Must-Read Pre-Liftoff Lollapalooza: Matthew Yglesias: This week, the US government will take action to slow the economy and prevent wage growth

Must-Read Pre-Liftoff Lollapalooza: Matthew Yglesias: This week, the US government will take action to slow the economy and prevent wage growth: “Imagine President Barack Obama announced a… new tax… [to] raise the price of borrowing money…

…Republicans would, of course, denounce him. Why would the president impose a new job-killing tax at a time when the American people have been suffering from an agonizingly slow labor market recovery and years of flat wages? And then imagine the Democratic reaction when Obama explained that… his only goal with the new tax was precisely to reduce the pace of job growth. To make sure that unemployment didn’t get too low. That workers’ bargaining power didn’t become excessive…. ‘When it comes to inflation,’ the president might say, ‘it’s better safe than sorry. So here’s your new job-killing tax!’…

The Federal Reserve is going to do exactly this by raising interest rates at its meeting next week…. The Federal Reserve is structured as an independent agency precisely on the theory that for the long-term good of the economy we sometimes want the central bank to slow the pace of job creation in order to avoid inflation…. But the weird thing about this week’s push for higher interest rates is that there’s no inflation problem to solve…. There has been literally no inflation at all throughout 2015. If you ignore food and energy prices… inflation… has still been below the Fed’s 2 percent target for all of 2015. And… 2014. And… 2013. And… for about half of 2012….

The reason the Fed is now comfortable with the idea of a rate hike is that the labor market has improved considerably from where it was a few years ago…. But even though the labor market is in much better shape than it was a year or two ago, it’s honestly still not in such great shape. A broad gauge of the labor market–the share of 25- to 54-year-olds who have a job–shows that something between 2 and 5 percent of the prime age population has vanished from the workforce…. At a congressional hearing earlier this year, Fed Chair Janet Yellen was asked about the black-white unemployment gap and said basically that there’s nothing she can do about it…. It’s easy enough to see… [that] the African-American unemployment rate and the white unemployment rate move in tandem at a 2-to-1 ratio…. But as Jared Bernstein points out, this semi-fixed ratio actually means that monetary policy matters a great deal for the racial gap….

With the United States currently enjoying a lowish 5 percent unemployment rate, it’s easy for relatively privileged people to neglect the benefits of further small reductions. But for an African-American population that will enjoy a double-scale version of any drop in the unemployment rate, the stakes remain quite high. The same is true of other kinds of vulnerable populations….

Most economists think I am wrong and the Fed should raise rates. But the thinking behind this, as measured in things like the IGM Survey of prominent economists, is awfully fuzzy. Anil Kashyap of the University of Chicago says he strongly agrees with a rate hike because, ‘As Mike Mussa once famously said, ‘If not now, when?” Darrell Duffie of Standard says ‘the macro vital signs look healthy enough now.’… Many supporters haven’t articulated a rationale at all…. The relevant question is whether, under the circumstances, the risks of a little bit of inflation are really worse than the risks of sluggish job growth. This is a subject that deserves to be debated squarely…

December 15, 2015


Brad DeLong
Connect with us!

Explore the Equitable Growth network of experts around the country and get answers to today's most pressing questions!

Get in Touch