Why the Fed Raising Interest Rates Matters

The Federal Reserve is the central bank of the United States. There are many valid criticisms of it as an institution, but it can act as a valuable force for the public interest if used properly.

As is the standard of central banks, the Fed has a powerful tool that allows it to have a major impact on short-term interest rates. Interest rates are basically bread and butter to the number of people who have jobs in the economy.

Raising interest rates has the effect of slowing the economy and keeping people — potentially millions of them, as shown in recent years — from finding jobs. Higher interest rates naturally mean less loans to businesses and organizations that could use them to hire more workers. The standard argument for raising interest rates though is to control inflation, as higher interest rates reduce pressure in the labor market, which then leads to workers having less bargaining power for pay increases.

The problem with the argument to control inflation is that inflation has already been quite low in past years, well below the Federal Reserve’s 2.0 percent annual target. The 2.0 percent target is supposed to be an average, and considering recent years, it hasn’t even been near that target. The Federal Reserve was set up with the dual mandate of both adequately controlling prices and maintaining what’s known as full employment. Full employment basically means a strong labor market with low unemployment, where workers can have good access to jobs with fair wages, and it’s quite important as a policy measure. (Due to slow wage growth among most, the U.S. economy clearly isn’t at full employment now, contrary to what you’d likely read in the newspapers.)

If unemployment is low, it means that there will be an increased demand for labor, which should both mean higher wages for workers and that the economy’s resources are being used decently well. The increased demand for labor raising wages is because employers cannot so easily hire other workers if their employees happen to leave the firm. Without enough employees, the firm risks being losing profitability to its competition and going out of business. This situation would allow an existing employee to say something like “Give me a raise or I will find a job elsewhere,” and it would potentially allow a prospective employee to refuse a job unless the wage is adequate enough.

The increase in worker bargaining power leading to higher wages and then higher inflation is due to firms needing deciding to raise prices some after seeing that workers generally can pay more. There is nuance needed in this description, and it should be noted that wages for most workers in the U.S. have been mainly stagnant for decades due to the policy-driven upwards redistribution of income to the wealthy, but it’s a standard point. If the policy is actually directed towards the interest of the general public, the increases in prices will be more than offset by the increases in wages, however. There is evidence of this worker-friendly approach doing well in the U.S. from about 1947 to 1973.

It should also be noted that the only times that many American workers have experienced even minor real wage increases in the last four decades have been when there were tighter labor markets. This occurred in the later 1990s and over the past several years, and it points to the immense importance of the Fed keeping interest rates low.

Alan Greenspan was the economist at the head of the Fed in the 1990s, and for whatever reason, he decided against raising interest rates as the unemployment rate got lower. This was at a time when it was standard in the economics profession to claim that the unemployment rate couldn’t go below about 6 percent without leading to rapid inflation. Inflation never got that high in the 1990s though, and even if Greenspan deserves serious criticism for failing to contain the housing bubble that was the main cause of the devastating economic crash and Great Recession, he does deserve praise for doing this one thing to help low- and middle-income workers.

Janet Yellen’s chair appointment at the Fed also saw the institution keeping interest rates quite low for her tenure, which is clearly one of the main reasons that the U.S. economy is doing decently well now in 2018 relative to the last four decades. Driving around America now would allow someone to see many more help wanted signs than in at almost any other time thus far in the 21st century, and there’s an advantage to this that may not be so obvious: Disadvantaged workers (typically those from minority ethnic groups or with disabilities) will have an easier time finding jobs. The increased demand for labor means that there’s less room for discrimination against them. As proof of this, the disabilities application rate and the unemployment rate for African-Americans have fallen to historically low levels.

The unemployment rate does of course have its flaws. It measures workers looking for jobs, not the amount of people who have dropped out of the labor force and are no longer looking for employment. There is plenty of good work that needs to be done, and there are idle hands that want to do it, but the dysfunctional American economy isn’t putting the two together enough. So while the unemployment rate is an important measure, there are other relevant indicators (such as the labor force participation rate among prime-age workers) that should be considered in assessing the economy.

But if the majority of workers benefit most from lower rather than higher interest rates, why does the Fed continue to raise them then? It’s largely because financial institutions exert significant control over the Fed, and their preference is to keep inflation as low as possible. More worker bargaining power via lower interest rates can mean a shift from net corporate profits to wages for workers, and bank loans also stand to depreciate in value with higher inflation.

The after-tax corporate profit share of national income has almost doubled since 2000, and this to a significant extent is because of wages for workers being diverted into corporate profits that are largely pocketed by executives and major shareholders. According to one reputable estimate, if the after-tax corporate profit share was back at its 2000 level, it would translate to nearly $4000 more per U.S. worker in wages, a fact that is undoubtedly quite disturbing.

The loans of banks and other financial corporations typically are set at a fixed rate, the repayments of those loans will be worth less to them if inflation rises. For one example, if a bank offered a 5 percent home loan while expecting that inflation would be 1 percent, the bank would assume that it would receive a real interest rate of 4 percent. If the inflation rate actually becomes 2 percent, the bank will take a considerable profit loss (receiving a 3 percent real interest rate) compared to what it expected.

In sum though, the issue of the central bank raising interest rates has historically been one that’s favored powerful financial corporations at the expense of the working class, and it’s a very significant issue that should be kept in mind more.

Wages of the Top 1% Still Growing at the Expense of Others

Who the economies of the world were rigged to benefit most. The latest data confirms the trend of the upwards redistribution of income often seen over the last several decades.

The world’s largest economies have grown at a steady pace and unemployment has consistently fallen in the years following the greed-driven global financial crisis of 2008, but income gains during the so-called recovery have been enjoyed almost exclusively by the top one percent while most workers experience “unprecedented wage stagnation.”

