Credit: Justin Ruckman on Flickr, under Creative Commons (CC BY 2.0)
(WOMENSENEWS)–If Janet Yellen survives the confirmation process she will be on track to mark two firsts.
As the first woman to lead the U.S. Federal Reserve she will also be Fed’s first leader to understand that job losses for the many is a worse problem than the loss of interest income for the few.
Because women are more likely than men to be underemployed, work part time or be stuck in the lowest-paid, least-secure occupations, Yellen’s importance goes far beyond symbolism.
Her specialty is labor economics; the who, what, where, why and when of unemployment. In her own words, "These are not just statistics to me . . . The toll is simply terrible on the mental and physical health of [jobless] workers, on their marriages and on their children."
Yellen understands that people out of work can’t pay their bills. She knows that joblessness on a mass scale is a structural problem, rooted in the economic system, not the pathology or sloth of individuals.
And she knows that while inflation can hurt workers when wage increases don’t keep up with price increases, it can be good at a time like this, when the indebtedness of American consumers keeps them from spending. The consumer debt overhang–about $11 trillion–is an albatross around our economic neck.
Since the beginning of this crisis, current Fed Chair Ben Bernanke has been using monetary policy to keep interest rates at historically low levels because unemployment’s been so high. Meanwhile the GOP controlled Congress has refused to approve additional fiscal measures to stimulate the economy. The pressing question for those of us who depend on jobs for income is what will the next Fed chair do when unemployment starts to drop? Will Yellen follow the Fed’s traditional policy formula of raising interest rates to ward off inflation, or will she let employment grow? My bet is she will favor employment, a position unprecedented in recent Fed history.
‘Maximum Employment’ Mission
The Federal Reserve’s mission statement charges the Fed with "conducting the nation’s monetary policy by influencing the monetary and credit conditions in the economy in pursuit of maximum employment, stable prices, and moderate long-term interest rates" (emphasis added).
But for most of its 100-year history, the Fed’s been for the banks, by the banks and of the banks. Inflation terrifies bankers because it erodes their profits on existing loans. Thus, the Fed has seen its main job as controlling prices by raising interest rates to prevent inflation. This pro-bankster policy is bad for the rest of us because forcing up interest rates causes job losses.
In the trade-off between inflation and unemployment, the Fed has consistently favored curbing inflation. We saw this repeatedly between 1980 and 2008. Whenever the Fed saw that the economy was nearing full employment (full employment does not mean zero unemployment, it means that folks who want full time work have full time work) it went into panic mode imagining a massive inflationary tsunami right around the corner. For the inflation hawks nesting at the Fed, virtually any uptick in employment is a harbinger of skyrocketing inflation. But there’s scant evidence supporting this view.
Nevertheless, once in panic mode the Fed intervened in bond and money markets to reduce the flow of credit into the economy. It stamped on the monetary brakes, causing interest rates to spike. Higher interest rates can and have curbed inflation. When interest rates are pushed higher, companies and households borrow less. Firms don’t expand operations; instead they cut back causing a further retreat in employment. Consumers postpone big ticket purchases (homes, consumer durables and cars). The fall off in demand means firms can’t pass on price increases, hence inflationary pressures subside.
There’s no polite way to say it: the Fed is paranoid about inflation. Why? Because banksters and those who derive their income from financial assets lose when inflation occurs.
Every consumer debt contract–mortgages, college loans, car loans–is a legally enforceable promise to a financial entity that you’ll make a stream of payments stretching out over time (one year, three years, five years, 30 years). If you borrow $100 today at 10 percent interest, and pay it back in one year, then you’ll make one payment of $110. The loan issuer makes 10 bucks. Story over. But, if during that year there is 10 percent inflation, then the $110 you pay the issuer only buys the same amount of stuff as the original $100 that was lent. The lender sees no increase in her real (inflation adjusted) purchasing power. In other words, the lender makes nothing–in real terms–on the loan.
Protecting Creditors’ Income
Bankers and their Federal Reserve buddies will do anything (mass unemployment anyone?) to protect the future income of creditors.
Today’s financial elites have unprecedented levels of political prestige and economic power. From 1929 until the mid-1970s no one bragged about working on Wall Street. The crash and the Great Depression so scarred the national psyche that financial sector employment was unsavory. Thus, for 40 years the best and the brightest devoted themselves to actually improving the production of things that improved our well-being. If only that were still so.
Today the 1 percent–the banksters who brought the economy to its knees in 2008–have consolidated their hold on society and they’ve shaped our perspective on the relative importance of inflation versus unemployment. Unfortunately, their paranoid view of the terrors of inflation has come to be the accepted view.
Moderate inflation would actually be really good right now because it will eat away at the real value of debt. U.S. households currently owe about $11.1 trillion. There’s $1 trillion in student loan debt, $848.9 billion in credit card debt and $7.78 trillion in mortgage debt. You can bet your bippy that the banksters are salivating. If Federal Reserve policy makers hold down inflation then the real value of household debt will remain the same. If instead the Fed puts jobs first, letting inflation creep into the economy, the real value of consumer debt will fall. Consumer spending will increase, and that in turn will stimulate job creation. In a severely depressed economy like ours, inflation is an important tool of economic recovery. But that’s not the story coming out of Wall Street.
Yellen’s track record of advancing policies shaped by these views means that at the same time as she cracks the financial world’s glass ceiling, she’ll be bringing the economic fire power of the Federal Reserve to the job of job creation. And that’s worth cheering about.
Susan F. Feiner is a professor of economics and a professor of women and gender studies at the University of Southern Maine in Portland. She’s written extensively about gender issues in the economy. Her blog is coming soon: watch for Economics She Wrote.com.
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