The Fed Prepares To Screw Working People Again

The Federal Reserve Board has signaled its intention to hike interest rates, citing a fear of an overheated economy. Robert Reich has an opinion piece in The Guardian saying that raising interest rates will hurt working Americans. Reich explains; “They fear that a labor shortage is pushing up wages, which in turn are pushing up prices – and that this wage-price spiral could get out of control.” Reich explains why this is wrong.

The theory behind the Fed’s action is called the Philips Curve, which says roughly that as unemployment rises, inflation goes down, and vice versa, that as unemployment goes down, inflation increases. Here is a technical discussion of the history of the Philips Curve. This one is shorter and may be easier to read. They both say the same thing: there isn’t any obvious relation. The first piece describes some professional criticism of the Philips Curve which sadly has never had any impact on decision-making. The position of the economics profession apparently is that it must be right because they learned in in an advance economics course in College.

When you think about it, it’s utterly absurd: there are many sources of inflation, not the least of which is corporate pricing power. When most industries are highly concentrated in a few market participants they can set prices to maximize their profits. For example, Amazon dominates retailing. They just raised the price of their Prime service by $20 per household. There are about 150 million US subscribers. That’s about a $3 billion increase in revenues. Amazon blames wage increases and inflation for the increase. No, really. It comes on top of stupefying profits of $33.4 bn. So right there you get a huge increase in profits, vastly more than any wage increases or other inflationary costs.

Reich says that the impact of Fed interest rate hikes will fall on working Americans. As he puts it, “Higher interest rates will harm millions of workers who will be involuntarily drafted into the inflation fight by losing jobs or long-overdue pay raises.”

Let’s look at the numbers.

This chart shows the share of GDP going to labor*.

The gray bars are recessions. Almost all of the recessions since 1947 were triggered by interest rate increases. This chart says that when wages start to rise, the Fed raises rates, leading to recessions. Wage share falls. When it starts to rise again, the Fed triggers more rate increases. Before 1960, the labor share rose nearly to its previous highest levels. After 1960 the labor share peaks never reach their previous level.

The Great Crash led to a recession, one not caused by the Fed. In response, the Fed dropped interest rates to zero. But the labor share didn’t return to 2008 levels until 2020, and has fallen back since. Why does the Fed fear wages at this absurdly low share of GDP?

Now let’s look at corporate profits. This chart shows an estimate of corporate profits**.

The chart says that from 2012 to 2020, corporate profits were roughly steady at about $2.2 trillion. Then profits jumped straight up to the current level of $3.1 trillion in just two years. I’d guess the total rise is something like $1.4 trillion. That’s an astonishing increase. When did any media outlet point out that this is a major driver of inflation? Business reporters repeat the claims of corporate PR hacks that it’s all the fault of greedy American workers, or Covid, or supply chains***, and it’s just market forces at work. Talking heads will tell us that gigantic oligopolistic corporations will use those profits to build new factories and increase supplies. Or some other claptrap from Econ 101 textbooks.


1. The Fed protects capital at the expense of labor. That’s what we mean when we say that inflation is such a big problem we have to hammer working people with unemployment to guard against inflation. It’s true that inflation affects working people, but why is there no way to solve that problem by penalizing capital? After all, inflation due to corporate actions, as in the case of the supply chain, market power, price-gouging and favorable government treatment is just as dangerous as any inflation driven by wages.

2. Reich points out that there isn’t any evidence of wage push inflation. Quite the contrary. Working people have been pounded by Covid and by aggressive union busting, and by price-gouging, and by surging health care costs and student debt. They haven’t caught up. He doesn’t say it, but the top quartile has done quite well, and the higher up in wealth and income people are, the better they’ve done.

3. Corporations have rigged the market structure so that working people are screwed. Government has done little to help. Can you imagine Congress stepping in to help working people? They can’t even raise the minimum wage. How long will people put up with this mistreatment?

* Here’s the methodology. The number is a ratio, with all wages and salaries and proprietor’s labor compensation in the numerator, and what I take to be Gross Domestic Product as the denominator, all measured in constant dollars.

