The Fed Is Getting This Economy All Wrong

Friday's jobs report from the Department of Labor was a warning sign about the US economy. It should cause widespread concern about the Fed's plans to raise interest rates to control inflation. And it should cause policymakers to rethink ending government supports such as extended unemployment insurance and the child tax credit. These will soon be needed to keep millions of families afloat.

If corporations faced tough competition, they would not pass those wage increases on to customers in the form of higher prices. They'd absorb them and cut their profits.

Employers added only 199,000 jobs in December. That's the fewest new jobs added in any month last year. In November, employers added 249,000. The average for 2021 was 537,000 jobs per month. Note also that the December survey was done in mid-December, before the latest surge in the Omicron variant of Covid caused millions of people to stay home.

But the Fed is focused on the fact that average hourly wages climbed 4.7% over the year. Central bankers believe those wage increases have been pushing up prices. They also believe the US is nearing "full employment"--the maximum rate of employment possible without igniting even more inflation.

As a result, the Fed is about to prescribe the wrong medicine. It's going to raise interest rates to slow the economy--even though millions of former workers have yet to return to the job market and even though job growth is slowing sharply. Higher interest rates will cause more job losses. Slowing the economy will make it harder for workers to get real wage increases. And it will put millions of Americans at risk.

The Fed has it backwards. Wage increases have not caused prices to rise. Price increases have caused real wages (what wages can actually purchase) to fall. Prices are increasing at the rate of 6.8% annually but wages are growing only between 3-4%.

The most important cause of inflation is corporate power to raise prices.

Yes, supply bottlenecks have caused the costs of some components and materials to rise. But large corporations have been using these rising costs to justify increasing their own prices when there's no reason for them to do so.

Corporate profits are at a record high. If corporations faced tough competition, they would not pass those wage increases on to customers in the form of higher prices. They'd absorb them and cut their profits.

But they don't have to do this because most industries are now oligopolies composed of a handful of major producers that coordinate price increases.

Yes, employers have felt compelled to raise nominal wages to keep and attract workers. But that's only because employers cannot find and keep workers at the lower nominal wages they'd been offering. They would have no problem finding and retaining workers if they raised wages in real terms--that is, over the rate of inflation they themselves are creating.

Astonishingly, some lawmakers and economists continue to worry that the government is contributing to inflation by providing too much help to working people. A few, including some Democrats like Joe Manchin and Kyrsten Sinema, are unwilling to support Biden's Build Back Better package because they fear additional government spending will fuel inflation.

Here again, the reality is exactly the opposite. The economy is in imminent danger of slowing, as the December job numbers (collected before the Omicron surge) reveal.

Many Americans will soon need additional help since they can no longer count on extra unemployment benefits, stimulus payments or additional child tax credits. This is hardly the time to put on the fiscal brakes.

Policymakers at the Fed and in Congress continue to disregard the elephant in the room: the power of large corporations to raise prices. As a result, they're on the way to hurting the people who have been taking it on the chin for decades--average working people.