Message to Janet Yellen: Focus The Fed On Full Employment

Terrance Heath

Federal Reserve chair Janet Yellen is scheduled today to go before Congress’ Joint Economic Committee, where she is expected to declare that the recovery from the Great Recession is nearly complete, and that it is time to raise interest rates again.

But progressives have been making the case that if the Fed takes that step now, it could shut down the hopes of the millions of Americans who have yet to feel any real recovery from the 2008 financial crash.

Yellen has for the past few weeks been indicating that it’s about time to end the seven-year run of near-zero Fed funds rates. Last month, Yellen told the House Financial Services Committee that the economy was “performing well,” and that “it could be appropriate” for the Fed to raise rates at its next policy meeting, scheduled for December 15-16. Then, on Wednesday, she all but announced a Fed rate hike in a speech before the Economic Club of Washington. “I currently judge that U.S. economic growth is likely to be sufficient over the next year or two to result in further improvement in the labor market,” Yellen said. Other policymakers at the Fed appear ready to declare the economy recovered and at full employment, and inflation the biggest threat to the economy.

But at a briefing on Tuesday hosted by Rep. John Conyers (D-Mich.), co-chair of the House Full Employment Caucus, progressive leaders told Congress that the Fed’s plan to raise interest rates would have a devastating impact on communities hit hardest by the Great Recession and the financial crisis that precipitated it. Members of Congress, low-income workers, and economists from the progressive Fed Up campaign, told the audience in a packed congressional hearing room that raising the rate would slow the already glacial pace of job and wage growth, and take any hope of recovery away from the most vulnerable Americans.

Conyers is the sponsor of the “Full Employment Federal Reserve Act of 2015,” which would focus the Federal Reserve’s full attention on full employment — defined as an economy with “an unemployment rate of not more than 4 percent,” where “median wages are rising with worker productivity,” and anyone who wants a full-time job can find one.

Raising interest rates puts downward pressure on the economy, slowing the job growth needed to truly reach full employment and reducing possible wage growth. At a time when economic inequality is worsening, and many African-American and Latino communities are experiencing double-digit unemployment, increasing interest rates takes any chance of recovery for those communities.

Communities of color have the most to lose if the Fed raises rates, and the most to gain if the Fed focuses on full employment. “Lowering the unemployment rate benefits those at the bottom,” said Dean Baker of the Center for Economic Policy Research (CEPR). The African-American unemployment rate (9.2 percent), Baker noted, is twice the unemployment rate for whites (4.4 percent). Lowering the unemployment rate for whites by one point means lowering the African-American unemployment rate by two points.

All American workers would benefit if the Fed were focused on full employment. “America needs a raise,” Rep. Brad Sherman (D-Calif.) said, “That cannot happen without economic activity and a specific goal that we want unemployment down and wages up.” Keeping the Fed’s interest rates low, Sherman reasoned, would accomplish this by encouraging investment and increasing economic activity to the point that it creates a labor shortage that increases wages.

“I look forward to hearing from the businesses in my community saying, ‘Oh my God, we can’t find the people we need,’” Sherman said. “Then I’ll tell them, ‘Pay them more money.’”

Howard University economics professor and chief economist for the AFL-CIO, William Spriggs, gave a presentation that pointedly asked, “Do black lives matter to the Fed?” The African-American unemployment rate should be lower, and everyone should care that it isn’t.

Spriggs noted an “intellectual problem” among his fellow economists who claim that structural unemployment is caused when employers can’t find workers with the skills they need. Structural unemployment, Spriggs said, is just a fancy way of saying that African-Americans are “too stupid” and uneducated to get jobs. Data shows that discrimination, not structural unemployment, is responsible for the high unemployment rate among African Americans.

Unemployment disparities based on race have continued even as overall educational attainment has improved for African Americans. High school graduations rates among all racial groups have largely converged since the 1970s. A college graduation gap remains, but as a Pew Research report in 2014 showed, college enrollment for African Americans increased at a rate six times that of whites between 1999 and 2012. Yet, the unemployment rate for college-educated African Americans is similar to that what of uneducated or under-educated whites. At all education levels, the disparity persists.

Spriggs said this is largely due to discrimination. “Employers have enough unemployed people that they can pick and choose who they want to hire,” he said. But when economic policy is focused on full employment, “you can heat up the labor market to the point that even employers who want to discriminate will have to hire,” Spriggs said.

Josh Bivens, Research and Policy Director at the Economic Policy Institute, underscored the urgency of the question before the Fed. “We still have a profoundly damaged economy. We have not recovered from the Great Recession,” Bivens said. “In the absence of wage growth signals, it’s too soon to put on brakes.”

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