Opinion pieces and speeches by EPI staff and associates.
When Is a Soft Landing Too Hard?
by Jared Bernstein and Robert Cherry
The current economic debate is almost entirely focused on whether the upcoming landing will be hard or soft. Are we headed for a recession? Or will the Fed be able to turn down the heat without shutting off the burner?
These are important questions, since the difference between the two scenarios is clearly of great consequence. But there is a third, often overlooked scenario, one that is just now being experienced by some of our least advantaged families.
Under this scenario, everything looks very benign. Interest rates are raised to slow the economy; GDP growth slows accordingly (but not too much); unemployment ticks up slightly; and inflation recedes. The policy czars at the Fed and Treasury shake hands, pat backs, and consider it a job well done.
But this outcome is not nearly so benign from the perspective of the millions of workers who have benefited the most from the hot economy that prevailed up until very recently. Their economic fortunes are already beginning to unravel.
For these low-income families, the historically low unemployment rate translated into higher quality job opportunities than they’d seen in decades. Starting around 1996, for the first time in a quarter century, the wages of low wage workers began to rise in inflation-adjusted terms.
And they rose at a pretty impressive clip — 2.5 percent annually — faster, even, than the wage growth of some higher paid workers. This pattern helped to slow the increase in inequality that had seemed so inexorable before the labor market really tightened up.
The benefits of full employment go well beyond wage growth. Welfare reform, the success of which is predicated on moving less-skilled workers into the private sector workforce, would have been a disaster in the absence of the surge in demand for low-wage labor.
With surplus labor around, employers could indulge in the belief that poor women coming off the welfare rolls lacked the necessary traits to be stable workers. Now these employers have found that former welfare recipients have higher retention rates than other workers. Even a good chunk of the much-hailed decline in crime rates is defensibly assigned to full employment.
When the Federal Reserve started raising interest rates last year, these gains were threatened. The law of “last hired, first fired” still prevails, and when their employers begin to perceive weakening demand — which is, after all, the Fed’s goal — we should expect to see the negative signs among these workers first.
Such signs are now appearing. The unemployment rate among young, African American job seekers without any college education, after falling more than 10 percentage points, leveled off at around 20 percent several months ago. Their real wage growth has also slowed. Meanwhile, the high-end of the job market shows none of these signs of softening, suggesting that our respite from growing inequality is probably short-lived.
Could things have unfolded differently? If the economy was truly overheating, what else could the Fed have done but try to slow things down? After all, a soft landing will certainly be better for all parties than the alternative.
There are three points to consider. First, one can make a credible argument that the Fed overreacted. The wage pressure they claimed was behind their 1.75 percentage point rise in interest rates was never really in the data. Wages rose over this period, but they did so smoothly, never accelerating in an obvious way.
Second, Greenspan and company do not seem to consider the costs of their actions to those hardest hit by them. If they did, they would be less quick to pre-emptively raise rates and would use their influential bully pulpit to cite the need to protect these vulnerable families through targeted policies that respond to the business cycle.
Finally, something is wrong with this picture. The only way for low-wage workers to get ahead is when the labor market is teetering on the edge of full employment. But, with the exception of the last few years, the Fed hasn’t let us get there. Now its actions have cut the economy’s growth rate in half and will soon lead to higher unemployment. There must be a fairer way to run the economy.
If they bring us in for a soft landing, the cheers will resound. Chances are the noise of the celebration will drown out the voices of those for whom even a soft landing is too hard.
Jared Bernstein is an economist at the Economic Policy Institute in Washington, D.C.
Robert Cherry is a professor of economics at Brooklyn College.
[ POSTED TO VIEWPOINTS ON JANUARY 24, 2001 ]