Dean Baker on How We Can Make the 'Free Market' Work for the 99%
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JH: OK, I think we need to step back and explain that a bit. Can you just touch on this idea that the Fed ostensibly has a dual mandate, and explain what people mean when they accuse it of holding an anti-inflationary bias?
DB: The Fed has two vaguely defined goals: price stability and full employment. The former means containing inflation, while the latter means keeping the unemployment rate low. To my mind, the focus should be overwhelmingly on the latter. Unemployment involves enormous suffering, especially in a country like the U.S. with a minimal welfare state. In many European countries it is possible to maintain a decent standard of living while unemployed since health care is covered and benefits tend to be far more generous.
In the United States, being unemployed for any substantial period of time virtually guarantees a near-poverty-level existence. People lose their homes, families break up, kids get dragged from school to school as their parents move in search of housing or jobs.
It's also important to remember that unemployment disproportionately hits the disadvantaged. When we see the unemployment rate rise, most of the people who lose their jobs are likely to be retail clerks, factory workers and custodians. They will not be doctors and lawyers. As a rule of thumb the unemployment rate for African Americans is twice the overall rate and for black teens it is six times the overall rate. So higher unemployment for the population as a whole is really bad news for disadvantaged segments of the population.
So what this policy amounts to is subjecting certain segments of the population to high unemployment in order to depress their wages. That will then contain costs and reduce inflationary pressure. This means, in effect, that we are saying that because we can't think of a better way to contain inflation we will throw a lot of people without college degrees out of work (disproportionately African Americans and Hispanics) in order to put downward pressure on those who still have jobs. That is not a good thing for the government to be doing.
JH: Let's turn to a subject that's on the minds of many these days, as the Occupy Wall Street movement spreads: reining in the banks. You talk about how banking is an "intermediary good," like trucking, but the sector has become hugely bloated. What is the impact of that on the economy, and how might we "rein them in"?
DB: There are two issues here. The first is that the financial sector can actively distort the economy insofar as it ends up financing speculative bubbles, as was the case with the housing bubble. In this situation, money that could have gone to productive uses instead was diverted into housing speculation. We had hundreds of thousands of housing units built that probably made no economic sense. Many of these are still sitting empty -- new developments at the outskirts of places like Phoenix and Las Vegas. Of course the run-up of house prices led to even larger distortions, causing people to spend based on the bubble-generated wealth in their homes. When this wealth proved to be ephemeral, homeowners found themselves heavily in debt and the economy lost the bubble-driven consumption, which had been a major engine of growth.
The other issue is simply that the sector itself consumes a vast amount of resources. The share of the private sector devoted to the narrowly constructed financial sector (investment banking and securities and commodities trading) has quintupled over the last three decades. This means that we're paying five times as much for their services relative to the size of the economy. It is not clear how the productive economy is being better served by this sector now than it was in the '50s and '60s.