“Do Black Lives Matter to the Fed?” That was the question posed as the title of a workshop held at an unprecedented counter-conference that ran alongside the Federal Reserve's annual central bankers' conference last week in Jackson Hole, Wyoming. The counter-conference, titled “Whose Recovery?” was put on by Fed Up, which describes itself as “a coalition of organizations across the country, campaigning for the Federal Reserve to adopt pro-worker policies for the rest of us.” Initiated by the Center for Popular Democracy, members include the AFL-CIO, Demos, Campaign for America’s Future, the Economic Policy Institute [EPI], Daily Kos, and grass-roots organizations from each of the Fed's 12 regions.
“The Federal Reserve is arguably the nation’s most powerful economic actor,” Fed Up said in the conference's policy agenda, Whose Recovery? A National Convening on Inequality, Race, and the Federal Reserve, “But, for far too long, our communities have been isolated from the Federal Reserve’s policy choices. Monetary policy has been left up to the bankers and the economists, with the public largely shut out and confounded by its seeming complexity.” And that's what they are out to change, both by focusing on specific policies, and on changing how the Fed works, making it more democratic, more inclusive, more attuned to everyday public needs.
But—as we'll see—that doesn't mean that what ordinary people want is at odds with sound economic policy. In fact, Nobel Prize-winner Joseph Stiglitz was on hand to speak to the Fed Up participants. This level of expertise stands in stark contrast with another counter-conference, put on by the American Principles Project, which combines anti-gay advocacy with a return to the gold standard. The idea that left and right are mirror images of each other has rarely seemed more absurd.
Given that Fed policies have a profound impact on employment, and that black unemployment rates have long been roughly double that of whites, the Fed's evident lack of focus on black lives made very good sense to focus on. With black unemployment now at 9.7 percent, compared to 4.9 percent for whites, there is continued talk that the Fed may raise interest rates—perhaps as soon as later this month, but more likely later this year or early next—thereby slowing the economy and causing unemployment to rise—or at best to fall more slowly than it otherwise would. While this would impact all workers and job-seekers, it would clearly hit blacks the hardest.
“The preponderance of economic data indicates that the predictable costs of premature tightening — slower job and wage growth — far outweigh the risk of accelerating inflation,” Stiglitz wrote in an L.A. Times Op-Ed. “Six years into a lackluster U.S. expansion, price growth for personal consumption expenditures — excluding food and energy — has averaged less than 1.5% annually in the recovery, well below the Fed's unofficial 2% inflation target. It slowed to 1.3% so far in 2015,” Stiglitz explained. “Global economic forces are poised to drive inflation still lower.” These include falling oil prices, sluggish growth in Europe, and dramatic slowing in China.
In short, the prospect of the Fed raising rates soon is a puzzling one, to say the least, simply based on the numbers. Yet, in a speech on Aug. 29, Fed Vice Chair Stanley Fischer suggested that raising rates remained very much on the table. Reuters reported:
U.S. inflation will likely rebound as pressure from the dollar fades, allowing the Federal Reserve to raise interest rates gradually, Fed Vice Chairman Stanley Fischer said on Saturday in a speech careful not to overreact to a possible Chinese slowdown.
The influential U.S. central banker was circumspect whether he would prefer to raise rates from near zero at a much-anticipated policy meeting on Sept. 16-17. But he said downward price pressure from the rising dollar, falling oil prices, and slack in the U.S. labor market is fading.
With the labor force participation rate at a 38-year low, there's a whole reserve storehouse of slack that seems to have slipped Fischer's mind. “The true unemployment rate, including those working part time involuntarily and marginally attached, is more than 10.4%,” Stiglitz pointed out. So if Fisher sounds like a man divorced from reality, that's precisely the point Fed Up is trying to raise, which is why they're challenging how the Fed works, its divorce from the vast majority of the American people, as well as specific policies.
In Whose Recovery? they offer the following common-sense analysis, citing facts that Fisher surely must know, but that somehow seem to have slipped his mind:
By raising interest rates, the Federal Reserve will make it more expensive for us to pay our credit card, student loan, car, and mortgage payments. That means we will have less money in our pockets to buy the goods and services we need. And that will have a terrible ripple effect throughout the economy: businesses will earn less revenue, so they will lay off workers (or avoid hiring new workers) and they won’t be able or willing to give workers any raises. With bad job prospects and stagnant wages, working families won’t earn enough to buy the goods and services they need, which starts the whole cycle again.
If this sounds like a terrible idea, that’s because it is. But, unfortunately, it is exactly the goal that Federal Reserve officials are trying to achieve when they raise interest rates.
The Fed has a dual mandate under law: first, to control inflation, and second, to produce full employment. These two goals are in tension with each other, which is resolved by keeping unemployment as close as possible to the non-accelerating inflation rate of unemployment, or NAIRU. Of course, economists differ over what the NAIRU is, but a good consensus proxy is the Congressional Budget Office's (CBO) semi-official estimate of the NAIRU, begun in 1949.
