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What if we’re fighting inflation all wrong?

Who loses in the battle against inflation.

A $100 bill being torn to pieces.
Inflation is a disaster. Is the way we’re fighting it one, too?
Getty Images/Tetra images RF/Mike Kemp
Emily Stewart covered business and economics for Vox and wrote the newsletter The Big Squeeze, examining the ways ordinary people are being squeezed under capitalism. Before joining Vox, she worked for TheStreet.

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 hurt 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.

It is a little wild that we accept this premise that in order to “fix” the economy, everything just has to be miserable for a while, and oh, by the way, hope you get to keep your job! The way to make the economy “good” again is to make it really terrible for a while for a lot of people.

We’re also not used to what good is. When somebody talks about whether the economy is “good” — and we can debate about whether the economy is good right now — a lot of the time, people respond with, “Well, my local restaurant has a ‘Help Wanted’ sign and they’re not able to get enough staff.” That’s a mindset that’s very hard to break. Most of us are workers, in some sense or another, and from the workers’ perspective, bosses who really, really need you and aren’t able to find other people to fill those jobs is good for you. That means you have more bargaining power, that you can have better wages, that you can push to make your workplace better for you. But because we’re so used to thinking of things from a consumer perspective, it can be hard to notice when things are good.

You’ve got to switch your mindset. If the local low-end retailer that you know pays the lowest wages and they’re having trouble finding workers, that’s generally a good thing, that’s not a bad thing.

It might be a little more convenient if the economy gets cracked down upon and suddenly there are a ton of people working for restaurants and you have the quickest service possible. But maybe you’re also on the other end of that, where your wages aren’t going up as much anymore, or you’re one of the ones who wins the unlucky lottery of losing your job altogether.

That’s a thing I think about a lot, the way we’ve come to view ourselves as consumers and not workers. But getting back to the point, why do we, as the public, buy into this idea that the Central Bank is the only one that can fix inflation and that’s it?

It’s a combination of things. One thing is that people don’t think about it very much at all; they don’t know who the head of the Federal Reserve is or that it exists. Maybe they’ve glanced at a dollar bill once and thought, “Oh, that’s weird, I wonder what that is.”

If you have heard of it, I think it’s intuitive. A lot of people think that the economy works where the Federal Reserve prints the money, that gets us out of recessions, but then they printed too much money. That’s not really how it works. When they’re talking about raising interest rates and cracking down on the economy, they’re not talking about getting literally less dollar bills out there. They’re talking about how you need less income.

The mechanism works through reducing your income, and once they reduce your income, they’re going to reduce your spending, and that’s how they’re supposed to get inflation under control. I think if a lot more people understood that they were talking about cracking down on your income, it would be much more controversial and be something that bothered people a lot more.

What do you think the better way to fight inflation is then?

Pre-pandemic — I said this in the Financial Times with a couple of colleagues of mine — that it is very dangerous for the Federal Reserve to be the sole holder of the price stability mandate, because what they’re going to do is to ignore their maximum employment mandate, as they’ve done decade in and decade out. And they’re going to do it with the inappropriate tools that they have.

So the first step is spreading that mandate around, having an inter-agency council the way that we have a Financial Stability Oversight Council, [which was created after the financial crisis to identify risks in the financial system]. We should have a price stability oversight council. That is a way that you can focus on problems before they happen. It provides a place for saying, “Hey, we need to fix the ports, and we need to do this if we are going to stop inflation.” There were people in government who were talking about port problems in 2018 and 2019, but no one in government had the foresight to connect this with the inflation conversation.

The biggest thing is to proactively respond to problems. All the Federal Reserve can do is, after the fact, say, “Something’s broken, and we need to kill income in the economy to fix it.”

Would this solution be perfect? No. You can come up with all sorts of examples of the political gridlock that we currently have, but nevertheless, we are seeing movement with these bipartisan bills focusing on specific bottlenecks, like semiconductors. With the continued years of problems, it’s taken inflation and the fallout from the pandemic to get people thinking about these non-monetary policy tools. We should have had agencies and individuals working on and putting out these things in advance. If we had something like that in 2020, then all those proposals would have been on the table from an official government agency or inter-agency council in January 2021 rather than being outside proposals that eventually made their way into Congress’s knowledge.

The other piece of that is that we need some other sort of agency, whether it’s the Treasury Department or something else, that has some more fiscal policy discretion, that can spend money to solve these kinds of target problems. They might seem like micro problems but can become these big economy problems.

We give the Federal Reserve unlimited discretion over interest rates, which has huge impacts, including how much interest the federal government pays to private entities. We could afford to give a limited amount of discretion to some sort of fiscal body to respond to targeted issues. That obviously has a big set of political questions that would have to be answered as well, but you know, what’s good for the goose is good for the gander. If discretion is good and helps to manage the economy with the Federal Reserve, even though they can’t predict and proactively fix problems, then we can have some discretion and independence in some sort of fiscal policy that’s tasked with proactive things.

Which, as we all know, the government is great at being proactive.


So what is the takeaway here? Fed not a scam, but maybe the way we depend on them to fix the economy, a little not great.

We need to take their ability to try to fix the economy by causing unemployment off the table. This is why my colleagues and I think a legally enforceable right to a job is important, meaning a federal jobs guarantee. Because if some agency — whether it’s a fiscal agency or monetary policy or Congress — thinks we need to reduce inflation by reducing demand, we need some kind of automatic stabilizer [policies that kick in automatically as economic decisions change to stabilize the economy] there to make sure that, at the very least, someone will have some basic job with basic paying benefits at the end of that process. They can’t just unemploy, cause destitution, among people. That legal right to a job is a critical function that should happen.

These problems seem new in this moment, but they are a lot of the same issues that were happening 50 years ago. The interest rate-mongers won that battle then, but they don’t have to win again now.

We live in a world that’s constantly trying to sucker us and trick us, where we’re always surrounded by scams big and small. It can feel impossible to navigate. Every two weeks, join Emily Stewart to look at all the little ways our economic systems control and manipulate the average person. Welcome to The Big Squeeze.

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