How the Federal Reserve promotes income inequality
January 18, 2016 12:47 PM   Subscribe

Fed officials deny they’re taking sides. They justify policies that keep workers too weak, disorganized, and traumatized to demand higher wages by focusing on the purported dangers of low unemployment.
posted by Lycaste (38 comments total) 26 users marked this as a favorite
 
The Federal Reserve has, by law, a dual mandate to promote stable interest rates and maximum employment.

I doubt the casual observer would see much evidence of the latter for some time now. Certainly one would scarcely be aware of it by the reporting of the so-called "liberal media," which constantly talks about the Fed's rate setting (remember the good old days of reporters trying to read the tea leaves of Greenspan's obtuse syntax?) with hardly a peep about its duty to maximize employment.
posted by Gelatin at 12:56 PM on January 18, 2016 [13 favorites]


I doubt the casual observer would see much evidence of the latter for some time now.

But they would. The US unemployment rate has been dropping for years, and is nearing the lowest it's been in a decade.
posted by Sangermaine at 1:12 PM on January 18, 2016 [8 favorites]


But they would.

To clarify, I doubt the casual observer would see much evidence that full employment is a mandate of the US Fed. All the news ever talks about is interest rates. I can't recall any Fed action that was aimed specifically at employment, as opposed to managing the monetary base.
posted by Gelatin at 1:19 PM on January 18, 2016 [12 favorites]


For example, back in September Paul Krugman argued that the Fed should be cautious about raising interest rates, as improving employment is not yet showing signs of increasing inflation. Yet there's a constant drumbeat of calls for the Fed to do just that -- which Krugman has been criticizing for some time -- and recently the Fed did raise rates. One presumes the purpose was to forestall inflation fears, and not motivated by boosting employment.
posted by Gelatin at 1:23 PM on January 18, 2016 [2 favorites]


Also, that's one of the narrower unemployment measurements. This chart compares that U-3 rate to the U-6 rate (labor force participation) that includes those who've been forced to take part-time/gig economy jobs and those who've given up on looking for full-time work. Usually U-6 is cited by wingnuts as a way to burn Obama simply because it's a higher number than U-3, but they do sort of have a point, because the gap between U-3 and U-6 increased during the Great Recession and hasn't come down yet. (The chart only goes to 2014, but I haven't seen evidence that the gap has narrowed that much even as the headline unemployment rate has settled into pre-recession levels.)
posted by tonycpsu at 1:25 PM on January 18, 2016 [11 favorites]


I believe the interest rate issue is less about keeping workers scared than the Fed avoiding anyone in bond markets concluding that they have printed a shit ton of money since the crash without any concern about inflationary expectations. More importantly, it has other ramifications for income inequality.

Since the Kennedy Administration, we've given up on the fiscal policy side of economic policy (at least in name - in reality Republican admins have been expansionary defence spenders and tax cutters).

Quantitative easing has unintended and obvious income inequality effects, and the asset price inflation to those with assets is a serious lever. With no corresponding fiscal policy to aid the fortunes of those without assets (i.e. jobs and well paid ones), the haves are leaving the have nots further behind.

Maybe one day there will be a reconsideration of active policies to assist wage growth and general demand side stuff in a deflationary flavored environment.
posted by C.A.S. at 1:29 PM on January 18, 2016 [4 favorites]


I can't recall any Fed action that was aimed specifically at employment, as opposed to managing the monetary base.

Quantitative easing certainly didn't DECREASE inflation. If they really didn't care about employment they could have skipped that completely.

Could they have been more aggressive? Sure. But given the attacks of the Fed coming from Congress it's reasonable to think they may have feared loss of independence if they were any more aggressive than they were. The saying is that "the Fed moves last" but actually Congress always gets a veto on top of that, in the form of possible legislation restricting their action.

I also doubt that the gig economy is responsive to the federal funds rate. U3 is as good as it gets without legislative action, which has been oddly lacking in the last five years or so....
posted by anotherpanacea at 2:01 PM on January 18, 2016 [1 favorite]


The Fed re-created a reserve army of labour with high interest rates in 1981, and hasn't really had to use monetary policy as a hammer to smash labour since then.

