had dropped to a historic low (just over 40 percent in 2019). Democrats in Washington are now floating plans to strengthen US labor by reshoring key US manufacturing, re-building US infrastructure, offering support to unionization, and pursuing a worker-centered trade policy that puts labor and wage standards into trade agreements. If successful, a healthy growth of wage and price could lead to a more sustainable economic expansion without requiring incessant monetary growth. The end of cheap money will not only tame financial bubbles and reduce inequality, but also help reduce international tension worsened by the excessive global supply of the USD.
The Democrats’ initiatives to re-empower labor are commendable. But there is no indication that the defeats of the 1980s will be reversed easily. The defeat of organized labor in the Amazon warehouse, along with the defeat of efforts to raise the federal minimum wage, reminds us that labor's position has been further weakened by the heightened precarity of lockdowns and massive layoffs. Despite recent scares about the return of inflation, any price increases so far seem to be temporary and related to specific bottlenecks, rather than a general shift in class power. Even if such a shift were in the cards, the political consequences of a new surge of worker power remain deeply uncertain. As a recent study shows, to re-empower labor and push the inflation rate up to a healthy level, the Biden administration would need to let money wage grow faster than productivity and price growth for a sustained period. This would certainly provoke interest rate hike and financial asset deflation, which would trigger strong political resistance from Wall Street and affluent households.
In China, domestic redistribution would go a long way to reducing global tensions. A redistributive reform corresponding to an American “new New Deal” could increase wages and household consumption growth relative to capital accumulation. This would tame China’s urge to export capital and arrest the impending collision between late imperialism and established empires. But the power monopoly of the party-state capitalist elite makes redistributive reform in China no easier to achieve than it is in the US. Until the difficult rebalancing and reforms on both sides of the Pacific gain traction, the world will continue to be on the dangerous path of inter-imperial antagonism resembling the international politics of a century ago. Renewing the world economy without a clash between great powers is going to be an uphill battle.