The Fed's Interest Rate Hike Will Prevent People From Getting Jobs
Monday, March 20, 2017
By Dean Baker, Truthout | Op-Ed
(Photo: Greg Dunlap; Edited: LW / TO)
This month the Federal Reserve Board raised interest rates for the third
time in the last year and a half. This move did not get nearly as much
attention as it deserves.
The decision to raise interest rates was a conscious decision to slow the
rate of economic growth and job creation. It will raise interest rates that
people pay on credit cards, car loans, home mortgages and other types of
debt. It will also raise the cost of borrowing for businesses looking to
invest and state and local governments borrowing for infrastructure.
As a result, we will see less spending and borrowing and therefore slower
economic growth. The Fed is slowing the economy because it fears that too
rapid growth will trigger inflation. I think this view is wrong, but before
making the case it is worth making a couple of basic points about the logic
of the Fed's rate hike.
First, the Fed is raising interest rates because it is concerned that the
economy is creating too many jobs. Last month, the Labor Department reported
that the economy added 235,000 jobs. The concern at the Fed, and among many
other economists, is that the demand for labor is outstripping the supply of
labor. This will lead to upward pressure on wages, which will then be passed
on in higher prices, potentially leading to a wage-price inflationary
spiral.
Note that this concern is 180 degrees at odds with the "robots are taking
our jobs" story. The robots taking our jobs story is one in which we don't
have enough jobs and we have too many workers. The Fed obviously is not
concerned about robots taking all the jobs or it wouldn't feel the need to
raise interest rates.
It's worth noting that the data agree with the Fed here. Productivity
growth, which measures the rate at which jobs are being replaced by
technology, has been extraordinarily slow in recent years, averaging less
than 1 percent annually over the last decade.
By contrast, productivity growth averaged 3 percent between 1947 and 1973
and also between 1995 and 2005. In other words, despite stories of
self-driving cars and other technological breakthroughs, the robots are
taking jobs at a much slower pace today than in past years.
The other point is that the people not getting jobs because of Fed rate
hikes are disproportionately less-educated workers and members of
disadvantaged groups. It is very difficult to devise good policies to help
people from depressed areas.
By comparison, it is relatively easy to allow these people to get jobs by
keeping interest rates low and letting the economy continue to expand. The
Fed's rate hike goes in the wrong direction.
The Fed and the other economists supporting a rate hike do have a case. The
unemployment rate is relatively low and the recent rate of job creation is
certainly far faster than the rate of labor force growth due to demographic
factors. This means the labor market is tightening.
Nonetheless there are important reasons for believing the economy is still
far from hitting any capacity constraints. The percentage of prime-age (ages
25 to 54) people working is still 2 percentage points below pre-recession
peaks and 4 percentage points below the peaks hit in 2000.
There is no plausible explanation as to why so many fewer people now have
the skills or inclination to work. Few, if any, economists anticipated this
drop. It's not clear that their understanding of the labor market is better
today than it was in 2000 or 2007.
Other factors are also inconsistent with a tight labor market. The number of
workers involuntarily working part-time continues to be well above
pre-recession levels. Also, the share of unemployment due to people who
voluntarily quit their jobs, a key measure of workers' confidence in the
labor market, remains at near recession levels.
Furthermore, there is little evidence that either wage growth or inflation
is accelerating. The average hourly wage increased at just a 2.5 percent
annual rate over the last quarter, slightly lower than its pace in late
2016. Broader measures of compensation, which factor in the drop in
employers' payments for health care insurance, show even weaker gains.
In addition, the inflation measures themselves show no evidence of
acceleration. The core consumer price index, which excludes volatile food
and energy prices, has been rising at the same 2.2 percent rate for more
than a year. If rent is excluded, the rate of inflation would be just 1.3
percent.
Also, the core personal consumption deflator, the index targeted by the Fed,
remains at 1.7 percent with no sign of acceleration. The Fed targets a 2
percent average rate for this index, meaning that it should want to see some
rise above 2 percent to keep to its target.
These are all reasons for believing the Fed's rate hike last week was a
mistake. However it is important to keep in mind that a quarter point hike
has relatively little impact. What matters far more is a sequence of rate
hikes.
If the Fed makes further hikes in a context where there is little evidence
of inflationary risks then it could needlessly be keeping millions of people
from getting jobs. It will also be weakening the bargaining power of tens of
millions of workers, to the benefit of corporations and higher paid workers.
That would be a very serious policy mistake if it happens, and one that we
should not blame on robots.
Copyright, Truthout. May not be reprinted without permission.
Dean Baker
Dean Baker is a macroeconomist and codirector of the Center for Economic and
Policy Research in Washington, DC. He previously worked as a senior
economist at the Economic Policy Institute and an assistant professor at
Bucknell University. He is a regular Truthout columnist and a member of
Truthout's Board of Advisers.
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