You'll notice that the Fed has only used high interest rates to solve one kind of inflation, and that's the inflation caused by workers getting "too much" of the economic pie. House price inflation? Food and energy price inflation? Those aren't "core inflation", so the Fed doesn't worry about them.

Factory workers getting raises? Now *that's* the kind of inflation the Fed needs to stamp out. The '70s were the only time in recent memory when that was really a threat, so the early '80s were the only time when interest rates were used with a vengeance.
posted by clawsoon at 2:12 PM on January 18, 2016 [16 favorites]


The early 80s were not about smashing factory workers. There was a genuine inflationary expectations spiral and real rates hit 18%.

Regarding wage growth, its not true that the 70s were the only time factory workers threatened to get raises. Wage growth was reasonable post WWII until the seventies.

That inflationary process began under the Guns N Butter LBJ years, combined with the various shocks of the 70s. In fact some of that inflation was energy price inflation.

The Fed is not necessarily fascist about smashing wage growth. It just doesn't have a full toolset to deal with every issue. Low wage growth can not be addressed by monetary policy. Growth itself can only be addressed by monetary policy so far.

We've had the opposite problem in recent years, in that real interest and inflation rates have been too low for too long. Famously (if you read Krugman) that is about us having been pushing against the "zero bound".

I suspect that the Fed will nudge rates just enough to say to the financial world that they are aware, yet rates will stay low for the foreseeable future as there is nothing on the horizon to drive growth and in fact growth is slowing. Maybe Keynesian economics is due a return.
posted by C.A.S. at 2:45 PM on January 18, 2016 [10 favorites]


To clarify, I doubt the casual observer would see much evidence that full employment is a mandate of the US Fed. All the news ever talks about is interest rates. I can't recall any Fed action that was aimed specifically at employment, as opposed to managing the monetary base.

So here are some sort of jumbled thoughts on the subject:
One thing to keep in mind is that the the monetary base and interest rates are a thing that the Fed (more or less) controls semi-directly, whereas employment (and inflation) are results of the policy changes the Fed makes. Whether the Fed can do a lot to increase employment is actually not all that clear, empirically speaking. (My prior is that monetary policy can affect the unemployment rate, but there is an extent to which the Fed has only a certain amount of tools and sometimes they're less suited to getting people jobs than other times). For example, we seem to have some reason to believe (the Volker experience) that the Fed can lower inflation and raise unemployment by jacking up rates. It's not necessarily clear that the reaction of unemployment (and inflation) to rate changes is symmetric. The nominal zero bound on interest rates complicates lowering its target rate as much as it "should" in some circumstances, which might explain this asymmetry.

Second, the concept of 'full employment' is somewhat amorphous (so is price stability, but the Fed has been explicit about what they think that means). I think a year, two years ago, most economists would have said "full employment" was consistent with an unemployment rate of about 6.5 percent. Now, I think most are lowering that number. Whether low inflation without much change in wages or overall prices is a unique feature of this recovery - the result in an increase in long term unemployed or lowering labor force participation - or some structural change in how the economy operates, I'm not sure, and I bet there are a lot of people working with the Fed trying to understand that question.

Third, I don't think it's a fair statement that the Fed doesn't take action, or talk about, unemployment as part of its policy actions. Consider the most recent policy statement from the FOMC. It starts by taking about what's happening in labor markets, and it explicitly and repeatedly mentions its dual mandate. For awhile it adopted the "Evans rule" of conditioning rate hikes on a particular level for the unemployment rate, although they abandoned that once it was clear that unemployment could fall further without inflation increasing. I have a hard time understanding how someone who knows what the Fed does and has paid any attention to it since the crisis would think that the Fed doesn't pay any attention to full employment as a specific policy goal. Perhaps this comes down to a difference in what policymakers think "full employment" is versus what the modal Metafilter commenter thinks it means

Fourth, monetary policy is a blunt instrument. The Fed changes an interest rate for interbank markets and hopes that affects the rates at which firms and households can borrow. It hasn't, and perhaps can't, target particular sectors or regions that are in need of more help. I think that's part of why Bernanke and Yellen have both said fiscal policy needs to step up (or at least stop making things worse).

