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“Whacking Labor” to Fight Inflation and Fix the Economy

Summary:
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

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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

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