Americans need real debate about the Fed

There was a major debate on Capitol Hill through this fall and winter over the future of food stamps, or the Supplemental Nutrition Assistance Program (SNAP), which subsidizes low-income families’ food purchases. Republican legislators originally called for cutting $40 billion from the program over the next 10 years. This got scaled back in the bill that finally passed Congress, with cuts of less than $10 billion over the decade.

There was a lot of public attention focused on these cuts. Many newspaper columns and editorials weighed in on the importance of the food stamp program. Most people who regularly read the papers or listen to the news on radio or television probably heard at least a portion of this debate. Some progressive groups campaigned on the issue, using their mail or e-mail lists to try to build pressure on members of Congress to oppose the cuts.

The original proposal by the Republicans would have reduced spending on food stamps by $4 billion a year. These cuts would have amounted to a bit more than 5 percent of spending on the program and roughly 0.1 percent of the total federal budget. The cuts would average about $120 per beneficiary per year for families with incomes near the maximum benefit level.

The loss of $360 a year in benefits is hardly a trivial matter to a family with an income near the poverty line (approximately $19,500 for a family of three), so it was not foolish for people to be concerned about the impact of the proposed cuts. However, it is worth contrasting the interest in the proposed food stamp cuts with the lack of interest from the general public over the Federal Reserve Board’s plans for tightening monetary policy.

Most Americans likely have only a vague idea of what the Federal Reserve Board is and does for the economy. A substantial portion of the public has probably at least heard of Janet Yellen, the new chairwoman of the Fed. This is in large part because, as the first woman to be appointed to the position, she received somewhat more attention than would typically be the case. Beyond knowing the identity of the current head, however, and having a general sense that the Fed is important, few Americans understand the extent to which the Fed can affect the economy and affect their lives.

Ever since the economy collapsed in 2008, the Fed has been doing what it can to boost the economy. This has meant lowering the short-term interest rate that it directly controls to near zero, making money cheaper to borrow. It has also engaged in a policy of quantitative easing, which means buying up large amounts of government bonds and mortgage backed securities. The purpose of these purchases is to drive down mortgages interest rates and other long-term interest rates to provide a boost to the economy.

It is arguable how much of a positive impact quantitative easing had. Also, some economists have argued that the Fed should have taken even more aggressive steps to improve the economy. However, even if there is some question as to how effective the Fed can be in boosting the economy when it is coming off a severe downturn such as the 2008 crash, there is no doubt that it has the ability to slow the economy. If the Fed were to reverse its quantitative easing policy and deliberately start to raise interest rates, there is little doubt that this would reduce consumption and investment and slow economic growth.

This is important in the current political environment because there are many economists and economic commentators arguing that the Fed needs to be following precisely this path. They argue the labor market has tightened enough that workers are in a position to see wage gains, which will in turn lead to higher inflation.

There are good reasons for believing this argument is wrong, most obviously that the economy is still more than 6 million jobs below where it would be if it kept creating jobs at its prerecession pace. But more important than the specifics of the argument is the issue of who is involved in the debate. While millions of people and advocacy groups were active in the food stamp debate, the discussion over the Fed’s actions seem largely confined to the financial industry and a relatively small group of economists.

This is unfortunate. There is a huge amount at stake in this debate. If the Fed were to decide to begin tightening so the unemployment rate did not get below 6 percent, when in fact the economy could sustain an unemployment rate of 5 percent, then it would needlessly be raising unemployment by 1.5 million people. In addition, we would be denying jobs to an additional 1.5 million people who would enter the labor force at the lower unemployment rate.

If the economy could sustain an unemployment rate of 4.0 percent, as my co-author Jared Bernstein and I argue in our new book, these numbers would add 3 million unemployed people and 3 million more who would not be working. In addition to those 6 million lost jobs, we would be denying additional hours of work and higher wages to those at the middle and bottom of the wage distribution.

By our estimates, if we could sustain an unemployment rate 1.0 percentage point lower, that would raise wages for those at the bottom by 12 percent. For a person earning $20,000 a year, this would come to $2,400. This is a big deal.

For this reason, it is important that the public be made aware of the debate over Fed policy. This means that the media have to report on this debate in a way that makes it clear how much is at issue. The group of people leaning on the Fed should include more voices than Wall Street lobbyists' worried about higher inflation.