--
Two more things I guess, which is somewhat related to this discussion and to the original article. First, while there is a class struggle reading of why the Fed pays attention to wage inflation in particular (which, if that's your prior, I doubt you're satisfied by anything I've written in this over-lengthy comment...), there is also at least an alternative justification. Energy and food price changes are highly variable and don't always feed into the overall price level - oil is cheap this month, might be expensive the next, and so it pays to wait and see how those prices are affecting prices broadly in the economy. Wage increases, on the other hand, tend to be a better predictor of increases in inflation, which is a first-order thing the Fed is legally required to care about in its policy decisions. That said, I agree that the Fed should not choke out wage increases when they come and I think it should tolerate higher inflation if it means more people get back to work and the level of economic activity recovers faster.

Second, Yellen and her colleagues/predecessors are not elected, but are appointed by elected officials, who also govern what tools they have and what their policy objectives are. I guess I would be uncomfortable if unelected central bankers deviated too far from what their statutory mandates are from my vantage point as a citizen, even if I agreed with the economics of that action. Congress should do something about income and wealth inequality. One of the things it is probably worth considering as part of a mix of policy actions is what role, if any, the Fed plays in addressing those problems. Honestly, I'm not sure what it is the Fed can do about inequality, but I have plenty of ideas about what Congress can do.
posted by dismas at 2:50 PM on January 18, 2016 [10 favorites]


I think this article is a case of people trying to put the genie back in the bottle. Foreign nations are catching up to the US in stability and infrastructure. American pay inequality compared to the rest of the world is becoming harder and harder to maintain. Americans looking for the old-school style of middle class existence are chasing shadows.
posted by Dmenet at 3:13 PM on January 18, 2016


This is an excellent article pointing out the banking industry bias of the Federal Reserve. Particularly apt was his take down of Paul Volcker, who is often inexplicably deified on this forum. Volcker was a terrible and cruel Fed Chairman. He deliberately caused the greatest recession since the Great Depression in order to break the backs of the working class. He destroyed millions of lives, causing job losses, family home losses, retirement and pension losses.

The right wing and unfortunately a lot of the Democratic wing believes that profligate government spending was the primary cause of inflation in the 70s and that morality play justice required citizens to suffer for their sins. But the simple fact is that inflation in the 70s and 80s was cause mostly by temporary oil embargoes and oil inflation. Inflation increased simultaneously all over the world and over the next decade decreased simultaneously all over the world. They rest of the world didn't have a Paul Volcker pulling the strings and did just fine with a little patience.

The fact is that inflation would have slowly receded in the U.S. just like it did in the rest of the world without Volcker. Volcker's real goal was to put his foot on the necks of wage earners.

And Janet Yellen isn't much better. Alan Greenspan did some really awful things and made some inexcusable errors, but the one thing he did right was to resist the calls to raise interest rates in the 1990s. That was the one decade in the last three in which wage earners made some real gains even as inflation was tamed. And you know who on Greenspan's committee was the screaming the loudest to raise rates -- Janet effing Yellen.

At the time of Yellen's nomination I was warning that she wasn't the dove people thought, given her record under Greenspan. And sure enough, when even the slightest threat of wage increases appeared, she jumped on the bandwagon to raise rates.
posted by JackFlash at 3:18 PM on January 18, 2016 [12 favorites]


I can't recall any Fed action that was aimed specifically at employment,

Just about every FOMC meeting over the past 5 years has expressly talked about unemployment. It's a big, big part of why rates have been zero for as long as they have.
posted by jpe at 3:21 PM on January 18, 2016 [1 favorite]


This seems like a bit of an overreaction to a 0.25% rise after seven years of a rate of 0. It's dumb, but not catastrophic.

The Fed could hardly do more than it did for the last 7 years. The failure is on the part of Congress and the states, which responded to a huge recession with austerity. (The 2009 stimulus was inadequate, and more than counterbalanced by enormous cuts at the state level.)
posted by zompist at 3:34 PM on January 18, 2016


This seems like a bit of an overreaction to a 0.25% rise after seven years of a rate of 0. It's dumb, but not catastrophic ... The Fed could hardly do more than it did for the last 7 years.

