Putting aside the noise that rumbles from the Boehner-McConnell-Fill-In-The-Blank Republican divorced-from-reality view of the economy, who rail about job-killing taxes/regulation/voodoo, the far bigger threat to jobs right now hails from the halls of the Federal Reserve Board. It could, within weeks or months, guarantee that hundreds of thousands of people won't have a job, and reawaken the deficit-mongering crowd's call for cuts in government that will hurt millions more.
All of this could happen because of the signals the Fed is sending about raising interests rates. As Dean Baker explains:
The Fed’s plans to raise interest rates are rarely spoken of as hurting employment, but job-killing is really at the center of the story. The rationale for raising interest rates is that inflation could begin to pick up and start to exceed the Fed’s current 2.0 percent target if the Fed doesn’t slow the economy with higher interest rates.
Higher interest rates slow the economy by discouraging people from borrowing to buy homes or cars. They will also have some effect in discouraging businesses from investing. With reduced demand from these sectors, businesses will hire fewer workers. This will weaken the labor market, which means workers have less bargaining power. If workers have less bargaining power, they will be less well-situated to get pay increases. And if wages are not rising there will be less inflationary pressure in the economy.
The potential impact of Fed rate hikes on jobs is large. Suppose the Fed raises interest rates enough to shave 0.2 percentage points off the growth rate, say pushing growth for the year down from 2.4 percent to 2.2 percent. If we assume employment growth drops roughly in proportion to GDP growth, this would imply a reduction in the rate of job growth of almost 10 percent. If the economy would have otherwise created 2.4 million jobs over the course of the year, the Fed’s rate hikes would have cost the economy more than 200,000 jobs in this scenario.[emphasis added]
It could be worse, Dean says:
In fact, the impact of Fed interest rate hikes on jobs can easily be far larger than this 200,000 number. If the Fed decides that the unemployment rate should not fall below a certain level (5.4 percent is a number is often used), then it could be costing the economy millions of jobs if the economy could actually sustain a considerably lower level of unemployment as it did in the late 1990s.
In
a more detailed paper on the topic of how higher interests rates will hurt the budget, Dean says:
- The budget surpluses of the Clinton years were only possible because the Fed allowed the unemployment rate to fall far below the level most economists thought was sustainable. If the Fed had raised interest rates enough to keep the unemployment rate from falling below 6.0 percent (as projected by CBO), the federal government would have run a large deficit in 2000, instead of a large surplus.
- Higher interest rates will directly lead to larger budget deficits. If the Fed were to keep
interest rates near their current levels, so that the ratio of interest payments to debt did not change, the government would save $2.868 trillion on interest over the 10-year budget horizon. This is a bit less than four times what the federal government is projected to spend on the Supplemental Nutrition Assistance Program (food stamps) over this period. If the Fed adopted a middle course, so the ratio of interest to debt rose to half way between the 2015 and the projected baseline levels, the government would save $1.481 trillion on interest over this 10- year period.
- The federal budget also benefits from the interest payments that the Fed refunds from the Treasury bonds and mortgage-backed securities it holds as part of its quantitative easing (QE) program. If the Fed were to hold enough bonds so that the amount of interest it refunded to the Treasury Department each year remained at its 2015 level, the cumulative budget savings over the 10-year horizon would be $617 billion. In a middle scenario, in The Budgetary Implications of Higher Federal Reserve Board Interest Rates which annual interest payments were halfway between the 2015 level and the projected baseline, the savings would be $309 billion.
- If the Fed were to allow the unemployment rate to fall to 4.0 percent and remain at that
level, it would lead to substantially higher tax revenue and reduced payments for unemployment benefits and other transfer programs. The cumulative difference over the 10-year budget horizon is nearly $1.9 trillion, over two and a half times the projected cost of the food stamp program.
- The Fed’s interest rate policy would also have large impacts on state and local budgets. If the unemployment rate were to remain at 4.0 percent instead of the 5.4
percent baseline, states could anticipate roughly 2.8 percent more revenue each year. In addition, they would see their annual payments for unemployment insurance fall by roughly 25 percent. The implied savings are substantial. In the case of California
, for example, the combined benefit to the budget in 2016 would be more than $6.3
billion. In Illinois it would be almost $2 billion.
I make a special note about the first point he makes: The miracle that Bill Clinton runs around talking about--what a wonderful economic steward he was--is bullshit (more on that another day). It sticks in my throat to even say this but Alan Greenspan, who mostly is the spawn of the devil, did the right thing by not pushing interest rates up...and Clinton's budget surpluses had almost very little to do with the fantasy he spins out about the "good times" of the Clinton years (true, he should get "credit" for cutting aid to dependent children and other welfare payments...).
But, to return to the main point: the Fed has in its power to destroy the future for hundreds of thousands of people, all in service to the bond markets. Inflation is dead in the water--and will likely continue to remain that way, largely because oil prices are plummeting for the foreseeable future.
The Fed's denizens--particularly those who sit on the Fed's Open Market Committee (FOMC) which determines interest rates--just don't have the concerns regular people have, as Dean rightly says:
It is likely that the members of the FOMC, who largely come from the financial industry, are much more concerned about inflation than the population as a whole. They are also likely to be less concerned about unemployment. These are people who tend to read about unemployment in the data, not to see it themselves or among their friends and family members.[emphasis added]
We should not be silent and let this happen.