Inflation has decreased to 6.5 and unemployment remains relatively low. And yet, many economists, including those in the Federal Reserve Bank continue to insist that more needs to be done. What needs to be done? Well, of course, aggressively raise interest rates. In other words, interest rates should continue to be raised even if the effect is to crash the economy with millions of workers being forced into unemployment. And while this approach has a patina of legitimacy because it is grounded in monetarism, it is but another example of the elite’s war on ordinary workers.
It is a staple of monetary policy that when unemployment is high, the Fed pumps money into the economy by lowering interest rates and lowering reserve requirements in member banks. This enables firms to obtain money more easily, in which case they will invest and create jobs. Then when inflation is high, the Fed tightens the money supply whereby it raises interest rates and reserve requirements in member banks. This makes it more difficult to invest in new plants and equipment, with the result often being an increase in unemployment.
The problem with monetary policy is that inflation and unemployment are inversely related. Lower unemployment may lead to inflation and efforts to combat inflation may lead to higher unemployment. The Fed typically looks at monthly jobs' numbers and a good jobs report showing that unemployment declined, may signify inflationary pressure. Hence the claim that the Fed needs to do more to combat inflation.
The irony here is that following COVID and the assorted shutdowns that resulted, the labor market is strong. Unemployment is low and wages are up. In fact, some sectors have had difficulty in finding workers. One might think this is good news. But it isn’t because it adds to inflationary pressure. That is, if workers are earning more, then we need to take steps to combat inflation. Never mind that inflation began with the supply chain crisis. We can now blame ordinary workers. After all, in the mind of the neoclassical model of competitive markets, labor costs aren’t fixed, but discretionary.
When the Fed asserts the need to keep raising interest rates in order to bring down the inflation rate, it is effectively saying that ordinary workers need to be sacrificed for the interests of the elites. The Fed has long served the interests of the banking industry. In fact, by statute — the Federal Reserve Act of 1913 — it is supposed to serve the banking industry. On the contrary, it is only following the Employment Act of 1946 that it has assumed the role of general economic management.
The Employment Act, which created the Council of Economic Advisors, said that it would be the official policy of the federal government to maintain as high a level of employment as practicable. Because fiscal policy — lowering taxes during a recession to increase aggregate demand for goods and services and raising taxes during inflation to curb aggregate demand — requires an act of Congress, monetary policy has been inferred.
The problem here is that the Fed is unelected and unaccountable, Fed governors are appointed by the president and confirmed by the senate. Once confirmed, they cannot be removed before their terms expire. So, if a Fed action adversely affects ordinary workers on main street, they have no recourse.
Over fifty years ago, the late economist Sidney Weintraub argued that it was immoral for economists, particularly at the Fed, to be applying the brakes to control for inflation, as they themselves were unlikely to lose their jobs. For Weintraub, ordinary workers were nothing less than innocent lambs being led to their slaughter.
Of course, unemployment figures are merely numbers. They aren’t people, rather they are commodities in the production process. When a recession ensues from continuous interest rate hikes, the elites at the Fed can take comfort in the knowledge that they did not target anybody specifically. And yet, the real question is are these hikes really necessary?
If the rate of inflation is declining and there are jobs for workers, then why raise rates anymore? Those who claim that more needs to be done assert that prices are still high and haven’t decreased enough. Some leading economists, like former Treasury Secretary Lawrence Summers, maintain that we need to return to an annual inflation rate of 2 percent. One can’t help but think that this is a pipe dream. Moreover, Summers who has tenure at Harvard will not be losing his job either.
Even if the rate of inflation decreases, it is questionable whether prices will really come down again. The question from a policy standpoint is why workers should bear the brunt of these costs. Let’s consider the following: Inflation began with the supply chain crisis due to COVID. The energy shortage exacerbated it. Inflation was increasing when Biden took office and cancelled oil pipelines and drilling leases as part of a broader green energy push. Of course, the rising cost of gas, which increased production costs and getting goods to market, was exacerbated further by the war in the Ukraine.
Still, the Fed hasn’t been blameless here because it maintained artificially low interest rates along with quantitative easing beginning with the Great Recession of 2008. Workers were already suffering from that. With Covid, workers were suffering again. And now the Fed wants workers to suffer more because of inflation which it contributed to?
One doesn’t have to be a Marxist to see that workers continue to be exploited. For Marxists, the production process has always been a deliberate war on workers. But the war against workers appears to continue on. Those who were locked out of their jobs during COVID were ordinary workers. Those who have lost and are continuing to lose their jobs in the oil and gas industry because of green energy policies are ordinary workers. For these workers the war on fossil fuels is a war on them, largely because new jobs in green energy don’t pay as well. And now they are expected to lose their jobs due to the recession that will be created in response to interest rate hikes.
If the Fed is truly launching a war on inflation and not a war on workers, then the sacrifice needs to be shared equally across the board. But if the only reason that we continue to raise interest rates is because the elites say they are necessary, and without much justification, then it is nothing less than a war on workers.