The 0.25% is catastrophic. It sends a signal to the economy that they will not tolerate even the slightest increase in wages. That is a very powerful message.

They could have, seven years ago, announced that they would have a zero interest rate and determined to keep it that way for the next decade. Instead, they literally threatened to raise rates, a close call, at virtually every Fed meeting for the last 7 years. That is guaranteed to dampen the expectations of inflation and slow the recovery.

They could have announced that their inflation goal was at least 4% instead of considering 2% not just as a target but a hard ceiling.

They could have announced that they were determined to keep rates low and increase inflation until real wages started to rise to their share of income in the 1950s and 1960s.

They could have announced that they would buy and keep buying through quantitative easing until the goals above were accomplished.

They could have taken a position on the budget shutdown, indicating that it would do grave damage to the economy (which it did).

They could have taken a more vocal position on fiscal policy and the headwinds that it was creating. And don't tell me that the Fed can't do that because Greenspan certainly didn't hold back when the heartily endorsed the Bush tax cuts.
posted by JackFlash at 3:52 PM on January 18, 2016 [11 favorites]


unemployment rate has been dropping for years

We're still around 10 million jobs short of the full-employment rate of 75% of age 15-64 people we hit in 1999:

https://research.stlouisfed.org/fred2/graph/?g=3aVT

And things are actually worse than that since we have more age 65+ people working; the baby boom was age 36 to 54 in 2000 and are 52 to 70 this year.
posted by Heywood Mogroot III at 4:31 PM on January 18, 2016 [4 favorites]


Current ZIRP is to dig ourselves out of this hole:

https://research.stlouisfed.org/fred2/graph/?g=2t80
posted by Heywood Mogroot III at 4:33 PM on January 18, 2016


The Fed could hardly do more than it did for the last 7 years.

I gotta admit the QEs they did were pretty impressive:

https://research.stlouisfed.org/fred2/graph/?g=3aW5

Too bad it all ended up here:

https://research.stlouisfed.org/fred2/series/EXCSRESNS
posted by Heywood Mogroot III at 4:38 PM on January 18, 2016 [1 favorite]


The 1970s inflation was partially if not largely caused by the baby boom hitting their mid-20s and joining society as consumers and borrowers, stressing both supply sectors (financialization was only getting started and Red China was still terra incognito to us and would be for another 10+ years).

As for the Fed back then:

https://research.stlouisfed.org/fred2/graph/?g=3aWb is one of my more interesting FRED charts.

Blue is years of labor supply, left axis -- high is good, low is bad in that it is how many years before all employees get laid off at current initial claims rate.

Red is the fed funds rate.

Aside from Carter facing a monotonically rising Fed Funds rate, the Volcker fed stuck the shiv in deep and hard in 1981, engineering the double-dip recession to defeat wage inflation.
posted by Heywood Mogroot III at 4:44 PM on January 18, 2016 [3 favorites]


I agree about a 4% inflation target. The rate hike is dumb, but it's strange to call the Fed "catastrophic" when the ECB has been doing consistently worse.

Given that the people who hate QE tend to be the bad guys, I wouldn't argue against it, but I don't think it's proven to help much. E.g. Krugman has been consistent in saying that fiscal stimulus would work much better and more directly. Congress and the state legislatures are the real villain here.

Greenspan was a politically motivated dick, but he was telling Congress what it wanted to hear. Maybe Bernanke could have been more vocal about the need for stimulus (and paying debts), but it wasn't what Congress wanted to hear, and in fact the Tea Party hates the Fed even more than Jacobin does.
posted by zompist at 5:22 PM on January 18, 2016 [3 favorites]


Here is Janet Yellen's labor market dashboard - the nine indicators that she looks at to gauge the overall job market (unemployment, underemployment, job openings, nonfarm payroll growth, layoffs, new hires, quit rate, long-term unemployed, labor force participation rate).
posted by triggerfinger at 5:23 PM on January 18, 2016 [4 favorites]


Greenspan was wrong about those tax cuts, but he told Congress something, frankly, that they wanted to hear after spending nearly 15 years being what appeared to be the most successful central banker in history. Bernanke instance, was telling Congress that they should do better fiscal policy at a time when it was controlled by people who were highly skeptical of what monetary stimulus there was and what financial reforms had been passed. Bernanke and Yellen have had to deal with deeply Fed-skeptical Congresses in general.
posted by dismas at 5:53 PM on January 18, 2016 [1 favorite]


There needs to be a word in the English language that roughly defined as:

xxxxxx (verb): To describe a matter of public knowledge in detail as if it were conspiracy. In addition, to insinuate that the conspiracy's objective is equivalent to the publicly stated goals of those involved with the matter.