** Here’s the definition.

Profits from current production, referred to as corporate profits with inventory valuation adjustment (IVA) and capital consumption (CCAdj) adjustment in the National Income and Product Accounts (NIPAs), is a measure of the net income of corporations before deducting income taxes that is consistent with the value of goods and services measured in GDP. The IVA and CCAdj are adjustments that convert inventory withdrawals and depreciation of fixed assets reported on a tax-return, historical-cost basis to the current-cost economic measures used in the national income and product accounts. Profits for domestic industries reflect profits for all corporations located within the geographic borders of the United States. The rest-of-the-world (ROW) component of profits is measured as the difference between profits received from ROW and profits paid to ROW.

*** David Dayen, editor of The American Prospect, has produced a terrific series explaining the breakdown of the supply chain. Hint: it isn’t Biden’s fault.

45 replies
  1. jesse says:

    Would we be looking at a different outcome if Biden hadn’t decided to let Powell have another term?

    [Welcome to emptywheel. Please use a more differentiated username when you comment next as we have several community members named “Jesse.” Thanks. /~Rayne]

    • Ed Walker says:

      I don’t know, of course, but it seems to me that anyone who could reasonably be appointed deeply believes all the conventional wisdom.

    • Theodora30 says:

      I think you underestimate Powell. Look at the comment posted by Jansen below. Powell and Yellen are much more nuanced than the media makes them appear. If they were the typical conservatives they would have raised rates long ago instead of keeping rates at such low rates.

      • Ed Walker says:

        I don’t think so. The Fed kept interest rates near zero for years after the Great Crash under Bernanke and Yellin, so there’s precedent for keeping them low for long periods. It’s especially important as the dumb shit Dems like Manchin try to repeat the horrible mistake of moving to austerity while the conditions are unchanged: Covid, economic disruptions and anti-worker policies from the monopolized business sector.

  2. Peterr says:

    The inflation we are seeing is largely driven by non-wage factors. Two big ones are housing and automobiles, and some funny numbers in the oil markets aren’t helping.

    Housing: When the pandemic hit, construction of new homes dropped like a rock. Among other things, this led lumber companies to reduce their logging, because no one would be buying their products. When the housing market came back, it came back with a vengeance — far faster than the construction industry could deal with. Home builders could rehire their construction crews fairly quickly, and so could the lumber companies — but it takes time to turn living trees into construction-grade lumber, and more time to ship it across the country to where it is needed. Meanwhile, you had home builders charging higher prices for new homes (assuming they had the lumber to build the homes), and folks who could not get a new home built turned to existing homes, and drove those prices strongly higher as well. Right now we are seeing historically low inventory of homes for sale, which drives prices up. See Calculated Risk for more on this.

    Cars: It’s not really the cars themselves, but the chips that are inside the cars that are driving prices up. Chips are in short supply due to the pandemic and supply chain issues that reach to the chip factories in Asia, and car makers do not have as many chips as they’d like. Thus, they can only put out so many new cars, and most if not all of them are getting MSRP or better on the sales floor. This in turn is driving some folks toward the used car market, which is pushing those prices higher as well. Once the supply chain hiccups clear out, the market for both new and used cars will return to more normal pricing. For the time being, however, they are a huge part of our inflation calculations.

    The funny numbers part of the inflation story is tied into the cost of gasoline and other fuels. During late 2020 and the first part of 2021, prices crashed compared to the same time in year before, as people were driving less due to lockdowns and telecommuting. Now, with driving figures well on their way back to 2019 levels, demand for gasoline is likewise going back to 2019 levels. This in turn is pushing prices up by large amounts when compared with last year’s epidemic-depressed prices. Yes, they are up, but that’s only if you compare it with 2021 and not pre-pandemic levels. What we are seeing is a simple demand crash from 2019 followed by a demand surge that is bringing us back to the same 2019 prices.