That’s according to the OECD’s 2018 Employment Outlook (pdf) published Wednesday, which examines recent economic trends and finds that wage growth for most citizens in the 35 industrialized nations studied is “missing in action” due to a number of factors, including the the rapid rise of temporary low-wage jobs and the relentless corporate assault on unions.

[…]

In a statement on Tuesday, OECD Secretary General Angel Gurría said “[t]his trend of wageless growth in the face of a rise in employment highlights the structural changes in our economies that the global crisis has deepened, and it underlines the urgent need for countries to help workers.”

[…]

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Inequality Shown as the Fight For 15 Movement Continues

The story of U.S. wage disparity: “In 2007, average annual incomes of the top 1 percent of households were 42 times greater than in­comes of the bottom 90 percent (up from 14 times greater in 1979), and incomes of the top 0.1 percent were 220 times greater (up from 47 times greater in 1979).”

The income share of the top 1 percent in the U.S. has doubled from its share during most of the 1950s to 1980. This is an amount high enough to increase the income of people in the lowest 90 percent of the country’s income distribution by over 20 percent, and it’s nearly enough to double the income share of the bottom 40 percent. That basically represents massive amounts of money being wrongly transferred upwards.

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Today’s article that’s linked to here reports on the movement of employees fighting for a $15 an hour wage. This is hardly radical when it’s considered that the minimum wage would be about $20 an hour today if wage gains had kept pace with productivity rates since the late 1960s. That’s yet another absurdity about inequality in the United States though.

According to the compensation research company PayScale, fast food workers make an average of $8.28 per hour. Those wages, depending on hours, leaves those workers making about $15,000 to $21,000 per year.

According to the National Low Income Housing Coalition, the current minimum wage of $7.25 per hour leaves workers unable to afford a two-bedroom rental apartment in any U.S. state.

The Poor People’s Campaign and Fight for $15 are also planning six weeks of “direct action and nonviolent civil disobedience” starting on Mother’s Day.

Corporations Trying to Sell the False GOP Narrative on Tax Cuts

Hey, this latest U.S. tax scandal will be the third time in the last 40 years that America runs the detrimental experiment on big tax cuts for the wealthy and large corporations. Every rational person should be able to see that it won’t work out well for most people.

The Republican lawmakers have sold the corporate portion of their tax cuts with the claim that it is actually about helping workers. Their argument is that the corporate tax cut will lead to so much growth that the increase in wages will actually be considerably larger than the tax cut itself. The GOP’s story is that lower corporate taxes inevitably mean more investment, which means higher wages for more workers, as well as increased imports and greater productivity.

The vast majority of economists have questioned this basic logic, because in the past, investment has not been highly responsive to after-tax rates of profit. But that didn’t stop the Republican-controlled Congress from passing the tax bill. And now, in an effort to build public support for the corporate tax cut, several major corporations have been announcing bonuses and pay raises for workers.

AT&T announced that it would give a one-time bonus of $1,000 to 200,000 workers. Its rival Comcast also promised a $1,000 bonus for 100,000 workers. Fifth Third Bancorp promised a $1,000 bonus for 13,500 employees, while raising its minimum wage to $15 an hour. Wells Fargo said it would raise its minimum wage to $15 an hour, too. Boeing announced a $300 million fund to be spent on training workers, upgrading facilities and matching workers’ charitable contributions.

While the employees getting these increases will undoubtedly be pleased, there are a few caveats that must be kept in mind.

First, many of these announcements refer to one-time bonuses, not permanent pay hikes. This is not what the GOP promised. The corporate tax cuts were made permanent on the grounds that companies needed the expectation of higher future after-tax profits in order to justify greater investment today. If the economy is following the course predicted by the Republicans, all these pay increases should be permanent, too.

The second caveat is that some of the increases may have little to do with the tax cut. They can be attributed instead to the tightening labor market, along with higher minimum wage laws. This is especially true of Wells Fargo, which is based in California. The state has already passed into law a $15 minimum wage, which is scheduled to be fully phased in by 2022.

Wells Fargo will be getting there a bit more quickly if it adopts its $15 minimum in 2018. It will also be applying that hike in parts of the country where the federal minimum wage of $7.25 an hour still sets the standard, but even in these other areas, a tightening labor market is putting upward pressure on wages. Last summer, Target announced that it would get to a minimum wage of $15 an hour by 2020. That announcement had no obvious connection to any expectation of a corporate tax cut.

Third, but perhaps most significantly, these pay hikes are not especially large relative to the size of the corporate tax cut. Take the example of AT&T: In 2016, the company reported operating income, net of interest, of $19.4 billion. It paid $6.5 billion in taxes, which means an effective tax rate of 33.5 percent.

If it had instead paid the 21 percent tax rate in the new bill, AT&T’s savings would be $2.4 billion. The promised bonus for 200,000 employees comes to $200 million, or less than one-tenth the size of the tax cut. This is very much in line with the expectations of tax bill critics, who predicted that the overwhelming majority of the money that corporations now get to keep will end up as higher profits paid out to shareholders, not as permanently higher wages for workers.

The end of the article says that “So if there is going to be the huge upsurge in investment predicted by tax cut supporters, it should be showing up in the data on orders for capital goods almost immediately. . . Until we get those data, we have little basis to judge whether the tax cut will deliver the economic growth and pay increases the Republicans said would happen.” Prediction in human affairs is often a difficult task, but it’s apparent that the extra profits grabbed via the tax cuts will primarily go towards enriching executives and shareholders instead of increasing worker wages and creating valuable investments. This scam has already been seen enough times to realize that.