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This week, the US government will take action to slow the economy and prevent wage growth

Photo by Mark Wilson/Getty Images

Imagine President Barack Obama announced a plan for a new tax that he said would raise the price of borrowing money in America. Every new mortgage would become more expensive. So would every auto loan and small-business loan. Towns and school districts would find the cost of new bonds elevated, as would large corporations. All across the land, credit availability would diminish.

Republicans would, of course, denounce him. Why would the president impose a new job-killing tax at a time when the American people have been suffering from an agonizingly slow labor market recovery and years of flat wages?

And then imagine the Democratic reaction when Obama explained that it wasn't his aim to spend the money on some new social program, or even use it to reduce the deficit. His only goal with the new tax was precisely to reduce the pace of job growth. To make sure that unemployment didn't get too low. That workers' bargaining power didn't become excessive.

After all, it's been a long, difficult recession, but the economy is a lot stronger now than it used to be. Let growth continue and wages might rise, forcing corporate profit margins to shrink until companies had no choice but to start raising prices.

"When it comes to inflation," the president might say, "it's better safe than sorry. So here's your new job-killing tax!"

It's unimaginable, of course. Congress, the press, and the public would all throw a fit. Yet at this point it is considered all but certain that the Federal Reserve is going to do exactly this by raising interest rates at its meeting next week. There's broad agreement among economists that this kind of tight-money policy leads to slower economic growth and fewer jobs being created. Yet it's happening with barely a word of public concern.

Inflation is low and has been low

It's natural to wonder why any government official would ever decide that it makes sense to increase borrowing costs across the board and slow job growth. But the reason is inflation. At times, a central bank can boost growth with easy money, but there are fundamental limits to this strategy. A country that is out of workers, or out of natural resources, or out of machines and equipment or new ideas isn't going to be able to produce more stuff just because the central bank has made it cheap to borrow and spend. All that's going to happen is prices are going to rise.

The Federal Reserve is structured as an independent agency precisely on the theory that for the long-term good of the economy we sometimes want the central bank to slow the pace of job creation in order to avoid inflation, even though standing in front of a podium and saying, "I want to slow the pace of job creation" sounds terrible.

But the weird thing about this week's push for higher interest rates is that there's no inflation problem to solve.

Thanks to the global collapse in oil prices, there has been literally no inflation at all throughout 2015. If you ignore food and energy prices — which people often do, since they shift rapidly for non-monetary reasons — then inflation looks quite a bit higher. But it has still been below the Fed's 2 percent target for all of 2015. And it was below the Fed's 2 percent target for all of 2014. And it was below the Fed's 2 percent target for all of 2013. And it was below the Fed's 2 percent target for about half of 2012.

It's true that if you ignore food and energy prices, inflation is currently close to the Fed's 2 percent target. That's why the Fed is now eager to raise rates. It doesn't want to be caught "behind the curve" and facing a period in which inflation lingers above target as it enacts several rounds of rate increase. But given that we've survived three and a half years of consistently below-target inflation, it doesn't seem like being a little behind the curve would be the worst thing in the world.

The labor market is still not great

The reason the Fed is now comfortable with the idea of a rate hike is that the labor market has improved considerably from where it was a few years ago. The unemployment rate is down to 5 percent and seems to be falling. That means the economy clearly can tolerate somewhat higher interest rates, and it's making the Fed eager to implement them.

But even though the labor market is in much better shape than it was a year or two ago, it's honestly still not in such great shape. A broad gauge of the labor market — the share of 25- to 54-year-olds who have a job — shows that something between 2 and 5 percent of the prime age population has vanished from the workforce:

It's not clear how many of these people could be tempted back into work — or would be considered hirable by employers — if we let the economy keep growing. But the number almost certainly isn't zero. The risk that keeping interest rates low a little too long could lead to a little bit of inflation needs to be balanced against the risk that slowing the pace of job creation could keep hundreds of thousands of people permanently trapped out of the labor force.

Low interest rates are critical for marginalized groups

At a congressional hearing earlier this year, Fed Chair Janet Yellen was asked about the black-white unemployment gap and said basically that there's nothing she can do about it. If you delve into the data, it's easy enough to see what she means — the African-American unemployment rate and the white unemployment rate move in tandem, at a 2-to-1 ratio that seems to be fixed by factors that are out of control of monetary policy.

But as Jared Bernstein points out, this semi-fixed ratio actually means that monetary policy matters a great deal for the racial gap. If white unemployment goes from 10 percent to 5 percent, the Fed has achieved a 5 percentage point reduction. At the same time, we would expect black unemployment to fall from 20 percent to 10 percent — a much larger 10 percentage point reduction.

With the United States currently enjoying a lowish 5 percent unemployment rate, it's easy for relatively privileged people to neglect the benefits of further small reductions. But for an African-American population that will enjoy a double-scale version of any drop in the unemployment rate, the stakes remain quite high.

The same is true of other kinds of vulnerable populations. The college-educated cohort that dominates discussion of economic policy already has a very low unemployment rate. But working-class Americans could see considerable benefit from a stronger labor market.

Impatience isn't a good enough reason

Most economists think I am wrong and the Fed should raise rates. But the thinking behind this, as measured in things like the IGM Survey of prominent economists, is awfully fuzzy.

Anil Kashyap of the University of Chicago says he strongly agrees with a rate hike because, "As Mike Mussa once famously said, 'If not now, when?'"

Darrell Duffie of Standard says "the macro vital signs look healthy enough now."

The need for a rate hike has become so much part of the conventional wisdom that many supporters haven't articulated a rationale at all. But among those who are speaking — both in academia and on Wall Street — the predominant sentiment is one of impatience. Like Kashyap, many are simply sick and tired of waiting for a liftoff from the zero rates that have been in effect ever since 2008. And like Duffie, many feel that since the patient is now well enough to survive a rate hike, we may as well end life support.

But though this kind of impatience is understandable (I'm bored of having this argument too), it is ultimately not the point. The relevant question is whether, under the circumstances, the risks of a little bit of inflation are really worse than the risks of sluggish job growth. This is a subject that deserves to be debated squarely. Instead, it's been largely ignored by political authorities and even evaded by economists. But when rates go up, and six months from now politicians and voters alike are complaining that job growth has been too weak, they'll have the Federal Reserve — and their own inattention to it — to blame.