  3. Janson says:

    The Fed has written and spoken about the limitations of the Phillips Curve a lot recently. You could be quoting this fed paper: “Inflation Expectations, the Phillips Curve, and the Fed’s Dual Mandate.” You certainly come to the same conclusion. Here’s the intro quote:
    “There was a time where there was a tight connection between unemployment and inflation. That time is long gone.”
    —Jerome Powell, Chair of the Board of Governors of the Federal Reserve System

    The Fed has not linked increasing the fed rate from effectively 0 to what most believe will be around 1% because of increases in the cost of labor. What leads you to that conclusion?

    Many think excessive leverage, and the very corporate profits you mention are the cause for raising rates because of the risks to the stability of the system that excessive speculation represents. Why not mention that the hint of the fed raising rates caused speculation in stocks like Meta and the fake virtual currencies to fall. Surely that’s in the interest of the working person and not in the interest of the very companies you accuse the Fed of supporting?
    Finally, how does raising interest rates (for overnight loans to banks, not to consumers) to just 1% in the context of an economy growing at 6.9% present a risk to workers?
    I agree with you that Congress has a lot of work to do, but what does that have to do with the Fed?

    • Ed Walker says:

      Did you read Reich’s piece? That’s the source of the my statement about the Fed’s interest Powell’s fears of wage-push inflation.

      • Janson says:

        Yes, I read Reichs post. I think he sets up a strawman, that the Fed has already credibly disavowed. Here’s another quote from Powell at the last press conference: “Wages are not a big part of the high inflation story that we’re seeing.” Lisa Cook, with exceptional pro worker credentials, at her confirmation hearing said, “Everyday Americans are suffering from high inflation.” Her academic career has focused on the impact of inflation on the poor.

        • Ed Walker says:

          Well, maybe. There’s no reason to think Powell knows what the impact will be on workers, or that he’s relying on anything other than conventional wisdom to make this decision.

          I hope you are right. The impact on working people is harsh if Powell is wrong, as history shows. Even a marginal increase in downward pressure on wages will hurt people in this harsh environment. Corporations have pricing power, and can easily pass increased interest rates through to consumers. No other part of government will make up for the damage.

  4. earlofhuntingdon says:

    I highly recommend Dave Dayen’s work – and Ed’s.

    The business press keeps saying the sky is falling because we’re seeing the highest inflation in forty years. And how high is that? Seven fucking per cent. How much of a driver of that is wage labor? Let’s compare increases in the price of oil, medical care, transport, drugs, and corporate profits. For drugs alone, you’d have to move the decimal point one or two places to the right, just for starters.

    Ditto with other costs, including that roughly 20% increase for Amazon Prime for 150 million households. A single pricing change from Amazon just extracted $3 billion more from the US economy and sent it to offshore suppliers, tax havens, elite executives, and the coffers of rabidly anti-union law firms.

    The claim that wage labor is fueling inflation is embarrassingly laughable and a misdirection by capital and its captured business press. It is a sign that capital is upset over labor’s willingness to walk away from jobs where the pay is peanuts, working conditions are difficult or dangerous, and where there is no stability or safety net.

  5. blueedredcounty says:

    I’ve been listening to this rising scream about inflation and gritting my teeth about it. It’s been clear from the start it was going to be a shitty excuse to screw over the majority of the population while the rich continue to gorge themselves at everyone’s expense.

    What kills me are people that buy into this crap when they should know better. I’m in the tech industry, and in a company meeting someone asked about the company increasing salaries because of inflation. It was a stupid question, because there has never been a COLA component to our salaries. Hell, I haven’t seen that in the private sector since the 80’s. Our VP pointed out that our salaries and pay bands are set to be competitive for our location. I.e., if I am based in Silicon Valley (corporate HQ) I am paid more for the same job than if I am based in SoCal. If I decide to be classed as a remote worker and move to, say, rural Iowa, my salary is going to be adjusted to match that job market.

