“Whacking Labor” to Fight Inflation and Fix the Economy
It is refreshing to see Dean Baker using one of the words I use to describe what the FED does when they are hiking Interest Rates. Those FED actions do not create results over night. Because they can’t, read on. Powell appears to be frustrated by the lack of economic slowing.
Maybe there are other issues behind the slow reaction such as supply chains, fiscal stimulus early on, healthcare subsidies, etc. The latter two were vital otherwise we would be looking at another 2008. In 2010 they were throwing people off of unemployment even though there was a lack of jobs. In 2022, there still is a need for Labor. Here is New Deal democrat on September 15:
As I wrote last week, continued claims lag initial claims. I expected them to reverse lower, and they have, from a revised high of 1,437,000 on August 20.
I put this down to a positive effect of lower gas prices, which I also expect to positively influence consumer confidence and also Biden’s approval ratings.
The long-term outlook in next year remains negative; but I only expect this to reassert itself once the effects of lower gas prices are fully reflected in the coincident and short term data.
What I see is an angry Chair of the Federal Reserve Jerome Powell Whacking Labor for something they have no control over. Correcting the housing market? Young buyers do not want to pay 5-6% mgt interest rates. There is no amount of price reduction which will fix the resulting monthly payments either. More used and new houses are sitting on the market longer.
There is not a lot of Labor in growing wafers or fabbing chips. However, if there are no orders the plants shut down then. It takes a while to re-open them, grow the wafer, and then to fab them into semi-conductors. Automotive and the semiconductor industry blew themselves up again by not maintaining orders. 2008 Labor is paying for it again in 2022. Awwww, but the profits!!!
On to Prof. Baker . . .
“The Fed’s Interest Rate Hikes Are Going to Hit the Most Vulnerable” – Center for Economic and Policy Research (cepr.net), Dean Baker
When the Federal Reserve board hiked interest rates by another three-quarters of a point this week, the move was widely applauded by the business press. The rate hike showed the Fed’s commitment to fighting inflation.
While this is arguably true, it also showed the Fed’s willingness to make the most disadvantaged groups pay the price for slowing a burst of inflation that they did not cause. In effect, Black people, Hispanic people, people with less education, and people with criminal records are being forced to sacrifice to end a spurt of inflation caused by the pandemic and Russia’s invasion of Ukraine. AB: And Labor generally for that matter.
Just to cut through the euphemisms about an “overheated” economy and abstract pain, what we are talking about with the Fed’s rate hikes is throwing people out of work to put downward pressure on wages. The story is that with a slower rate of wage growth, there will be less cost pressure for companies, and therefore they can slow the pace of price increases, bringing inflation down to a more acceptable rate.
But, everyone is not equally susceptible to the unemployment created by the Fed’s rate hikes. The unemployment rate for Black people is typically twice the unemployment rate for white people. The unemployment rate for Hispanic people is typically one and a half times the rate for white people. For Black teenagers, it is close to six times the unemployment rate for white teens.
In a tight labor market, employers who might otherwise discriminate against these workers, are taking whoever walks through the door. They also are more likely to hire workers with less education, giving increased opportunities to workers with just a high school degree and even to workers who may have not graduated high school. In a tight labor market, employers are even willing to hire people with criminal records, giving them a chance to earn a decent living.
The idea of whacking those at the bottom might seem more acceptable if their pay increases were the main cause of the recent bout of inflation. But we know that is not true. Prices have been outpacing wage growth for the last year and a half, with inflation averaging over 8.0% since February of 2021, while the average hourly wage has risen at just a 5.1% annual rate.
The gap between prices and wages is attributable to a sharp increase in the profit share of national income. There have been shortages of a wide variety of items due to the pandemic shutdowns, the war in Ukraine, and a fire at a huge semiconductor factory in Japan.
These shortages have allowed everyone from oil companies, to online retailers, to auto manufacturers to increase their profit margins. There is a major debate among economists over the extent to which these higher margins are due to excessive monopoly power, but there is no debate that profit margins have risen.
The data is very clear. The profit share of corporate income rose from 23.9% in 2019 to 26.0% in the second quarter of this year. This is an extraordinary increase in profit shares in a relatively short period.
The most frustrating part of this story is all of these facts are well-known to the Fed chair, Jerome Powell. In the years just before the pandemic hit, Powell extolled the benefits of full employment, noting the extraordinary gains that high levels of employment meant for those at the bottom. He broke with decades of Fed policy and recommitted the Fed to taking the full employment side of its mandate seriously, rather than having an exclusive focus on inflation.
This is the reason that many progressives, including me, wanted to see Powell reappointed as Fed chair. We believe the would risk some inflation in order to sustain lower rates of unemployment.
Of course, no one thinks the Fed could just sit on the sidelines as inflation spirals higher, but that is not what is happening. Prices in many sectors are falling as supply chain problems are overcome. And, the basis for the Fed’s main fear of higher expectations of inflation leading to wages and prices spiraling upward, seems to have receded. Measures of inflation expectations have been falling for the last couple of months, not rising.
This should give the Fed the luxury of delaying further rate hikes. We know it takes a long time for monetary policy to have its full impact on the economy. The Fed should pause before it hikes further and see the extent to which its hikes to date, along with supply chain fixes, have quelled inflation.
It is awful that our only tool for controlling inflation is to throw the most disadvantaged workers out of their jobs. It is even worse if we make these people unemployed for nothing.
