Who should benefit from fighting inflation? Average working people or bond traders?

Yesterday, Fed Chair Jerome Powell, testifying before the Senate Banking Committee, said outright that the Fed’s higher interest rates won’t lower the prices of gas or groceries. Hello? Gas and food prices are the two items hitting families the hardest, and the Fed is openly admitting that raising interest rates will do nothing to ease the burden?

What rate hikes will do is force millions of Americans into joblessness and make families poorer. As Senator Elizabeth Warren said during her questioning of Powell, “You know what’s worse than high inflation and low unemployment? It’s high inflation with a recession and millions of people out of work.”

Earlier this week, Larry Summers argued that containing inflation will require five years of 6 percent unemployment, or two years of unemployment at 7.5 percent or one year at 10 percent.

If that’s the case, the cure is worse than the disease.

Let’s be clear: Workers aren’t to blame for inflation. Wages aren’t pushing up prices. Real wages have dropped 3.5 percent over the last 12 months. Corporate profits are pushing up prices. The goal of policymakers should not be to restrain wages, but to restrain monopoly profits.

Powell’s and Summers’s remarks remind me of a debate I had with Summers’s predecessor at the Treasury, Lloyd Bentsen, more than two decades ago. (From my memoir “Locked in the Cabinet”):

May 11, 1994, Washington

[Fed Chair Alan] Greenspan has been raising interest rates. He started three months ago and is about to do so again. My colleagues seem intent on egging him on. 

Lloyd Bentsen argues that the administration should publicly state that the economy is approaching its “natural” rate of unemployment—the lowest rate achievable without igniting inflation. This, he reasons, will reassure Wall Street that we won’t object if the Fed tightens the reins. And that reassurance should maintain Wall Street’s confidence that we’re committed to the inflation fight, which, in turn, will keep long-term rates well under control. 

I’m flabbergasted. “How can we be near the natural rate of unemployment when eight and a half million people can’t find jobs?” I ask. 

Bentsen stares at me like I’m a Texas toad. Others around the table explain to me that the last time unemployment was about to dip below six percent—at the end of the 1980s—wages started to rise, pushing up prices. “We can’t let Wall Street lose confidence.” The familiar chorus. 

But the economy is different than it was then. Workers aren’t about to demand wage increases this time around. The 1991–92 recession was a watershed. Most people who lost their jobs weren’t rehired by their former employers. In fact, job insecurity is now endemic. Big companies are downsizing. Medium-sized ones are outsourcing and subcontracting.

Out of concern that Lloyd’s proposal will carry, I inject a political note. “Has anybody forgotten?” I ask, far too condescendingly. “We’re Democrats. Even if we are approaching the danger zone where low unemployment might trigger inflation, we should err on the side of more jobs, not higher bond prices. That’s why we’re sitting here, and not the economic advisers to a Republican president.” One or two heads nod in agreement, encouraging me on. “So here’s my proposal: The President should warn the Fed against any further increases in interest rates.” 

My idea is rejected out of hand. But, happily, so is Lloyd’s. A standoff is better than the likely alternative.

Lloyd does have a point, and it’s a conversation I wish we had. There’s some level of unemployment that will trigger inflation, and whatever that magic level might be, it will still leave millions of people out of work. A seeming paradox: Millions of people unemployed or underemployed, and yet wages begin to creep upward because employers can’t fill jobs. Paradox explained: They can’t fill the jobs with these people. These people are walled off from the economy because they lack the education, or have the wrong skills, or don’t know what’s required, or are assumed to be too old to make the change. 

So whatever the “natural” rate of unemployment, we don’t have to assume it’s fixed there. It can be reduced by helping these people scale the wall. 

We keep having these goddamn arid debates about deficits and interest rates, as if they were the only variables, as if we were dealing with immutable laws of physics. But economics isn’t a physical science. Its “laws” are subject to change. And the softer variables—ignorance, isolation, prejudice—make all the difference. I wish I could show them Father Cunningham’s project in Detroit, or the East Los Angeles Skills Center, or the community colleges brimming with adults trying to make something more of themselves, or exceptional companies—like L-S Electro-Galvanizing in Cleveland—that are building loyalty and teamwork while they upgrade employee skills. 

We should be puzzling over how we can help more Americans become productive citizens rather than how we can help more bond traders stay confident.

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