    If we are going to go the route of disruption, we need to start by replacing corporate income taxes with a market access fee – x% of your gross sales here.
    – It doesn’t matter where you are headquartered (like, if it is a post office box in the Cayman Islands, or a front in a Wyoming strip mall).
    – If you want to sell anything (goods or services) in this market, you need to pay for access to the market.
    – If you decide to set up a dozen shell companies to shift money and expenses around – each sale made by each shell organization owes this tax.
    Will this make prices higher as businesses pass this tax onto buyers? Yes. But depending on the value of x%, personal income taxes can be reduced or eliminated because of the new revenue (and to offset the increase in certain prices). It’s the ultimate in free enterprise – everyone is paying this, and paying the same rate.

    There are other benefits. Imagine for a moment this following hypothetical business: a real estate development company in Florida. Let’s say the company is making large cash sales of properties to Russian oligarchs. As a company, under the current system, they aren’t having to pay any corporate income taxes because their expenses (legitimate or not) manage to zero out their net income. If they are paying a flat percent of their gross sales, even if they are laundering that money, at least they are paying some taxes on it up front, instead of dodging them all.

    Now that I’m thinking about it, compaign contributions are a purchase of a politician’s service. So the gross amount of campaign contributions collected by any organization (candidate or PAC) should also be subject to this tax.

  6. Spencer Dawkins says:

    I have absolutely no complaints about the kinds of posts that appear most often on this website, but I do wish there were more that talked about economics, and especially posts based on reality, and not on what right-wing economists would like for us to think

    Thank you for this one, Ed. It’s very helpful.

  7. earlofhuntingdon says:

    Pfizer’s profits last year were $37 billion – more than $3 billion/month. Not bad for, “the least trusted company in the least trusted industrial sector in the United States.”

    It apparently has Covid-19 to thank. And monopoly power that goes unregulated in a country that equates market concentration and price gouging with corporate benevolence. (One that isn’t too careful about structuring government purchases from industries in which it pays for most of the costs of research.) But the Fed and the economics profession want us to focus on wage labor’s “inflationary” and “excessive” costs to the economy. If this were a play, it would be a farce.

  8. John Colvin says:

    Some Berkeley economists (postdoctoral researcher Thomas Blanchet and the professors Emmanuel Saez and Gabriel Zucman) have created an online tool to track wealth/income distribution without the delay that typically accompanies government statistics (with inputs being added on a monthly basis):

  9. Rapier says:

    I want to be nice but this description of the Feds motivations is a cartoon. But where to begin? I can’t even come up with a place to begin. I’m too old to start writing a book which nobody will read anyway. It’s very dispiriting.

    What the hell. Where to begin? How about here, the beginning? Who creates money and how do they create it? I mean right now. By what mechanism is money created? What institutions and mechanisms create money? If this question cannot be answered by you, whoever you are, author or reader, then how can you think your talking about monetary matters?

    Again, I wish to be nice but talk about the Phillips curve is like talking about the unicorns on the Moon.

    • Doctor My Eyes says:

      I wrote my comment below before reading this one. You’ve expressed the same thing, but more directly and completely and apparently from a ground of wider understanding. “Unicorns on the Moon”: I could not agree more.

    • Epicurus says:

      If you are at all interested there is a book called The Little Book of Economics: How the Economy Works in the Real World by Greg Ip. It is literally little. It will answer many, if not most, of your questions most simply, including where money comes from, who and how money is created right now, and subjects Mr. Walker and Mr. Reich are addressing such as inflation, the role of the Fed (among the many other financial institutions with their regulatory fingers in the pie), the Phillips curve and its relationship to the New Keynesians and inflation control, inflation/deflation problems and the like. It even has explanations of why the derivative types and regulators were in over their heads back before the big slide in the early 2000s (easily grasped) and why Iceland/Ireland blew out their economic tires not so long ago.

      The book is not as deadly dull as an economics textbook. In fact it is quite humorous in places. It is well worth a read by anyone that wants a better encapsulated idea about how economic things work in the country – and why they might not work if that is the situation.

