Yellen Signals Interest Rate Hike, Will It Increase Inequality?


PERI’s Gerald Epstein says the Fed needs to expand its toolbox to get finance to Main Street because raising interest rates will hurt workers.

JESSICA DESVARIEUX, PRODUCER, TRNN: Welcome to the Real News Network. I’m Jessica Desvarieux in Baltimore. And welcome to this edition of the Epstein Report. Now joining us from Amherst, Massachusetts, is Gerald Epstein. Gerald is a co-director of the Political Economy Research Institute and professor of economics at UMass Amherst.

Thanks so much for joining us, Gerry.

GERALD EPSTEIN, CO-DIRECTOR, PERI: Thanks for having me.

DESVARIEUX: So Gerry, big news. On Friday, Federal Reserve Chair Janet Yellen said she expects the Fed to raise interest rates at some point this year. That’s of course big news like I said, because that could affect your mortgage rate, or how much interest you pay on a car loan. So for you, considering the Fed hasn’t raised the rates in nearly a decade, do you think this is the right move for the Fed to be making?

EPSTEIN: Well, I don’t think there’s any compelling reason why they should do it. I think Janet Yellen is under enormous pressure from the financial markets, from some economists, to do this because this is a way of saying we’re getting back to, quote-unquote, normal. As you know, the Federal Reserve under then Bernanke and then continued by Janet Yellen reduced interest rates dramatically in the wake of the financial crisis. And this is also being done around the world, in many countries in Europe, in Great Britain and elsewhere.

And ever since that happened, some economists and businesspeople, bankers, and others have said, well, but we have to get back to normal eventually. And so I think Janet Yellen and the Fed is under a lot of pressure to do that.

The problem is that raising interest rates, it’s hard to see how that’s going to help the economy. For one thing, we don’t have much inflation now, so there’s no compelling reason to raise interest rates to reduce inflation. Second of all, if anything it will raise the value of the dollar. Which might be good for tourists but won’t help exports and those workers working in export industries, because it will make exports more expensive to foreigners and imports cheaper.

So it is true that unemployment has been going down, but part of that is because workers have given up looking for jobs, and raising interest rates aren’t going to help them. So there’s no compelling reason to do it, and I don’t think it’s going to help in any way.

DESVARIEUX: But some are arguing that keeping interest rates so low, all this quantitative easing as well, is really benefiting the wealthy and stockholders and not really benefiting Main Street, and creating more inequality. You have Nobel Prize winner Joseph Stiglitz, he’s an economist, he came out basically saying that we shouldn’t be keeping interest rates so low because it disproportionately benefits capitalists. What do you make of that argument?

EPSTEIN: Well, it’s a very interesting debate now. And Joe Stiglitz and others who are progressives have been making this argument, and also there are many on the right who have also argued that keeping interest rates low just helps the wealthy, worsens inequality, and therefore that’s a reason to raise interest rates, that it will actually reduce inequality.

The problem with this argument is that it’s–there’s some truth to the argument, so let me first talk about that. It is true that lowering interest rates in this environment has raised asset prices, and that assets are mostly owned by the wealthy. So for example, it’s raised the value of bonds, corporate bonds. It’s possibly raised the value of stocks and other assets. And the wealthy disproportionately own most of these financial assets. So in that sense, it’s true that it’s helped the rich.

The problem is that normally, under normal circumstances, it also contributes to the welfare of workers by increasing employment, lowering interest rates. Often in the past it’s helped debtors by raising inflation, which erodes the real value of having to pay back debt, and generally makes it easier for small businesses to borrow so that they can expand and hire more workers and so forth. So on the other side, lowering interest rates in most situations in the past has really helped the economy grow and helped workers and debtors.

The real problem is that this time around, many of those channels which would normally lead low interest rates to help most people are blocked. The financial system is still broken because the government, the Federal Reserve, the Treasury never required the banks to really clean up their books. Never pushed the banks to start lending to small businesses. Never pushed them to give debt forgiveness in any significant way. Moreover, the banks are sitting on millions if not billions of dollars of excess reserves instead of lending them to small businesses and so forth.

So the more positive aspects of lower interest rates really haven’t helped most people. So it is true this time around that it’s primarily the wealthy that are benefiting from the low interest rates. But the problem is, that does not mean that raising interest rates, as I said at the beginning, will help most people. In fact if anything, it will slow down the economy more through raising the value of the dollar, and so it won’t help most people.

DESVARIEUX: Gerry, the Fed has four remaining meetings this year. Just really quickly, what could the Fed be doing in order to really get the job market going and helping out Main Street?

EPSTEIN: So the way to get out of this conundrum, where lowering interest rates in this environment just helps the wealthy and raising interest rates just hurt everybody else, the Federal Reserve has to start–first of all, the Federal Reserve has to start expanding its toolbox to have more direct lending to small businesses, have more direct lending to homeowners to help them get out from under their debt of mortgages. To work with other institutions like the Treasury Department to help relieve student debt, have student debt forgiveness. The Federal Reserve has to take a much more active stance in order to relieve the debt burden that’s really weighing down small businesses, students, households. That’s number one.

Number two, the Federal Reserve cannot solve all these problems by itself. Until the government really starts to take a more active fiscal role through more public programs, more fiscal spending, tax increases on the rich and tax decreases for everybody else, until that starts happening there’s not going to be a solution to this problem.

But I think it’s a mistake for progressives, and I have all the respect in the world for Joe Stiglitz, but it’s a real mistake for progressives, I think, to make this argument and let people take the inference that it would be good for the Federal Reserve to raise interest rates. That’s not the alternative policy solution that we should be promoting. We should be promoting more fiscal policy, progressive fiscal policy, and more active Federal Reserve policy to get credit to where it’s really needed.

DESVARIEUX: All right. Gerry Epstein, always a pleasure having you on the program. Thank you so much for being with us.

EPSTEIN: Thank you.

DESVARIEUX: And thank you for joining us on the Real News Network.


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