The Fed is still trying to murder the recovery

We're $1.7 trillion in the hole, and some Fed officials are worried it's not deep enough

The Federal Reserve building.
(Image credit: REUTERS/Jim Bourg)

The greatest short-term threat to the well-being of the American people is not immigrants, political correctness, or even obnoxious Canadian professors. It's our very own central bank, the Federal Reserve.

The economy is doing fairly well, with growth ticking along and (more importantly) unemployment low. Yet there is a serious risk that the Fed will pointlessly strangle the economy by raising interest rates before full economic strength is reached. They prioritize a hypothetical future risk of inflation over the current welfare of the working class.

From about 2010 through 2014 or so, there was a furious debate over the policy choices of the Federal Reserve. The economy was in extremely poor shape, yet there was consistent pressure from conservative economists and members of the Fed's governing board to raise rates and slow growth. In late 2010, with unemployment still near 10 percent, a slew of conservative bigwigs wrote an open letter to then-Fed chief Ben Bernanke warning of currency debasement, inflation, and no improvement in unemployment if he went through with his (quite timid) efforts at unconventional monetary stimulus.

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That warning has proved to be utterly mistaken. There has been neither currency debasement nor inflation, and unemployment has steadily fallen to near 4 percent. On the contrary, the Fed has consistently made the opposite error, halting its unconventional stimulus far before full employment was reached and beginning to raise rates in late 2015 despite still being far below its 2 percent inflation target. Just in March, it raised them again, and loudly promised to keep raising them in future.

Overall, the Fed has undershot its target in all but 16 of the 104 months between the end of the recession in June 2009 and February 2018. By my calculations, the average inflation over that time has been a mere 1.4 percent — meaning more jobs and growth almost certainly could have been had without spiraling inflation. If the Fed hadn't started tightening the screws in 2015, we might now be enjoying a real red-hot job market — and perhaps even catching up to the pre-2007 growth trend.

But like some mayor flipping out about fire prevention during the 10th consecutive year of knee-deep flooding, top Fed officials are still fretting anxiously about hypothetical future inflation:

Forecasters expect growth to accelerate later this year, though. Those predictions, along with a recent uptick in the inflation rate, are prompting some Fed officials to push the bank to raise interest rates at a faster pace than it has been, in order to reduce the risk of overheating ... [Federal Reserve Bank President Eric] Rosengren is among those pushing for the Fed to raise interest rates more quickly than some of his colleagues would prefer, in part because he fears a situation in which rapid inflation forces the bank to raise rates drastically, tipping the economy back into recession. [New York Times]

As ever, this is a severe error of risk analysis. We are right now looking back on an entire lost decade of severely subpar growth and high unemployment. The U.S. economy is about $1.7 trillion below its pre-crash GDP trend. One cannot say how much of that ground can be made up, but the potential gains are very large. And only in the last year or two has unemployment fallen low enough to reduce long-term unemployment into half-decent territory. People who have left the labor force (that is, they gave up looking for jobs) are coming back. Suddenly, ex-cons and other marginalized people — that is, folks who need jobs more badly than anyone — are finally getting work.

On the other hand, the forces that fueled the strong inflation of the 1970s are almost entirely absent. Few workers are unionized, and don't have the cost-of-living contract stipulations that were a powerful part of wage-price spirals then. Back there, there was a tremendous growth in the labor force as Baby Boomers came of age and women entered the workforce en masse at the same time, while today labor force growth is slow and steady. (Like generals, elite economists have a powerful tendency to be constantly fighting the last war.) Freaking out about future inflation at this moment is, frankly, stupid.

For the most desperate people in society, the recovery is just now reaching their neighborhood. Rosengren would slow its progress for fear of a recession, achieving in fact the thing he is supposedly trying to prevent.

Ultimately, it's hard to avoid the conclusion that worries about inflation are merely the sublimated class interest of the rich. Further growth might increase sales and revenues, but it would probably also eat into sky-high corporate profits (particularly those of finance). It might even push inflation briefly over 2 percent, thus eroding the value of nominal assets. Even if a real economic boom did increase profits, it would come at the price of more assertive labor that might gain more political strength, and make demands for more regulation or investigations into the corporate crime spree of the last decade. Better to keep the economy weak and corporate elites at the pinnacle of power and influence than risk a potentially destabilizing boom.

The lesson for anyone who wants to create a real full employment economy is simple, however. The Fed will have to be brought to heel first, either by changing it into an ordinary government department, or stacking its board with people sympathetic to the working class. The current arrangement simply is not working as advertised.

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