    • Rapier says:

      I will answer my own question. Almost all money today is created by bank loans, and thus by banks. Bank “loans create deposits”. “Not the other way around”. Banks do not lend from the deposits of customers as most everyone thinks. It’s just the opposite. Bank loans create bank deposits, aka money.

      Go directly to 50 seconds. Everything else will confuse about this issue. Study later but here the issue is who creates money and how.

      Now the Fed is a special case but remember it’s still a bank which is making a loan, creating money.

      So let’s look at motivation. Your a bank, You have the unique ability to create money. Everyone loves money. So you’ve created untold trillions, much of which stays locked up in the banking system to facilitate the purchase, and inflation, of financial assets. In other words they win in the system they designed, Who’d have thunk.

      But the key thing to know is banks create money. You may have to think about this every day for a few years to deprogram yourself.

        • earlofhuntingdon says:

          My guess is that this is not the place for incomplete remedial economics that are tangential to the topic. You leave out the shadow banking system, for example, in your riff on who creates money. It has a significant impact when it comes to screwing working people.

          • xy xy says:

            Can you believe it, “sky-high inflation” per BNN-Bloomberg The Daily Chase morning email.
            “U.S. futures are pointing to more losses at the start of trading after yesterday’s sky-high U.S. inflation report and talk of a half-point rate hike by the U.S. Federal Reserve at its next meeting sent stocks tumbling (including the TSX, which closed in the red after earlier trading above its record closing high). We’ll find out today if the Fed is losing control of inflation expectations when we see the University of Michigan’s consumer sentiment report.”

  10. Doctor My Eyes says:

    I won’t pretend to be able to comment intelligently on the details of economic issues. The third day of economics class, when we were presented with a linear curve showing a more or less predictable relationship between how much something costs and how well it sells, I smelled bs. An example postdating that event by more years than I want to admit was when sales of Reeses pieces blew through the roof after the movie ET. Is there a curve that measures suggestibility? I can’t say whether it’s all hocus focus or whether I just have no mind for it, but it seems suspicious to me from the bottom to the top.

    Anyway, I only want to respond to this sentence: “The position of the economics profession apparently is that it must be right because they learned it in an advance economics course in College.”

    I’m afraid it’s worse than that, in that prominent academic departments are corrupted by their financial ties to governments, bankers, and other gamblers. I base this opinion on little more than the film Inside Job, a documentary which examined the reasons for the 2008 collapse of the financial system. The film includes a striking moment in which a well-spoken Harvard economist becomes tongue-tied as he tries to explain how economists being paid to express opinions does not give rise to conflicts of interest. As the director says, one would search in vain to find people who express opinions which are at odds with the financial interests of those who pay them. He even says that economists are paid to testify before Congress without revealing this funding.

    From a review in The Guardian:

    “Of particular interest is the dubious role played by academic economists, especially those in the US. Many were paid vast, undeclared sums to produce biased reports saying CDOs and other dodgy derivatives were safe and that Iceland was fine to be gambling with 10 times its annual GDP. The corruption of top US economists and their complete lack of awareness of what they had done was truly shameful.”

    Apologies if this is too OT. Bottom line is, imo, “economics”, just like “the market” is an ephemeral notion with little grounding in reality.

    • xy xy says:

      A client who considered himself best in the market at what they did, showed me how much it would cost them to do a job and asked me how much they should charge on a project they were bidding on.
      I responded “as much as you can get so long as you don’t think you’ll be overkill versus the other bids.”
      Isn’t that what pharma does every day?

  11. Eureka says:

    And then there is the latest McKinsey plot to befall our nation, the remake of the WFT “brand” (WFT GM and McKinsey alum Jason Wright was supposedly in charge of this). [They were also supposedly scoping this brand to include some kind of meta-like tech bunk and other operations, but I can’t recall where I read that and who cares — for now…]

    Beyond the giant condiment accident unis and graphics (etc.), everyone apparently plans on calling them the Washington Commies. The reaction was so instant that you might think such could have been picked up in pre-market testing. And in a nice touch, I’ve seen a bunch of commenters include images of the Soviet flag (color-match = close enough).

