104 online
Most Popular Choices
Share on Facebook 24 Printer Friendly Page More Sharing
OpEdNews Op Eds    H3'ed 8/25/14

Truth Has No Place in the Attack of Inflation Hawks

By       (Page 1 of 1 pages)   No comments
Message Dean Baker
Become a Fan
  (42 fans)

Cross-posted from Truthout

(Image by (Image: Inflation lens via Shutterstock))   Details   DMCA

There is a growing push by inflation hawks to get the Federal Reserve Board to raise interest rates. They argue that inflationary pressures are picking up steam and if the Fed doesn't move quickly, we will soon be caught up in an inflationary spiral.

If this sounds obscure and esoteric, then you better do some quick homework. The Fed's decisions on the future course of interest rates will have a huge impact on the job prospects and livelihoods of tens of millions of families. If the Fed raises interest rates to prevent inflation, it would be slowing the economy and keeping people from getting jobs. Furthermore, slower job growth will weaken the labor market by raising the unemployment rate.

This is a huge deal, especially for those at the middle and bottom of the economic ladder. The analysis in my book with Jared Bernstein (Getting Back to Full Employment) showed that a sustained 1.0 percentage point drop in the unemployment rate is associated with a 9.8 percent increase in the hourly wage for a worker at the 20th percentile of the wage distribution. For a full-time full-year worker, that translates into $2,000 a year.

Lower unemployment rates also typically allow lower paid workers to work more hours. In addition they increase their probability of being able to get a job. A 1.0 percentage point decline in the unemployment rate for white workers is typically associated with a decline in the unemployment rate for African American workers of 2.0 percentage points and a decline in the unemployment rate for African American teens of 6.0 percentage points.

In short, a drop in the unemployment rate would have an enormous impact on the well-being of tens of millions of workers at the bottom end of the income distribution. Earlier this year, many people became concerned over Republican proposals to cut the food stamp program. Multiply the impact of the proposed food stamp cuts by 50 or 100 and you will have a ballpark number of what is at stake for low and moderate income families in getting the unemployment rate down.

The Fed comes into this picture because its decision to raise interest rates can discourage people from buying homes and cars. It can also discourage firms from investing. In this way, it reduces demand in the economy, which slows growth and reduces the rate of job creation. This is exactly what the inflation hawks want, since they argue that the risk of higher inflation more than outweighs the potential benefits to moderate and low-income families from further reductions in the unemployment rate.

There are a few points to keep in mind when considering the arguments made by the inflation hawks. First, most of the loudest inflation hawks have been making the same arguments for 3-4 years now. Some have been arguing since 2010 that the Fed's efforts to boost the economy with low interest rates and quantitative easing would lead to an explosion of inflation. They have been consistently shown wrong. There is little reason to think their predictive abilities have somehow improved.

The second point is that there really is no historical precedent for their story of an explosion of inflation. In the last 35 years the general direction of inflation has been downward with a few temporary upward blips. If we go back to the 1970s, when inflation was a problem, it was mostly a story of gradual increases, with the exception of the boost from the OPEC price shocks in 1974 and 1979. It's hard to envision anything like another OPEC price shock and the Fed's actions would not protect us in any case.

If the Fed were somehow asleep at the wheel, we might see inflation gradually creep up to 2.5 percent or even 3.0 percent. So what? We had decades of solid growth and general prosperity in which inflation averaged between 3.0-4.0 percent. If keeping its foot off the break allows millions of people to have jobs and tens of millions to see wage gains, who cares if these benefits comes at the risk of slightly higher inflation rate?

Finally, we should recognize that the inflation hawks are not willing to rely on honest arguments. Earlier this month I had an exchange with Harvard Professor Martin Feldstein in which he insisted that the rate of inflation in the consumer price index (CPI) and the core personal consumption expenditure deflator that the Fed uses as its main inflation gage had crossed the Fed's 2.0 percent target.

This is not true, as a quick trip to the websites of the Bureau of Labor Statistics and Commerce Department shows. The core CPI had increased by 1.9 percent over the prior year and the latter measure increased by just 1.5 percent from June of 2013 to June of 2014, the most recent data available at the time.

The public should recognize that the battle over the course of Fed policy is hugely important to the well-being of tens of millions of families. It should also recognize that the folks willing to deny these people jobs and wage increases will not feel constrained by the truth in pushing their agenda.

Rate It | View Ratings

Dean Baker Social Media Pages: Facebook page url on login Profile not filled in       Twitter page url on login Profile not filled in       Linkedin page url on login Profile not filled in       Instagram page url on login Profile not filled in

Dr. Dean Baker is a macroeconomist and Co-Director of the Center for Economic and Policy Research in Washington, D.C. He previously worked as a senior economist at the Economic Policy Institute and an assistant professor at Bucknell University. (more...)
Go To Commenting
The views expressed herein are the sole responsibility of the author and do not necessarily reflect those of this website or its editors.
Writers Guidelines

Contact AuthorContact Author Contact EditorContact Editor Author PageView Authors' Articles
Support OpEdNews

OpEdNews depends upon can't survive without your help.

If you value this article and the work of OpEdNews, please either Donate or Purchase a premium membership.

If you've enjoyed this, sign up for our daily or weekly newsletter to get lots of great progressive content.
Daily Weekly     OpEd News Newsletter
   (Opens new browser window)

Most Popular Articles by this Author:     (View All Most Popular Articles by this Author)

The Federal Reserve Board and the Presidential Candidates

The Deficit Hawks Target Nurses and Firefighters

The Attack of the Real Black Helicopter Gang: The IMF Is Coming for Your Social Security

The profit on the TARP and Bernie Madoff

Poverty: The New Growth Industry in America

The Real Reason For The Government Shutdown

To View Comments or Join the Conversation:

Tell A Friend