Inflation is, like, the thing going on in the economy right now. Even for non-economy watchers — which, let's be honest here, is most people — every time you walk into the gas station or grocery store lately, there really is a sense of, "What in the world is going on?" Since you're probably paying attention to inflation, that might mean you're also keeping a bit more of an eye on the Federal Reserve, the government body charged with keeping the economy in check.
The Fed has a dual mandate on the economy (stick with me here), which is maximum employment and price stability. To put it plainly, that means to keep unemployment low while at the same time making sure inflation doesn't rise too much. And when inflation does go up too much, one of its main policy tools to slow things down is to raise interest rates to make borrowing more expensive to cool off demand, which in turn can increase unemployment. That's what the Fed did to end runaway inflation in the late 1970s, and while it was successful, it also sucked. The Fed pushed the economy into a recession and pushed unemployment above 10 percent to achieve its goals.
Now we're here again: Inflation is once again a problem, and the Fed is trying to make it not one, once again by using the tools in its toolbox that could entail a lot of pain for a lot of people. There's hope the Fed could engineer a soft landing — meaning not tipping the country into a recession — as the job market and other economic indicators remain strong. Still, the prevailing economic wisdom remains sort of the same: Bringing inflation down for everyone means making the economy worse, and that process is going to hit some people — namely, workers — pretty hard.
But what if the prevailing wisdom is wrong, and workers don't have to suffer? That's what Nathan Tankus, research director of the Modern Money Network and publisher of the newsletter Notes on the Crises, thinks. Or, at the very least, he believes that leaving inflation up to a single body — the Fed — to try to find a balance between the prices people should pay and the jobs and incomes people should have is off. He also backs the notion of a federal jobs guarantee.
I recently reached out to Tankus, who is also in the Modern Monetary Theory camp (my colleague Dylan Matthews has an explainer on what that is for you here), to talk about how the larger forces of capitalism are squeezing the little guy. To Tankus, the Fed is an angle to examine. He makes a compelling case.
A transcript of our interview, edited for length and clarity, is below.
So I'm half-joking here, but since this is supposedly a column about scam-ish things, is … the Fed a scam?
Um, kind of?
Obviously, it's a real administrative agency; it does important things like clear the payments that go through the banking system every single day, trillions and trillions of dollars of payments. It's critically important in that basic job of providing a safe and stable payment system. There's cases in which the Fed is not quote-unquote a scam. But the way in which the Federal Reserve is a scam is the promise that it can manage the economy in the best interest of everyone and that when the Federal Reserve decides it's time to pump the brakes, that the way it does that, the impact on jobs for ordinary Americans is the best way to do that job.
To shorten that a bit, it's a scam to say that we need to balance things like inflation on the backs of the unemployed.
But in all seriousness, to back up a bit, inflation in the US and around the world is a big problem right now. And part of the Federal Reserve's job is to try to bring it down. Can you just explain, at least in theory, how this is supposed to work?
There are two important components to this. One is the basic, simple idea — inflation is when too much money chases too few goods. So if you have too much money out there and there's too few goods, that's going to cause inflation. And what we need to do is to have less money out there, meaning having less people spend less on currently produced goods and services.
In more simple terms, what you're saying is you need to have less income or, in the case of the unemployed, almost no income, in order to manage inflation.
You don't necessarily have to buy that. We have a conflict in Ukraine and sanctions on Russia causing food and energy prices to go through the roof. Well, is the cause of that resulting inflation really that you have too much money? Or is there this global circumstance that is beyond individual control? As a well-known economist, Olivier Blanchard, put it recently, it's kind of difficult to explain to people that Russia invaded Ukraine, so you need to lose your job.
On the demand side, though, on the Fed trying to reduce demand, does it work?
That's a complicated question. I would say it largely doesn't work. If you think about a lot of the prices that we care about — health care prices aren't going to move down because people have a little bit less money. There are all sorts of prices in the economy that are acyclical, meaning they don't respond to the ebb and flow of the state of the economy.
To the extent that there are prices that do — let's say potentially there's some impact on commodity prices, on food and energy prices — it's because speculators think there will be a global recession that happens as the result of the Federal Reserve raising interest rates and that globally, demand for food and energy will ease.
It largely doesn't work, but there's ways in which it can work, but those ways in which it can work involve a pretty brutal impact on ordinary people.
Got it.
The other important part about that is it sets us up to be in an even worse situation for next time. If you think rent is a problem, raising interest rates is going to make it a lot more expensive to build apartment buildings and provide housing for people. The same can be true for certain parts of the economy — oil and gas, certain commodity investments.
We go through these cycles where there is a little bit of price pressure and because the Federal Reserve has been given responsibility for it, we use their interest rate policy. It is the only tool that we have, instead of using other policy tools that could potentially push through bottlenecks. That leads to a negative dynamic, especially for ordinary people.
Part of our issue is that we haven't had other agencies who have been explicitly given the task to think about inflation, to preemptively respond to problems that could potentially cause inflation. As a result, it takes a long time to convince both the administration and the agencies under them to start focusing on it. We're starting to, in recent months, have agencies such as the Federal Maritime Commission [which regulates international ocean transportation] in an emergency jump in to being helpful contributors to bringing down inflation. But the worst time to do it is after we've already had some degree of inflation, as there's already enormous pressure on the Federal Reserve to raise interest rates. And it's people who aren't used to thinking in these terms because it's not what they were told their job was.
This is the sense in which the Federal Reserve — or the myth of the Federal Reserve — is a scam. We've been sold this lie that we can give this one agency responsibility for managing the economy, inoculated from politics, and then it'll work out best for everyone.
Managing the economy requires a lot of different agencies that are contributing, and it would work a lot better if you were approaching solving problems from many different angles.
If you weren't already indoctrinated on this stuff, and most people reading this probably haven't thought much about the Federal Reserve at all, you wouldn't necessarily think, "Oh, yeah, one agency moving interest rates up and down, that's the way to manage the entire complex 21st-century economy, rather than using many tools and many different specialties to do that job." It's kind of a crazy idea if you haven't been absorbed in a world that takes that for granted.
You can read the complete interview here.
