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  March 23, 2017

Fed Inflation Target Keeping Wages Low, People Out of Jobs

CEPR co-founder Dean Baker says there are good reasons for thinking that we still are far from full employment, needlessly slowing the economy and keeping people from getting jobs
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Dean Baker is senior economist at The Center for Economic and Policy Research (CEPR). He is the author of several books including, The United States Since 1980; Social Security: The Phony Crisis (with Mark Weisbrot); and The Benefits of Full Employment (with Jared Bernstein). He appears frequently on TV and radio programs, including CNN, CBS News, PBS NewsHour, and National Public Radio.


SHARMINI PERIES: It's The Real News Network. I'm Sharmini Peries, coming to you from Baltimore.

Last week, the U.S. Federal Reserve raised its benchmark interest rate for the third time in the past year and a half. It decided to raise the rate by a quarter percent, to between 0.75 and 1.0%. This is the highest the rate has been since the end of the great financial crisis of 2007-2008.

The reason for the rate increase, according to the Federal Reserve chairwoman, Janet Yellen, is that the U.S. is close to full employment and is sufficiently strong, and inflation is reaching the Fed's target of 2%. In other words, she signaled that a gradual deceleration of the economy is in order.

Joining us now to talk about the Fed's recent move is Dean Baker. Dean is the co-director of the Center for Economic and Policy Research, and is the author of “Rigged: How Globalization and the Rules of Modern Economy Were Structured to Make the Rich Richer”.

Thanks for joining us, Dean.

DEAN BAKER: Thanks for having me on.

SHARMINI PERIES: Dean, do you think that the Fed's reason for increasing the benchmark interest rate is justified?

DEAN BAKER: Well, I understand it. I mean they're looking from a framework where the economy is approaching what they consider full employment, so 4.7%. That's roughly the unemployment rate we had going into the downturn, and it's below, in fact, many estimates of the lowest the unemployment rate can get before you see inflation. So I understand that.

But I do think it's mistaken. So what I would say is that there are good reasons for thinking that we still are far from full employment and they're needlessly slowing the economy, needlessly keeping people from getting jobs.

I'll just mention two that strike me as very important. One I've talked about this before: the employment to population ratio, if we look at the percentage of people that are working, and we focused on prime age people, people 25 to 54 – these are not people that are retiring, and for the most part they're not in school in those years, that's still down by more than two full percentage points from its pre-recession level.

I don't think there's any good story that why roughly two million people, in fact more than two million people, decided just that they don't feel like working. And if we compare it to 2000 when the economy was very strong, we're down by four percentage points, so that's over four million people.

So, I don't see a good story there, a good explanation for that.

The other piece of data that I look to is the percentage of people who are unemployed as a result of voluntarily quitting their prior job. And, this is an interesting measure because in a sense it's saying what people themselves think about their labor market prospects. And if you don't think they're very good, you're not going to quit one job until you have another job lined up, so you don't end up being unemployed. On the other hand, in a strong labor market, a lot of people are willing to take that risk. They're very confident they'll get another job quickly.

Well, currently, that's a bit over 10%. That's actually a very low level. That's higher than it was in 2009 at the bottom of the crash, but if you compare it to prior recessions, that's pretty much a recession level, and if you look at a really strong economy, what we had in 2000, it was at 15% at its peak.

So, I look at that – there are other measures I could point to – but those indicate to me that we still have a lot of room in the labor market, that we're not at full employment, and we should be looking at trying to keep a foot on the accelerator, try and let these people get jobs.

SHARMINI PERIES: Right. And, Dean, why does the Fed consider 4.7% almost full employment, or that that... in terms of their target, full employment, given that a lot of people have dropped out of the job market? And also it's really not full employment in actual numbers.

DEAN BAKER: Yeah, well, of course, we aren't looking at zero. The question, what they're thinking was full employment is the point where we have a stable inflation rate. So if we have a low unemployment rate, let's hypothesize we're at 3%, which I'll concede that's probably lower than the economy can get to. In that context, you'd see rapidly rising wages, so in effect firms are bidding away workers from other firms.

