The Fed’s Interest Rate Decisions, Census Data on Income and Poverty… and Occupy Wall Street
It’s been a busy week already for people who think about the economy. On Tuesday, the Census Bureau released its estimates of household income, poverty, and health insurance coverage for 2013. And on Wednesday, the Federal Reserve released its statement on monetary policy, projections of economic growth, and activity for the next year, and Federal Reserve Chair Janet Yellen held a press conference. Wednesday also marked the informal three-year anniversary of Occupy Wall Street (OWS). To incorrectly paraphrase Neil DeGrasse Tyson: it’s all connected, man.
First, the Fed. The debate swirling around the Fed these days is how soon they should start raising short-term interest rates to slow economic growth and forestall excessively high wage and price inflation. The answer to this should be simple: not soon at all. Wage and price inflation remain extraordinarily low, with no evidence that they’re accelerating. In fact, wage growth could effectively double from its current pace before really becoming inconsistent with even the Fed’s too-conservative 2 percent overall price inflation target.
So if this is what the evidence says, why is there a growing chorus arguing for the Fed to tighten?
Here’s where Occupy Wall Street comes in. Tightening now would keep unemployment higher than it would be under genuinely full employment, and stopping job growth short of full employment is a powerful tool to shift bargaining power away from low- and middle-wage workers and keep them from realizing inflation-adjusted wage increases. This tolerance of sub-full employment is a big reason why inflation-adjusted wages for the vast majority have failed to rise at all for most of the time since 1979, and have certainly not risen anywhere near the pace of overall productivity growth. This wasn’t always the case, but starting in the late 1970s a number of policy decisions made on behalf of corporate managers and owners of capital helped tilt the playing field away from low- and middle-wage workers, and this has been a prime source of the rise in income inequality since. A key part of this inequality by design was having macroeconomic policymakers—particularly the Fed—slow the economy down before full employment could spur across-the-board wage growth. The one time the Fed did not slow the economy “in time”—the late 1990s—led to the first across-the-board wage growth in a generation. If OWS had a grand organizing theme, it was certainly along the lines of the idea that economic policy has helped generate the rising inequality we’ve seen over the past generation. They’re right, and macroeconomic policy that has privileged very low rates of inflation over very low rates of unemployment is part of how policy did it.
What does this have to do with Tuesday’s Census data? These data showed that 2013 was the year when the leading edge of recovery from the Great Recession finally appeared for American families. Families in the bottom 40 percent of the income distribution saw their inflation-adjusted incomes go up rather than down for the first year since 2007. Gains were actually largest for the bottom-fifth of families, which can go a long way to explaining the fact that child poverty fell for the first time since 2000. To be clear, recovery from the Great Recession remains far, far from complete. But this year’s report on income and poverty show that it’s finally turned a corner for many, even with the labor market still extraordinarily weak. Imagine how much better it would be if the economy continued to improve and policymakers gave it room by not short circuiting job growth in the name of battling phantom inflation.
Will these policymakers do this? So far Yellen has been admirably insistent that actual inflationary pressures be identified in real data before talk of monetary tightening should be entertained. But some regional Federal Reserve Bank presidents—including ones that vote on the Federal Open Market Committee are not heeding this advice. The OWS view of the world argues that pressure from inflation hawks will eventually win out and the plug will be pulled far too early on recovery. I hope this view is wrong. One thing that could help make it wrong would be for President Obama to fill the two vacant slots on the Federal Reserve Board of Governors with evidence-minded candidates who cared about lowering unemployment.