How Fed Money Policy Prioritizes Bank Over Full Employment
A report by the Center for Popular Democracy focuses on that segment of the nation that has not recovered from the great recession, Black America. The report examines an uneven economic recovery and the role the Fed has played.
For Wall Street, whose recklessness created and exacerbated the housing bubble and financial crisis, the Fed provided financing to shore up the big banks. Between the 2007 crash and March 2009, the Fed committed $7.8 trillion to financial institutions and the financial system. That amount is 100 times more than the Treasury Department committed to the controversial bank bailout (the Troubled Asset Relief Program), and roughly one half the country’s GDP.
On Main Street despite strong job growth, the 2014 unemployment rate in nearly every state is still above its 2007 pre-recession rate; and even further from its 2000 rate, which was much closer to what could be considered full employment.
In Black America, M.L.K. Jr. Blvd., unemployment rates are still above the national unemployment rates during the recession, Black wealth loss continues, and wages are falling. In January of 2015 the national black unemployment rate was still 10.3%, higher than the 10.0% rate at the height of the recession in October of 2010.
As the nation’s central bank, the Fed is responsible for “influencing monetary and credit conditions in the economy in pursuit of maximum employment, stable prices, and moderate long-term interest rates;” regulating banks and other financial institutions; preserving stability in the financial system as a whole; and serving as the bank to banks and governments.
According to the report, the Fed’s current policy approach prioritizes inflation concerns over the achievement of genuine full employment. It articulates an inflation target, but no employment or wage target. When the Fed announced a 2% inflation goal in 2012, then-Fed Chair Ben Bernanke acknowledged the tension, saying, “a fixed employment target would be in conflict with the inflation target because lower unemployment might trigger inflation above 2 percent.”
The Fed’s goal is about 5.2–5.6 % unemployment among people currently in the labor force. Keep in mind that the unemployment rate in the Black community is normally twice that of the national rate.
The unemployment rate however is not an accurate measure of slack in the economy because millions of workers have dropped out of the labor market, and millions more are employed part-time but desire full-time work (and are not counted as unemployed or partially unemployed).
A more complete definition of full employment would include; low unemployment rates, sufficient job vacancies so workers can find jobs, increases in real wages that match productivity growth, and an inflation rate of about 3 percent, which workers’ rising incomes would be able to sustain. The Fed should examine both the traditional unemployment rate—the ratio of employed people to those people actively seeking work—as well as the ratio of job-holders to the adult population, the number of part-time workers who want full-time jobs, and the number of discouraged workers. These additional measures are currently absent from the unemployment rate and are crucial to understanding the true.
The Report argues that a better approach would be to focus on wage growth and judge when wage growth accelerates and is likely to generate inflation above the target. Wage growth of 3.5 to 4.0 percent is consistent with the Fed’s target of 2% inflation.
A more equitable policy, given that the profits share of the economy has risen in recent years (and labor’s share has correspondingly shrunk) would be for wages to grow even faster than this 3.5 to 4% range for a period of time in order to restore working families’ share of national income.
Pre-empting wage growth in order to forestall asymptomatic inflationary fears has only hurt our economy and cause real misery for tens of millions of families.
Full report available at https://www.dropbox.com/s/j8dtg6llay8muvr/FedUp%20Report%2003022015%20web-2%20copy.pdf?dl=0