Economics as a discipline wields some ideological power through mystification. What is frequently referred to in media as “basic” economics is in fact loaded with ideological assumptions that often bear little resemblance to reality. Data for Progress (@DataProgress) is proud to host “econo-missed,” an economics advice column for the left, featuring a cast of young economics grad students and practitioners. Our first comes from Ben Wolcott (@bbwolcott), a public policy grad student and campaign researcher at Make The Road, who originally started econo-missed and has graciously offered us the name. - Sean
Why are people saying that the economy is at full employment and what does that have to do with the Federal Reserve raising interest rates? The New York Times just said:
It was the 92nd consecutive month of job creation. Most economists expect the momentum to continue, but a deeper drop in the unemployment rate or a big bump up in average hourly earnings would stoke fears of inflation and, in turn, a more hawkish Federal Reserve.
Fed policymakers are almost certain to raise interest rates when they meet this month, with at least one additional increase likely in the second half of 2018.
What’s going on here? It sounds to me like the Federal Reserve is choking off the economy just when workers are about to get a raise.
-- Baffled in Brooklyn
I swear economists intentionally made macroeconomics impenetrable, so working people wouldn’t be able to understand it. When social movements fought for full employment, they pushed for an economy where anyone who who wanted a job could get one. Economists used to agree with activists on this common sense definition, but it radically differs from how mainstream economists define full employment today. Instead, they say the economy is at full employment when the employment rate is at or below the “natural” non-accelerating inflation rate of unemployment (NAIRU). Theoretically, that’s the unemployment rate below which the economy would start to experience rising inflation. The Congressional Budget Office currently pegs NAIRU at 4.7 percent, which is below the latest reported unemployment rate of 3.8 percent, so congratulations and welcome to full employment!
Full employment is supposed to be great for working people because in addition to there being lots of jobs, wage growth is supposed to rise. The 1% hates this, and will look for any excuse to say hyperinflation is around the corner because rising wages will lead to rising prices. These inflation hawks tell the Federal Reserve to raise interest rates in order to slow down the economy and intentionally kill jobs. Those attacks hurt all working people and disproportionately impact those who typically face discrimination in the labor market because it’s harder for employers to discriminate when unemployment is low. It’s also worth mentioning that because of racism in the labor market, black unemployment is always significantly higher than the reported unemployment rate. Despite being at a record low of 19.8 percent, black teen unemployment is still astronomically high compared to the national unemployment rate.
Because estimates of NAIRU are just attempts to pin down a theoretical concept, progressive economists (who fight for progressive ends within the constraints of mainstream economic discourse) say that the Federal Reserve shouldn’t treat it as a iron law of economics. At this point, there aren’t even many academic economists who are even willing to defend NAIRU. For all the inflation hawks squawking and the Federal Reserve’s terrible decisions to regularly raise interest rates since December 2015, there actually hasn’t been significant evidence of increasing wage growth let alone significant inflation. Doesn’t sound like we’ve reached full employment at all.
Instead of adhering to the empirically-disproven nonsense of NAIRU, let’s define full employment the same way economists originally did. Will we inevitably get hyperinflation if we ensure everyone has access to work on decent terms? That's an empirical question, and signs point to "no." Many leftist economists argue that everyone who wants a job can have one without leading to hyperinflation. In order to recognize everyone’s right to a job and achieve full employment, the government should implement a job guarantee. While the government currently raises interest rates and controls inflation on the backs of the unemployed, there are less inhumane ways to control inflation through a job guarantee. This would give workers significant more ability to bargain and organize without the threat of unemployment.
In other words, NAIRU is as natural as capitalism, which is to say, not at all.
- Ben Wolcott
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