----

It might have something to do with Vaping, Goatee Stroking, or Fedora Adjusting.

Maybe something like Red Eyeing...
posted by ethansr at 6:05 PM on January 18, 2016 [1 favorite]


Heywood, I'm not sure what all the charts you're dropping are supposed to mean precisely but: Regarding demography as the cause of the inflationary pressures of the 1970s: That might have something to do with it but it seems like oil shocks might be a more proximate explanation (and expansionary fiscal policy that was accommodated by the Federal Reserve at the time).
posted by dismas at 6:09 PM on January 18, 2016 [1 favorite]




So the basic argument here is that instead of making a tradeoff between unemployment and inflation, the Fed is now making a tradeoff between unemployment and real wage growth. I find it pretty easy to believe that they'd be under intense pressure to do so. After all, companies stand to make trillions of dollars if they can just keep wages from going up.

But the fact remains that interest rates have been near-zero for basically a decade. Whatever pressure the Fed is under, it doesn't really seem to be working.

Also, the article didn't mention that the Fed really has to raise interest rates to avoid being zero-bounded in the next recession, which is the most obvious reason for them to do it right now.
posted by miyabo at 9:43 PM on January 18, 2016



You'll notice that the Fed has only used high interest rates to solve one kind of inflation, and that's the inflation caused by workers getting "too much" of the economic pie. House price inflation? Food and energy price inflation? Those aren't "core inflation", so the Fed doesn't worry about them.


What do you want the Fed to do about house prices?
posted by esprit de l'escalier at 10:01 PM on January 18, 2016


the Fed really has to raise interest rates to avoid being zero-bounded in the next recession, which is the most obvious reason for them to do it right now.

This argument amounts to "We have to create a recession now in order to be prepared for a possible recession that might occur in the future."

To the contrary, the way to prepare for the future is to make the economy stronger right now. The Fed has prolonged the Great Recession by too timid inflation goals, constant hand-wringing and threats to raise rates at any moment for the past seven years. They learned nothing from the last couple of decades of the Japanese experience.
posted by JackFlash at 10:15 PM on January 18, 2016 [4 favorites]


It was many years of zero interest rate policy that got us into this mess in the first place as capital searched for any sort of yield, resulting in massive malinvestment. Until real price discovery is allowed to return and the fraud and corruption is prosecuted (which will result in a horribly painful recession/depression) we're going to keep experiencing our lovely bubble economy. Clearly this benefits a small segment of the population, but for the rest of us, not so much.
posted by alpinist at 10:30 PM on January 18, 2016 [3 favorites]


So the basic argument here is that instead of making a tradeoff between unemployment and inflation, the Fed is now making a tradeoff between unemployment and real wage growth. I find it pretty easy to believe that they'd be under intense pressure to do so. After all, companies stand to make trillions of dollars if they can just keep wages from going up.

I thought the article was very good but personally I'm not convinced by that frame and to me it was the least interesting part. The Fed is bankers and they think like bankers. Bankers think the economy will do well when bankers are comfortable, which means stable prices and predictable growth. Increasing corporate power is a side effect, and even one that worries some of them, but they won't see a way out of it.

If labor leaders were making the decisions they would think that solving the problems foremost in their minds--wage growth and unemployment--need to be addressed for the good of all. Inflation might be a tough problem but one they might not be able to fix with the tools they were willing to use.

