Fed up with the Fed

Financial Mirror (Cyprus) - - FRONT PAGE -

At the end of ev­ery Au­gust, cen­tral bankers and fi­nanciers from around the world meet in Jack­son Hole, Wy­oming, for the US Fed­eral Re­serve’s eco­nomic sym­po­sium. This year, the par­tic­i­pants were greeted by a large group of mostly young peo­ple, in­clud­ing many African- and His­panic Amer­i­cans.

The group was not there so much to protest as to in­form. They wanted the as­sem­bled pol­i­cy­mak­ers to know that their de­ci­sions af­fect or­di­nary peo­ple, not just the fi­nanciers who are wor­ried about what in­fla­tion does to the value of their bonds or what in­ter­est-rate hikes might do to their stock port­fo­lios.

And their green tee shirts were em­bla­zoned with the mes­sage that for these Amer­i­cans, there has been no re­cov­ery.

Even now, seven years af­ter the global fi­nan­cial cri­sis trig­gered the Great Re­ces­sion, “of­fi­cial” un­em­ploy­ment among AfricanAmer­i­cans is more than 9%. Ac­cord­ing to a broader (and more ap­pro­pri­ate) def­i­ni­tion, which in­cludes part-time em­ploy­ees seek­ing full-time jobs and marginally em­ployed work­ers, the un­em­ploy­ment rate for the United States as a whole is 10.3%. But, for African-Amer­i­cans – es­pe­cially the young – the rate is much higher. For ex­am­ple, for African-Amer­i­cans aged 17-20 who have grad­u­ated high school but not en­rolled in col­lege, the un­em­ploy­ment rate is over 50%. The “jobs gap” – the dif­fer­ence be­tween to­day’s em­ploy­ment and what it be – is some three mil­lion.

With so many peo­ple out of work, down­ward pres­sure on wages is show­ing up in of­fi­cial sta­tis­tics as well. So far this year, real wages for non-su­per­vi­sory work­ers fell by nearly 0.5%. This is part of a long-term trend that ex­plains why house­hold in­comes in the mid­dle of the dis­tri­bu­tion are lower than they were a quar­ter-cen­tury ago.

Wage stag­na­tion also helps to ex­plain why state­ments from Fed of­fi­cials that the econ­omy has vir­tu­ally re­turned to nor­mal are met with de­ri­sion. Per­haps that is true in the neigh­bor­hoods where the of­fi­cials live. But, with the bulk of the in­crease in in­comes since the US “re­cov­ery” be­gan go­ing to the top 1% of earn­ers, it is not true for most com­mu­ni­ties. The young peo­ple at Jack­son Hole, rep­re­sent­ing a na­tional move­ment called, nat­u­rally, “Fed Up,” could at­test to that.

There is strong ev­i­dence that economies per­form bet­ter with a tight labour mar­ket and, as the In­ter­na­tional Mon­e­tary Fund has shown, lower in­equal­ity (and the for­mer typ­i­cally leads to the lat­ter). Of course, the fi­nanciers and cor­po­rate ex­ec­u­tives who pay $1,000 to at­tend the Jack­son Hole meet­ing see things dif­fer­ently: Low wages mean high prof­its, and low in­ter­est rates mean high stock prices.

The Fed has a dual man­date – to pro­mote full em­ploy­ment and price sta­bil­ity. It has been more than suc­cess­ful at the sec­ond, partly be­cause it has been less than suc­cess­ful at the first. So, why will pol­i­cy­mak­ers be con­sid­er­ing an in­ter­est-rate hike at the Fed’s Septem­ber meet­ing?

The usual ar­gu­ment for rais­ing in­ter­est rates is to dampen an over­heat­ing econ­omy in which in­fla­tion­ary pres­sures have be­come too high. That is ob­vi­ously not the case now. In­deed, given wage stag­na­tion and the strong dol­lar, in­fla­tion is well be­low the Fed’s own 2% tar­get, not to men­tion the 4% rate for which many econ­o­mists (in­clud­ing the In­ter­na­tional Mon­e­tary Fund’s for­mer chief economist, Olivier Blan­chard) have ar­gued.

In­fla­tion hawks ar­gue that the in­fla­tion dragon must be slayed be­fore one sees the whites of its eyes: fail to act now and it will burn you in a year or two. But, in the cur­rent cir­cum­stances, higher in­fla­tion would be

for the econ­omy. There is es­sen­tially no risk that the econ­omy would over­heat so quickly that the Fed could not in­ter­vene in time to pre­vent in­fla­tion. What­ever the un­em­ploy­ment rate at which in­fla­tion­ary pres­sures be­come sig­nif­i­cant – a key ques­tion for pol­i­cy­mak­ers – we know that it is far lower than the rate to­day.

If the Fed fo­cuses ex­ces­sively on in­fla­tion, it wors­ens in­equal­ity, which in turn wors­ens over­all eco­nomic per­for­mance. Wages fal­ter dur­ing re­ces­sions; if the Fed then raises in­ter­est rates ev­ery time there is a sign of wage growth, work­ers’ share will be ratch­eted down – never re­cov­er­ing what was lost in the down­turn.

The ar­gu­ment for rais­ing in­ter­est rates fo­cuses not on the well­be­ing of work­ers, but that of the fi­nanciers. The worry is that in a low-in­ter­est-rate en­vi­ron­ment, in­vestors’ ir­ra­tional “search for yield” fu­els fi­nan­cial- sec­tor dis­tor­tions. In a well-func­tion­ing econ­omy, one would have ex­pected the low cost of cap­i­tal to be the ba­sis of healthy growth. In the US, work­ers are be­ing asked to sac­ri­fice their liveli­hoods and well­be­ing to pro­tect well-heeled fi­nanciers from the con­se­quences of their own reck­less­ness.

The Fed should si­mul­ta­ne­ously stim­u­late the econ­omy and tame the fi­nan­cial mar­kets. Good reg­u­la­tion means more than just pre­vent­ing the bank­ing sec­tor from harm­ing the rest of us (though the Fed didn’t do a very good job of that be­fore the cri­sis). It also means adopt­ing and en­forc­ing rules that re­strict the flow of funds into spec­u­la­tion and en­cour­age the fi­nan­cial sec­tor to play the con­struc­tive role in our econ­omy that it should, by pro­vid­ing cap­i­tal to es­tab­lish new firms and en­able suc­cess­ful com­pa­nies to ex­pand.

I of­ten feel a great deal of sym­pa­thy for Fed of­fi­cials, be­cause they must make close calls in an en­vi­ron­ment of con­sid­er­able un­cer­tainty. But the call right now is not a close one. On the con­trary, it is as close to a no-brainer as such de­ci­sions can be: now is not the time to tighten credit and slow down the econ­omy.

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