The main drivers of today’s inflation are out of bounds: the Federal Reserve can’t alter them, and the current administration in Washington won’t. So the Fed is raising interest rates to try to discipline labor. (Daniel Heuer / Bloomberg via Getty Images)
Original Coverage & Source Attribution: jacobin.com
With the emergence of economic instability in the early 1970s, President Richard Nixon imposed wage-price controls that limited how much wages and prices could rise. To oversee wage-price controls, his administration established two agencies, a Pay Board and a Cost of Living Council. Economist Arnold Weber was the executive director of the Cost of Living Council and a member of the Pay Board. In 1974, Weber summed up the actions that these federal institutions had undertaken to contain inflation with this statement, “The goal here is to zap labor. That’s what we’re doing here. . . . We have to zap labor.”
Attempting to quell inflation in 2022 by pushing interest rates up, then–Chairman of the Federal Reserve Board Jerome Powell saw the problem this way: “ . . . look at the average hourly earnings number we got with the last payrolls report. You don’t really see much progress in terms of average hourly earnings coming down.”
Whether the mechanism was wage-price controls, raising interest rates, zapping labor, or, as Powell proclaimed, viewing “progress in terms of average hourly earnings coming down,” the authorities in Washington have been consistent in the way they have seen policy bringing about a reduction of inflation.
Since the 1970s, the favored mechanism has been for the Fed to raise interest rates. The rationale is simple: raising interest rates makes it more costly to borrow money, and this leads both businesses and households to hold off on spending (fewer new factories, reduced housing construction, and fewer car purchases, for example). This reduction in investment lessens hiring and costs some workers their jobs. That in turn weakens the bargaining power of workers, leading to lower wages, or at least slower wage increases. As the wage bill of employers (how much employers spend on labor) grows more slowly and the buying power of workers ebbs, prices will tend to fall, or at least not rise so rapidly.
This policy has its greatest impact on workers, many of whom lose their jobs, and almost all are in a weaker position to attain wage gains. Yes, businesses can be hurt too in these circumstances. Yet for those who make the policies, the primary problem is that wages are getting out of hand, and it is workers who will bear the burden of the policy. Moreover, the impact on labor tends to have the long-run effect of weakening the power of workers.
The most dramatic application of this anti-inflation policy took place in the early 1980s. Prices, as measured by the Consumer Price Index (CPI), rose at an annual rate of more than 10 percent between mid-1977 and mid-1981. By the middle of 1981, the Fed had pushed up the Federal Funds Effective Rate (FFER) to over 20 percent, and that rate did not fall below 10 percent until August 1982. (The FFER is the interest rate banks charge on overnight loans to each other, and it is the rate most immediately affected by Fed actions.) It worked. Inflation abated, running at an annual rate of less than 3 percent in the mid-1980s.
And unemployment? The unemployment rate rose to 10.8 percent at the end of 1982, the highest monthly rate since World War II, except for some months during the pandemic of the early 2020s. And wages? The average wages for all workers fell off between the 1970s and 1980, and, for workers in the bottom half (by wage level) of the labor force, it wasn’t until the mid-1990s that wages again reached the level of the 1970s.
Labor had been zapped.
So why won’t it work this time?
