Former Treasury Secretary Larry Summers joined Bloomberg’s Wall Street Week last week to praise the Federal Reserve for having “come around” to the view that “there’s going to need to be increases in unemployment to contain inflation.” Summers, seemingly oblivious to the contrast between the cruelty of this policy and the luxury of his lifestyle, joined the broadcast from a beach, framed by dozens of palm trees and reclining lawn chairs dotting the background.
There’s a lot to unpack here: Summers’ inability or lack of desire to change his Zoom background, the fact that his job with Bloomberg (he’s a paid contributor) allows him to casually opine about the benefits of destitution and poverty while reclining in Edenic surroundings, and that U.S. officials still see punishing average people as being a silver bullet for inflation.
Summers’ perspective on unemployment is not unique, as it’s shared by the leadership of the Federal Reserve and members of both parties in Congress. Current Fed Chair Jerome Powell has said much the same thing: In comments last August, Powell, who is reportedly worth between $17 million to $55 million, said that interest rate hikes “will also bring some pain,” which he called “the unfortunate costs of reducing inflation.” Former Fed Chair and current Treasury Secretary Janet Yellen has expressed a similar view, though she was also criticised for keeping rates too low during the Obama presidency.
The thinking goes that when interest rates increase, it gets more expensive to borrow money, and companies, expecting their earnings to decrease as a result, start laying off employees. Those employees have less spending power as a result. With both corporations and consumers spending less, competition for goods decreases. And with more unemployment, corporations can pay their employees less, reducing labor costs and allowing them to, in theory, lower the cost of goods.
The Fed wants to prevent what economists call a “wage price spiral,” where a scarcity of unemployed workers leads workers to demand higher wages and leading corporations to raise prices on consumers.
If something seems off about that chain of cause-and-effect, it’s that the responsibility for price increases in the “wage price spiral” theory is placed on labor for wanting a piece of the profits they’re producing, and not executives for choosing to raise costs. Yet executive profits seem to be the main culprit: by some measures, up to 54 percent of recent price increases could be attributed to higher profit margins and only 8 percent to rising labor costs. Rather than supply issues, much of what we’re experiencing is profit-driven, as we’ve written about. Yet the Fed and Congress are loathe to address inflation through other measures, like taxing profits or setting price controls.
Summers, and the Fed, also seemingly believe higher unemployment lowers consumer demand. Yet the price increases most people have been complaining about are for basic staples of daily living: eggs, gas and electric bills, and rent. The people most likely to be laid off and remain unemployed are lower-wage earners, and the idea that we can get grocery prices under control by making poor people not want groceries does not seem to have any relationship to reality. But it is a great way to put unneeded strain on workers who have already felt decades of decreases in real wages. It’s also a great way to put more pressure on food pantries, which have been maxed out since the pandemic.
So entrenched is the idea that a minimum level of unemployment is a sign of a healthy economy that the government has a measure for it: the NAIRU, or Non Accelerating Inflation Rate of Unemployment. This is the Congressional Budget Office and the Federal Reserve’s estimate for the minimum amount of unemployment that can occur without causing inflation in the short-term.
And the Fed discourages attempts to soften the blow of unemployment by doing seemingly reasonable things like extending unemployment. According to staff at the Federal Reserve Bank at Philadelphia, extending unemployment benefits during the pandemic “tended to raise the unemployment rate to some degree without affecting labor market slack,” economists’ term for the demand for jobs compared to available labor.
For decades, the received wisdom of economists and the federal government has been this philosophy: inducing poverty, homelessness, and catastrophe on people who are already suffering is a necessary panacea to keep the economy running for middle- and upper-class people. So normal is this belief that someone can broadcast it from a tropical destination, lounging, at their job where they are paid to commend people for agreeing with them.
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