What struck me as more insightful, as it hit an assumption I didn't think much about, was this
“It is only when nominal wage growth exceeds the sum of inflation (about 2 percent) and productivity growth (about 1.5 percent) that the Fed needs to be concerned. . .”
I've read enough that I immediately understood it was written by an inflation "dove." I confess I did not immediately connect this to the fact that the most pro labor side of the current debate, when it comes to fed policy, is arguing that labor's share of profits should not always decline--it's OK if the decline pauses during boom years. Such are the terms of the debate.
posted by mark k at 11:09 PM on January 18, 2016 [4 favorites]


Clearly this benefits a small segment of the population, but for the rest of us, not so much.

horrible, painful depressions are easy to prescribe if they don't effect you. It was the deregulation of the lending industry 2002-2006 that caused the bubble in housing, the global saving "glut of the time" was the fuel but not the spark.

People assumed we still had an honest financial sector after 20 years of deregulation. They assumed wrong. It was fraudulent from top to bottom -- that was the Fed's true crime of the previous decade, Mr Greenspan and his free marketeer glasses.
posted by Heywood Mogroot III at 7:01 AM on January 19, 2016 [1 favorite]


that particular wolfers quote in context i think is consistent with what I was saying: It is only when nominal wage growth exceeds the sum of inflation (about 2 percent) and productivity growth (about 1.5 percent) that the Fed needs to be concerned that the labor market is generating cost pressures that might raise inflation. So the latest wage growth numbers suggest that we are not yet near the natural rate. And that means the Fed should be content to let the recovery continue to generate more new jobs.

Wolfers is saying (basically to policymakers): look, there's no reason to believe low unemployment is increasing inflation, so stop doing things as if you're worried inflation is coming. If nominal wages start to outstrip inflation and productivity, it typically is a sign that inflation is going to accelerate (which, in real terms, will eat up the nominal gains workers are making anyway). But nominal wages aren't doing that, so why are we worried about it?

The discussion here (and in the Jacobin article) make it pretty clear the Fed can't win. Keep rates too low, and you get people complaining about the impact on savers/people on fixed incomes and you get Austrian-ish "malinvestment" complaints and arguments they're fueling a bubble. Raise rates and you're putting people out of work and waging class warfare. Both concerns are probably some degree of legitimate, which means that the fed has to balance risks and keep everyone unhappy.
posted by dismas at 7:10 AM on January 19, 2016 [1 favorite]


C.A.S.: The early 80s were not about smashing factory workers. There was a genuine inflationary expectations spiral and real rates hit 18%.

Some of the people involved disagree.

"Volcker described Reagan’s breaking of the air-traffic controllers union as 'the single most important action of the administration in helping the anti-inflation fight.'"

Greenspan said in retrospect that "'traumatized workers' were the reason strong growth with low inflation was possible in the 1990s."

Thatcher advisor Alan Budd suggests that just maybe his bosses saw that high interest rates "would be a very, very good way to raise unemployment, and raising unemployment was an extremely desirable way of reducing the strength of the working classes — if you like, that what was engineered there in Marxist terms was a crisis of capitalism which re-created a reserve army of labour and has allowed the capitalists to make high profits ever since."

That inflationary process began under the Guns N Butter LBJ years, combined with the various shocks of the 70s. In fact some of that inflation was energy price inflation.

Yes. Exactly. But those were not the levers that they pushed back on to fight inflation. Defense spending - and government spending in general - went up. More guns and butter. The government didn't say, "The most important thing we need to do to fight inflation is rapidly increase oil production."

No, they said that the most important thing to do to fight inflation was to lower wage rates.
posted by clawsoon at 7:12 AM on January 19, 2016 [5 favorites]


the fed has to balance risks and keep everyone unhappy

or, it could just be labor's turn for the next half-century
posted by j_curiouser at 7:25 PM on January 19, 2016 [1 favorite]




Yellen's famous Footnote 14 really gives away the game. Declaring 2% inflation to be the new normal is a radical change from the entire history of the U.S. since WWII. Inflation has always been substantially above 2% except for severe recessions. Declaring 2% to be the target indicates that Yellen has completely abandoned the second mandate to support employment. She is no dove and intends to suppress wages forever, just as the Fed has for the last three decades.
posted by JackFlash at 12:46 PM on January 20, 2016 [4 favorites]




From the Philadelphia Fed: The Redistributive Consequences of Monetary Policy
posted by triggerfinger at 4:50 PM on January 26, 2016


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