“The Fed’s Interest Rate Hikes Are Going to Hit the Most Vulnerable” – Center for Economic and Policy Research (cepr.net), Dean Baker
“Improvement in initial jobless claims continues” – Angry Bear (angrybearblog.com), New Deal democrat
I consider what Powell did this past month performance art, because it does address the core reasons for inflation but merely provides the gloss of doing something to stop it. Actually, if one thinks about it, his rapidly raising rates makes it more difficult for entrepreneurs to jump into the market via access to the credit to improve supply chain problems, thereby worsening inflationary pressures. His leading the Fed to increase rates sharply back during the summer when coming off the floor to demonstrate awareness of the inflationary pressures and resolve might have made some sense, buy the most recent large increase does nothing but guarantee a very hard landing for economy. When do the bankers get their haircut? It’s past time for the Congress to take up renewing usury laws which got trashed 40 years ago.
I agree. I thought 2008 was enough of a rescue at our expense. Mixing commercial and private banking was too much of a change. Making GS a bank just encouraged them. None of what the FED did will fix the supple issues itself and how it got to this point.
The obvious way to attack the problem is to undo (and more) the Trump tax cuts. Unfortunately, reasonable fiscal policy can’t get past the Republicans. Powell, who, faced with the relative impotance of monetary versus fiscal policy to address covid, pushed asset prices through the roof, is now, faced with a similar relative impotence, is pushing us into recession. Powell’s logic is: Something must be done. This is something. We must do it.
There are many answers to this issue. It is not King Arthur’s war of knight v knight. It is a slaughter of the peasants again and not as bad as 2008 when Goldman tapped AIG on the shoulder and Main Street ponied up the funds. Good answer . . .
I think there’s a faction in the fed that’s just allergic to low interest rates, and can’t stand that they have been low for so long. Those people will take any excuse to raise them as much as possible as quickly as possible.
i suspect the blame the workers are standard operating procedure; they do the same when a company goes into bankruptcy. those at the top of the company get a pass (and not only get to keep their jobs, but they also get a bonus to stay), everyone else is going to be hit, and the former had a lot more to do with why the company is in bankruptcy than the later. with the pandemic, that caused a massive supply crisis (that continues), is the cause of the inflation today. so how exactly will higher interest rates will resolve the pandemic, and how will it fix the supply chain crisis. since the reason the pandemic caused the supply crisis was that demand crashed, now demand is about where it was before the pandemic, and the supply chain, made it so that so goods were in limited supply (which is what the supply chain caused), and high inflation. none of these things can the Fed do anything about. fixing the supply chains is a business problem, they created that just to ‘keep costs down’, not to make it resistant, nor any other reason.
I made a chart of the relative impact of booms and recessions on the top 5% and the bottom 20%. Basically, the top 5% ratchets up, but the bottom 20% gets kicked back to square one every time. (Click no my website link above to see it.)
In case anyone is wondering why productivity growth has been so low, it’s the Federal Reserve. As soon as there is some demand pressure in the economy that should be met by increasing efficiency, the Federal Reserve reacts by destroying the demand. Do this on a regular basis, and you have an increasingly stagnant and inefficient economy. Baker more or less says this, but doesn’t quite finish his last step in the logic.
A big tax increase on corporate profits would be much more effective than trashing the economy, but those who get the most are expected to do the least.
Write a little piece with the chart and AB will put it up. It sounds interesting.
Wage growth even if less than the price increases-ie negative real wage growth— is the only thing that gets the inflation hawks attention because that is the only thing the Fed can quash. Throwing folks out of work not only lowers the pressure on wages but leads to less demand for goods and services. Taxing the rich and business more would be good but likely has little effect on inflation and actually may be counterproductive. There are some positive effects of rising interest rates including rewarding small savers and helping clear out zombie companies who only survive because they can borrow money at virtually no cost so resources can be more efficiently allocated. Of course, inflation is not all bad anyway…. If you owe money.
Interest rates go up, but not your interest earned on your bank savings account. Interest rates go down, but not your interest rate on your credit card.
It’s very clear what this economy is about. Money from money. As everyone has noted here, the Fed’s can’t fix this one. Unfortunately, they don’t see that (or don’t want to see that). At the same time, Congress could fix this one, but they have given up their power over the decades to the free market fantasy. If only Congress (and those they look on for advise) would understand that it is government that creates the markets.
Then again, Greenspan raise the rates every time there was the slightest hint that labor was gaining. If I recall, Mike Kimel wrote here in the past showing there was evidence that the Fed seemed to put their thumb on the scale in favor of Republicans around presidential election time.
Of course as we go further down the road with the Republicans promoting mistrust and winning on that none of it will matter. Without trust in government, no nation or economy can provide for its citizens to the fullest potential.
Then again, climate change is messing with every economic theory and the Fed is certainly not the entity to manage the economic crisis it is slowly creating.
Every Fed Chair has twisted Labor’s arm when inflation picked up. A bit of Drucker for you. “Balance Sheets are meaningless. Our accounting systems are still based on the assumption that 80% of costs are manual labor.” Spencer and I would argue about this vehemently until before his death. I would help him with his posts. One Marine helping another.
This is an interesting article that should be getting more coverage but of course won’t.
Unregulated capitalism makes you poor, miserable — and short: New study | Salon.com
I learned of it via Digby in which she posts a link to the actual study in the beginning but quotes Salon. https://digbysblog.net/2022/09/24/the-wages-of-unregulated-capitalism/
They are criticizing a World Bank report by Martin Ravallion and his graph showing that capitalism is the world’s savior. I gather his graph has become what the Laffer curve is for those arguing all the benefits of unfettered capitalism.
Here is the actual study: Capitalism and extreme poverty: A global analysis of real wages, human height, and mortality since the long 16th century – ScienceDirect