July 20, 2022
Published on Forbes.com
With U.S. inflation at 9.1%, economic pundits are bracing for the U.S. Federal Reserve to pull a Paul Volcker. The Fed Chairman from 1979 to 1987, Volcker tamed inflation by driving short-term interest rates to 20%. Predictably, this triggered a recession, bringing U.S. unemployment to 11%.
We are not in a recession today or going into one unless the Fed chooses it. Volckerizing the global economy would address inflation woes in the short term while ignoring the deeper problem: a massive socioeconomic imbalance that feeds the growing inequality, oil cartels and frivolous innovations rotting the core of Western society.
Raising interest rates will not restore balance. Rather, we need to reshore the industrial jobs that are critical to economic security and a healthy middle class. We must also reinvent industries to produce clean, quality products that solve our carbon emissions crisis while fostering new jobs.
Generic rate increases were an answer (albeit painful one) to 1970s and 1980s inflation. For several reasons, they are the wrong tool in this moment.
First, wealthy countries have a labor shortage rather than a surplus. The U.S. Bureau of Labor Statistics reports two job openings for every American in need of work. The shortage is causing a long overdue increase in wages. CEOs at the top 300 U.S. companies earn 671 times more than the average worker. Meanwhile, a once-thriving middle class drives Uber on weekends to survive, as journalist Alissa Quart illustrates in her book Squeezed. An engineered recession would set back much-needed wage corrections.
Second, we face a climate crisis yet have seemingly tried our best to make oil companies unassailable. The 28 largest oil and gas companies made an astounding $100 billion of profit in the first quarter of 2022, abetted by war in Ukraine. Governments nervous about energy security (and elections) have granted these companies rights to develop wells that won’t come online until 2028, long after they’re needed.
Meanwhile, says the International Monetary Fund (IMF), fossil fuel subsidies reached $5.9 trillion in 2020—6.8% of global GDP—and are tracking to reach 7.4% of global GDP by 2025. Oil executives must be laughing their heads off at the joke policymakers have made of this energy transition. Taxpayer money is padding their margins—and funding wildfires, heatwaves, flooding and crop failure.
Third, we have a surplus of undeployed capital looking for opportunities. But our financial industry likes piping it into so-called Environmental, Social and Governance (ESG) funds, many of which do nothing to battle climate change. As the WSJ’s Andy Kessler recently noted, ESG is often a misnomer. He cites Blackrock’s ESG Aware MSCI USA ETF, which has almost the same holdings as its S&P 500 ETF. Customers pay 15 basis points for the ESG label but only three if they can afford not to virtue signal. Companies trying to clean up emissions-heavy industries critical to modern life—think energy, aluminum, steel, cement, food production and transportation—see almost nothing of that ESG capital. Mostly, it goes to big tech.
1980s-style generic rate hikes, applied across the board, would almost certainly cause a multi-year recession. This self-fulfilling prophecy would worsen our socioeconomic imbalances. Unemployment would rise, trapping workers back in underpaid, dead-end jobs. Oil and gas companies would once again outperform the market and therefore feel even less pressure to disrupt their core business with clean energy investments. The era of frivolous NFT startups, billion-dollar dog walking apps and taxis subsidized by venture capital (i.e., Uber) had to come to an end, but tighter capital would also paralyze the energy transition.
Different from their get-rich-quick counterparts, most industrial innovation startups have not been overvalued and have significant long-term capital needs to scale and effectively battle climate change. Now should be the best time to invest in these companies, but rate increases would make capital much more expensive for cleantech. Meanwhile, the war-windfall profits in oil and gas would divert investment back to fossil fuels.
Rather than hurtle towards 2° C of warming with rampant inequality, government-subsidized oil and cleantech dying on the vine, I think we should attempt to solve our real problem. It is time for a socioeconomic rebalancing that raises the probability of a good future for many. Here’s the vision:
Clean innovation and reshoring will revitalize the middle-class. Domestic value chains fueled by solar, wind, hydrogen and, hopefully soon, fusion energy will deprive Russia of blood money and secure Western economies against tensions with China.
This rebalancing should begin ASAP with governments offering tax credits for staple foods, housing and electricity to vulnerable families. It should also include massive rebates for electric vehicles and charging technology so that low-income families aren’t punished by carbon regulations. High earners who’ve disproportionally benefited from decades of low interest rates and low inflation should, temporarily, contribute to rebalancing through higher income, dividend and consumption taxes.
To get there, tax individual and corporate carbon usage based on each country’s committed greenhouse gas reductions under the Paris Agreement. Additional taxes should hold greenwashing ESG funds responsible when they plow capital into big tech or even fossil fuel companies, as many still do. Conversely, funds that invest in true clean innovation—and are vetted by professional auditors—should see rebates.
Inflation may persist for a while, but that doesn’t mean we should toss away promising innovations with the bathwater. A just rebalancing would allow capital to continue flowing into essential innovation without depriving families of their living standards, economies of healthy consumption and climate commitments of hope.
We are not in a recession, and let’s not talk each other into one. We are dealing with inflation and supply chain issues compounded by years of socioeconomic imbalance. To address the situation, we need policies reflective of 2022, not 1980.
My advice: don’t Volckerize the economy. Let’s support courageous politicians and business leaders to implement targeted policies that build the society our children and grandchildren deserve. Otherwise, the climate will stall as a political issue, and the planet will cook. Yet, with socioeconomic rebalancing, there is hope for our economy and the climate that sustains it.