15 September 2019
Nobel prize-winning economist Joseph Stiglitz, the author of this article, speaks during a demonstration by the Fed Up coalition at Jackson Hole last month. Photo: Bloomberg
Nobel prize-winning economist Joseph Stiglitz, the author of this article, speaks during a demonstration by the Fed Up coalition at Jackson Hole last month. Photo: Bloomberg

Fed up with the Fed

At the end of every August, central bankers and financiers from around the world meet in Jackson Hole, Wyoming, for the US Federal Reserve’s economic symposium.

This year, the participants were greeted by a large group of mostly young people, including many African- and Hispanic Americans.

The group was there not so much to protest as to inform.

Its members wanted the assembled policymakers to know that their decisions affect ordinary people, not just the financiers who are worried about what inflation does to the value of their bonds or what interest rate hikes might do to their stock portfolios.

And their green T-shirts were emblazoned with the message that for these Americans, there has been no recovery.

Even now, seven years after the global financial crisis triggered the Great Recession, “official” unemployment among African-Americans is more than 9 percent.

According to a broader (and more appropriate) definition, which includes part-time employees seeking full-time jobs and marginally employed workers, the unemployment rate for the United States as a whole is 10.3 percent.

But for African-Americans – especially the young – the rate is much higher.

For example, for African-Americans aged 17-20 who have graduated from high school but not enrolled in college, the unemployment rate is over 50 percent.

The “jobs gap” – the difference between today’s employment and what it should be – is about three million.

With so many people out of work, downward pressure on wages is showing up in official statistics as well.

So far this year, real wages for non-supervisory workers fell by nearly 0.5 percent.

This is part of a long-term trend that explains why household incomes in the middle of the distribution are lower than they were a quarter-century ago.

Wage stagnation also helps to explain why statements from Fed officials that the economy has virtually returned to normal are met with derision.

Perhaps that is true in the neighborhoods where the officials live.

But, with the bulk of the increase in incomes since the US “recovery” began going to the top 1 percent of earners, it is not true for most communities.

The young people at Jackson Hole, representing a national movement called, naturally, “Fed Up”, could attest to that.

There is strong evidence that economies perform better with a tight labor market and, as the International Monetary Fund has shown, lower inequality (and the former typically leads to the latter).

Of course, the financiers and corporate executives who pay US$1,000 to attend the Jackson Hole meeting see things differently: low wages mean high profits, and low interest rates mean high stock prices.

The Fed has a dual mandate – to promote full employment and price stability.

It has been more than successful at the second, partly because it has been less than successful at the first.

So why will policymakers be considering an interest rate hike at the Fed’s September meeting?

The usual argument for raising interest rates is to dampen an overheating economy in which inflationary pressures have become too high.

That is obviously not the case now.

Indeed, given wage stagnation and the strong US dollar, inflation is well below the Fed’s own 2 percent target, not to mention the 4 percent rate for which many economists (including former IMF chief economist Olivier Blanchard) have argued.

Inflation hawks argue that the inflation dragon must be slayed before one sees the whites of its eyes: fail to act now, and it will burn you in a year or two.

But, in the current circumstances, higher inflation would be good for the economy.

There is essentially no risk that the economy would overheat so quickly that the Fed could not intervene in time to prevent excessive inflation.

Whatever the unemployment rate at which inflationary pressures become significant – a key question for policymakers – we know that it is far lower than the rate today.

If the Fed focuses excessively on inflation, it worsens inequality, which in turn worsens overall economic performance.

Wages falter during recessions; if the Fed then raises interest rates every time there is a sign of wage growth, workers’ share will be ratcheted down – never recovering what was lost in the downturn.

The argument for raising interest rates focuses not on the wellbeing of workers but that of the financiers.

The worry is that in a low-interest-rate environment, investors’ irrational “search for yield” fuels financial sector distortions.

In a well-functioning economy, one would have expected the low cost of capital to be the basis of healthy growth.

In the US, workers are being asked to sacrifice their livelihoods and well-being to protect well-heeled financiers from the consequences of their own recklessness.

The Fed should simultaneously stimulate the economy and tame the financial markets.

Good regulation means more than just preventing the banking sector from harming the rest of us (though the Fed didn’t do a very good job of that before the crisis).

It also means adopting and enforcing rules that restrict the flow of funds into speculation and encourage the financial sector to play the constructive role in our economy that it should, by providing capital to establish new firms and enable successful companies to expand.

I often feel a great deal of sympathy for Fed officials, because they must make close calls in an environment of considerable uncertainty.

But the call right now is not a close one.

On the contrary, it is as close to a no-brainer as such decisions can be: now is not the time to tighten credit and slow down the economy.

Copyright: Project Syndicate

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Joseph E. Stiglitz is the winner of the 2001 Nobel Memorial Prize in Economic Sciences. His most recent book is Globalization and its Discontents Revisited: Anti-Globalization in the Era of Trump.