However, as economists Jared Bernstein and Dean Baker noted in "Getting Back to Full Employment: A Better Bargain for Working People," there has been a profound shift in how the unemployment rate has been calibrated: “In the pre-1980 period, the unemployment rate was below the full-employment benchmark in 84 out of 124 quarters; in the latter period, the unemployment rate was lower in just 39 out of 132 quarters.” Regarding the latter period, they write, “Since the 1980s, the job market has spent a lot more time above than below the NAIRU, i.e., it has had a lot of slack. Not coincidentally, over those years wages have stagnated and income inequality has grown.” However, there was a notable exception:
During much of the 1990s the unemployment rate was below the CBO’s NAIRU. In those years, not only did compensation rise across the workforce, but low-wage workers made particularly strong gains, poverty rates fell sharply, and, for the first time in years, middle-class incomes rose in tandem with productivity growth. Yet, inflation actually grew more slowly.
This tells us two significant things: First, that even by its own guiding principles, the Fed has failed to provide jobs for millions of Americans who could have had them productively over the past four decades, and second, that the Fed's guiding principles have probably been mis-calibrated over much, if not all, of this period, meaning even more millions of workers needlessly unemployed.
Commenting on this work, and his extension of it, in the issue brief, “Failing on Two Fronts: The U.S. Labor Market Since 2000,” economist John Schmitt wrote:
One reasonable interpretation of these data is that macroeconomic policy has consistently failed to reach what are arguably quite conservative estimates of the structural limits of the U.S. economy. This policy failure presents itself as a prime suspect in the breakdown of the U.S. jobs machine. Baker and Bernstein also link underpowered macroeconomic policy to economic inequality. As Figure 14 shows, periods of sustained low unemployment, such as 1996-2000, are associated with high and roughly equal growth in family incomes across the entire distribution. Meanwhile, periods of high and rising unemployment, such as occurred between 2007 and 2011, are associated with negative—and highly unequal—changes in family income.
Boiled down to basics, all this means that what the Fed Up activists are arguing for—lower interest rates that lower financial costs and put more people to work—is not just a feel-good answer for the demands of some, but a sound approach to creating a stronger, healthier economy for the benefit of all.
Of course, currently those rates are as low as they can go, so the ask right now is simply not to raise them. “We’re really just hoping that the Fed aims to remain data-driven,” EPI economist Josh Bivens, a Fed Up policy spokesman, explained to Jared Bernstein recently. “Preemptive rate hikes to beat back inflation that is not on the radar would be pretty damaging for low-wage workers.”
More affirmatively, Fed Up is arguing that the Fed needs a robust long-range full-employment commitment. “The Fed should target real wage growth that is higher than economy-wide productivity growth, in order to combat inequality and boost workers’ share of income, which has eroded over recent decades,” Fed Up says in a succinct document of its goals. “The Fed should target a significant reduction of the unemployment gap for Black workers and a rise in labor force participation of women as signs that the labor market is approaching full employment.”
But there are also two other ways the Fed can act to create a strong and fair economy. The first is to invest in the real economy, using the same authority used in its quantitative easing policy:
The Fed should use its existing legal authority to provide low- and zero-interest loans so that cities and states can invest in public works projects like renewable energy generation, public transit, and affordable housing that willcreate good new jobs.
The second is to engage in research for the public good:
The Fed should study the harmful effects of inequality and examine how policies like raising the minimum wage and guaranteeing a fair workweek can strengthen the economy and expand the middle class.
Fed Up is also pushing for the Fed to create a more transparent and democratic way of operating, at three levels. First, it should ensure that it hears the voices of working families:
Fed officials should regularly meet with working families and community leaders, not just business executives, in order to get a more accurate picture of how the economy is working.
Second, its officials should actually represent the public:
In regional banks around the country, Fed leaders come overwhelmingly from financial institutions and major corporations. The Fed should appoint genuine representatives of the public interest to these governance positions.
Elsewhere, Fed Up notes that “only 2 of the 108 current directors represent labor organizations and only 13 represent non-profit organizations or academia. The other 93 come from financial institutions and corporations.” With a makeup like this, it's not surprising that Fed policy is so out of touch with the lives of ordinary Americans.
Third, Fed Up asks for a legitimate process for selecting presidents of its 12 regional banks:
In late 2015 and early 2016, the regional Fed banks will select their next presidents, who will serve five year terms. Currently, the process for selecting those presidents is completely opaque and involves no public input. That needs to change, so that the public has a real role in the selection process.
What's being asked for here is a dramatic change in how the Fed operates, and how it sees its mission. Yet, the current way of doing things is largely something stumbled into over time. It's not carved in stone, and the Fed itself can implement these changes. There's never been an organized movement like this before, and seven long years after the Great Recession hit, it's long overdue. The arguments Fed Up is advancing are compelling, and it's time that political leaders weighed in as well.