    This should be _great_ for political discourse in our country.

  12. The Old Redneck says:

    The business press has been complaining nonstop about inflation. Much less attention is being paid to the fact that low wage workers finally have some leverage. That tells us whose interests really matter: people whose stock portfolios and trust funds might lose value.
    Nobody in the business press bitched while workers lost purchasing power for the last several decades. But when the investor class finally faced a risk of taking a hit because of inflation (which is largely due to supply chain and other factors not related to wages), then the sky started falling.

  13. earlofhuntingdon says:

    The latest from Dave Dayen’s How corporate giants Amazon and Walmart are gaming Covid-related problems with supply chains – the structure of which they helped invent – to force more small businesses out of business in order to increase their market share and political power. They can each already buy more than a negligible number of nation states. A refreshingly long read.

  14. Doctor My Eyes says:

    In addition to the excellent and interesting analysis as to the actual issues involved, should we not mention that a significant portion of the inflation boogie man talk arises from the same motivation as the selectively timed panic over the national debt–it is purely political.

  15. Wm. Boyce says:

    Big business raises prices because it can. There really isn’t any mystery, as capitalism and current law demands that corporations maximize profit for their shareholders. As others have pointed out, the concentration of players into a few giants insures higher prices on whatever they feel they can get away with. The rich will not feel “inflation” very much.

    • earlofhuntingdon says:

      The problem with too much Milton Friedman is too much Milton Friedman: bad economics and bad law. Nothing in corporate law requires, for example, that managers maximize returns to shareholders. Nothing. In fact, except for rare circumstances, shareholders come LAST, behind a slew of other interests.

      It’s bad economics, too, to maximize resource extraction above all. Financial and operational resilience is lost, for example, leaving a business exceptional prone to failure. Recent failures in global just-in-time delivery systems are good examples.

      Wall Street, though, adores the mythology, because it makes its proponents filthy rich, rather like destroying an entire mountain, its watershed, and the people dependent on them for a few pounds of gold.

  16. Nord Dakota says:

    RWers and libertarians are blaming fed spending for inflation. I recently came across an article and discussion criticizing this (don’t recall where, I guess some rebel economists–I have a young friend who completed a BS degree in economics but despaired of grad school when he realized how pervasive Chicago School economic views are). Their arguments were based on empirical evidence.

    IDK, is economics really like weather and climate only even more so? Chaotic forces along with some long term cycles along with long term changes?

    Which (speaking of economists) reminds me of not just the cloud seeders, but the dust bowl entrepreneurs who tried shooting rockets into clouds to make rain.

  17. xy xy says:

    All this talk about increasing interest rates.
    Yet the 10 and 30 year interest rates on treasuries have increased and yet the best money market and cd rates are about 0.50%, and savings accounts maybe 0.01%?

  18. earlofhuntingdon says:

    Let’s not allow a little inflation to get in the way of a good union busting move, eh. Budget retailer Target is the latest giant corporation to launch an all-out effort to fight unionization. It’s pleading with employees not to let a “third party” come between management and its oh-so-special minimum wage workers.

    Unions exist only to “profit” from union dues, says Targets highly profitable union-busting consultant in the training materials its prepared for every store manager. Those materials conveniently leave out service, collective bargaining, and the organized power that gives unions something individual employees never have.

    If Target meant what it says about how awful the profit motive is – wildly misplaced when it comes to union dues – it needs to rethink why it’s in business. But the profits-as-epithet meme is a good indicator that Target thinks its modest income customers are angry at high prices, poor service, and big corporate profits. Like a good Republican, it’s trying to project the anger people have toward it and its peers onto the wrong players.

    • earlofhuntingdon says:

      Target’s average annual profits? About $27 billion for 2021, about $24 billion on average for last three years.

      Being anti-union is a tribal thing: a store manager or CEO who let unions in the door would find themselves escorted out the same one. If companies would only pay their workers the money they spent on anti-union drives, and saved all that energy, the world would be a safer, saner, cheaper place.

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