This store is bidding up wages to get workers from the store across the street, same with factories, same with offices, on down the list. They're going to pass that on in higher prices, and then we have a serious problem with inflation.

So the idea of full employment, 4.7%, they're saying that's pretty much the best we could do. If we got to 4% unemployment, back where we were in 2000, then they'd say we'd have rising wages, rising prices. We'd have a big problem with inflation.

The two points I make on that is, one, we've been horribly wrong in the past in estimating that point. So, going back to 2000 got 4% unemployment, no noticeable rise in inflation to speak of that year, or prior years. If you go back to the mid-'90s the absolute consensus in the profession was that we couldn't do much better than 6%. So that's turned out to be hugely wrong. And even in the more recent period, if we go back, say, two or three years, the consensus probably would've put it at 5.1% to 5.2%. Now we're at 4.7% -- again no noticeable uptick in inflation.

So, first off, I'd just point out they've been wrong in the past. The other point I'd make is that, to my view, there's very little risk in probing, in the sense, let's get the unemployment rate lower. And we don't have any models that say inflation just shoots up. So, let's say they're right, 4.7% is the right number, and they foolishly listened to me and let the unemployment rate fall to 4.3% or something like that. Well, the models say that inflation would rise very gradually. We're currently at 1.7% by the measure they use. It might rise after six months, a year, to 2%. That's not a big deal.

So, to my view, this is kind of almost a no-risk proposition. Let people get jobs, and a very important point to be made here is the people who will get jobs are disproportionately the most disadvantaged: people with less education, African-Americans, Hispanics. Those are the people who are going to get jobs. So we let the economy keep creating them.

So to my view, it's a bad mistake. I'm not going to make it say a quarter point is the end of the world. The problem is if you keep doing it, it is a big deal.

SHARMINI PERIES: And lower unemployment rates also force the wages up, because of the competition. Is that not something that the Fed wants to achieve?

DEAN BAKER: Mixed story there. I mean, for a lot of these people, higher wages are bad news. You know, it does come out of corporate profits, and again this is one of the stories to the downturn. We've had a big shift from wages to profits as a result of the downturn and the very weak labor market we saw in 2008, 2009, and 2010. It's starting to shift back. We had about five percentage points of income shift from wages to profits; we've made back roughly half of that.

My expectation is if you allow the labor market to tighten we could get back not all of it, but certainly most of it, and that would be, again, in my view, a very good thing. I want to see workers get higher wages. But if you're looking at it from the standpoint of businesses and corporate profits, you don't want to see that.

SHARMINI PERIES: Right. And, now Trump and his new budget and his plans, as of his address to the joint congressional address last Tuesday, he was also talking about creating more jobs and investing in a huge infrastructure plan. Does this put him on a collision course with the Fed then?

DEAN BAKER: Well, it could well. I mean, we have to see exactly, A, what he proposes, and B, what actually passes Congress. What he's put on the table so far is increasing military spending offset by other budget cuts. That will have little net effect, and it might well be a negative, because the military on a per dollar basis doesn't create as many jobs as say the spending he's cutting -- Meals On Wheels, after school lunches. Those actually create more jobs on a per dollar basis. So, that's not going to have an impact, or it will have an impact the wrong way.

On the other hand, if he actually does put a serious infrastructure program on the table, proposes spending a trillion dollars over the next decade -- that would boost the economy.

So, what we have to see is what he actually puts on the table, and then of course at the end of the day what Congress approve. And in that situation, if we did see this big infrastructure plan, he would be at odds with the Fed, because the Fed probably would look to counteract any job growth that it created, which, my view, would be a mistake. I'm mean, I'm not a fan of Donald Trump, but I am a fan of jobs.

SHARMINI PERIES: All right, Dean. We'll keep an eye on this and come back to you when we have greater clarity on where we're going. Thanks so much.

DEAN BAKER: Thanks for having me on.

SHARMINI PERIES: And thank you for joining us here on The Real News Network.




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